To be eligible for PACE financing, a project must be in a county or municipality that has approved PACE programs within a state that has passed PACE-enabling legislation. For more details on where PACE is available, let us guide through the process. Note that residential PACE (RPACE) is also available in some jurisdictions. The PACE administrator will typically conduct marketing and sales to originate potential customers. Before financing is disbursed, the project must be approved by the PACE administrator. For properties with a mortgage, consent from the mortgage lender is usually required. Depending on state statute, capital for PACE projects may come from the government through reserve funds or bond issuances, from private investors, or a mix of the two. Once the project is approved and financing is secured, the contractor installs the equipment, and the customer begins to realize energy savings. The financing is then repaid in the form of an assessment on the building owner's property tax bill over a period of typically 10-20 years. A PACE lien is also placed on the property. The lien is senior to most other debt on the property, which can encourage investors to provide capital over longer terms than with standard loans. If the building is sold during the PACE repayment period, the lien securing the assessments remains on the property and becomes an obligation of the new building owner (unless it is paid off in full by the original owner before sale). Nonpayment of a PACE assessment results in the same set of repercussions as the failure to pay any other portion of a property tax bill.
PACE financing can be structured in a variety of ways depending on the jurisdictional laws, available providers, and project type. Building owners should be aware of the following details:
Funding Source: A PACE jurisdiction may have an open market, in which private financiers compete to provide competitively priced capital, or a turnkey program, in which a single public or private financing source is pre-selected to simplify the funding process and reduce complexity for the building owner.
Management: Some PACE programs are administered directly by the local government, whereas others are run by a third-party administrator. Many programs take a blended approach where responsibilities are split.
Applicable Project Types: PACE policies and programs differ on the types of eligible technologies. Some narrowly define the technologies they allow, and others are more flexible. Some programs allow non-energy measures as well, such as water efficiency, seismic retrofits (i.e. earthquake-proofing), wind resistance, flood mitigation, and storm water management. A variety of commercial building types, including multifamily facilities, are typically eligible for commercial PACE.
Savings to Investment Ratio (SIR) and Loan to Value (LTV) Requirements: Some programs have a required level of energy savings that must be realized through the project relative to its cost in order to qualify, known as an SIR. However, even in programs with an SIR requirement, certain types of measures may be exempt, or SIR can be improved by bundling low-return measures with high-return measures. Some programs also have an LTV requirement, which specifies that the funds borrowed through PACE must not exceed a certain ratio to the total value of the property.
Underlying Financing and Balance Sheet Treatment: PACE is a repayment mechanism that can have several different types of financing backing it (e.g. loan vs. lease vs. other arrangements). PACE is most commonly backed by debt or loan financing. Many organizations believe that because these loans are repaid via property tax bills that are often treated as off-balance sheet operating expenses, there may be some off-balance sheet benefit to PACE. This remains an open question subject to varying accounting opinions, as no consensus has been reached. In some cases, PACE can be backed by off-balance sheet financing such as an operating lease or energy services agreement (ESA), but these structures are not common.
ADVANTAGES
POSITIVE CASH FLOWS-PACE financing can cover 100% of project cost with long 10-20 year terms, not to exceed the useful life of the installed equipment. This results in lower annual payments that are typically less than project savings.
FAVORABLE TERMS-PACE provides strong security for investors because the financing is repaid on the property tax bill. This allows lenders the ability to offer better interest rates and longer repayment terms than are otherwise available.
TRANSFERABILITY-PACE assessments are linked to the property and automatically transfer to a new owner upon the sale of the property.
FLEXIBLE BALANCE SHEET TREATMENT-PACE may be structured to be off-balance sheet or on-balance sheet. However, appropriate accounting treatment for PACE remains inconclusive, as clear consensus has not been reached by the accounting community.
OVERCOMES THE TENANT/LANDLORD SPLIT-INCENTIVE-PACE can align incentives for landlords and tenants, as both the tax assessment and cost-savings from the project can be shared with tenants under most lease structures.
DISADVANTAGES
LIMITED AVAILABILITY-PACE is limited to jurisdictions with PACE-enabling legislation, which has currently been passed in 32 states and the District of Columbia.
MORTGAGE LENDER APPROVAL-For properties with a mortgage, mortgage lender consent is usually required before PACE can move forward. This can be difficult and time-consuming to obtain.
LIMITED TO INDIVIDUAL PROPERTIES-PACE financing must be structured differently for specific properties, making it challenging to use for portfolio-wide initiatives.
