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PACE Financing

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Description

 
Property Assessed Clean Energy (PACE) financing, an alternative to a loan, is designed to encourage the installation of renewable-energy systems and improve energy efficiency by helping property owners overcome the barrier of high up-front energy equipment and installation costs. While PACE financing does not reduce the total price tag of a solar-energy system, it helps make a system more affordable by spreading the cost of the system over a long time period.
 
PACE financing effectively allows property owners to borrow money from a local government to pay for renewable-energy systems and/or energy-efficiency improvements. The amount borrowed is typically repaid via a special assessment on property taxes, or another locally-collected tax or bill, such as a utility bill. Only property owners within a local jurisdiction that opt in to a PACE program may receive financing and are subject to the special assessment. In addition to reducing the upfront costs of renewable energy and/or energy-efficiency improvements, PACE financing ties the cost of home improvements to the property itself. If a property owner participating in a PACE program sells the property, then the repayment obligation legally transfers with the property. The benefits of PACE financing include long-term, fixed-cost financing; loans tied to the tax capacity of the property rather than to the owner’s credit standing; a repayment obligation that legally transfers with the sale of the property; and potentially a deduction of the repayment obligation from federal taxable income, as part of the local property tax deduction.[1]
 
In most states, the legislature must authorize cities or counties to establish PACE financing programs. However, certain local jurisdictions, including charter cities or local jurisdictions in "home rule" states, might not need state authorization to adopt a PACE program. Cities or counties may use their bonding authority to finance programs. PACE programs typically do not impact state budgets, local budgets or general funds; the administrative costs are typically covered by bond issuance and interest paid by property owners participating in the program.
 
 
Status & Trends

 
From 2008 to 2010, new state laws authorizing PACE financing spread rapidly across the United States. The fever has subsided more recently, although some states and local jurisdictions continue to develop and adopt programs. More than two dozen states have authorized local governments to create PACE financing programs, and a handful of local governments have created these programs. Local PACE programs are currently operating in at least nine states (California, Connecticut, Florida, Maine, Michigan, Minnesota, Missouri, New York and Wisconsin) and the District of Columbia. In 2012, California launched a massive PACE program that, at its inception, allowed non-residential property owners in 126 cities and 14 counties to finance renewable energy, energy efficiency and water-efficiency projects.
 
In other states, many residential PACE programs, especially those in states that have positioned PACE financing as the senior lien on a property, are currently on hold due to challenges created by the Federal Housing Finance Authority's (FHFA) stance on these programs. The FHFA's guidance directly impacts residential PACE programs (but not non-residential PACE programs) and effectively makes most residential PACE programs that assign the senior lien to PACE financing impossible to implement. However, some states, such as Florida and Hawaii,[2]  already had a structure in place to allow local governments to finance solar-energy systems through PACE programs. In response to the FHFA restrictions, a few states have enacted legislation that explicitly removes the senior lien provision in PACE programs, granting PACE financing a subordinate lien instead. The FHFA must issue a final rule by September 16, 2013.
 
Prior to 2009, only two states (California and Colorado) had enacted legislation authorizing PACE financing. In 2009, more than a dozen states enacted legislation authorizing PACE financing. In 2010, six more states and the District of Columbia enacted PACE legislation, and several states clarified existing laws. In 2011, two states (Oklahoma and Vermont) enacted legislation clarifying their existing PACE laws and downgrading PACE's senior lien status to a junior lien. Connecticut, Michigan, and Wyoming also enacted PACE legislation in 2011. In 2012, New Jersey enacted legislation to enable PACE.
 
Berkeley and Palm Desert, both in California, were the first municipalities to establish PACE financing programs in the United States. A Vote Solar Initiative report on municipal property tax assessment financing chronicles Berkeley’s experience and provides a policy primer on how to replicate the model in other counties and cities.[3]
 
 
Examples

 
  • Vermont initially enacted PACE-authorizing legislation in May 2009 (HB 446). In May 2011, Vermont renovated its PACE law (via HB 56), specifying that PACE liens are subordinate to existing liens and first mortgages, but are superior to any other liens on the property recorded after the PACE lien is recorded (except for municipal liens, which also take precedence over the PACE lien). This amendment was a direct response to the FHFA statement concerning the senior lien status of PACE financing. In addition, HB 56 created a state PACE reserve fund, in addition to a reserve fund supported by participating property owners. An amount equal to 5% of the assessment (not to exceed $1 million) will be transferred from Regional Greenhouse Gas Initiative/Forward Capacity Market funds to an escrow account maintained by the state treasurer. This account will provide funds to cover 90% of losses in the case of defaults of participating properties not covered by the reserve account. The main purpose of the state PACE reserve fund is to reduce risk for potential investors interested in investing in a municipality to finance a PACE financing district.
  • Maine enacted PACE legislation in April 2010 (LD 1717) that allows the financing of renewable energy and energy efficiency improvements via a special assessment on property taxes. Maine's law stipulates that PACE assessments will be considered subordinate liens, secondary to mortgages. Municipalities may use federal grants or other "funds available for this purpose" to establish PACE programs. Maine received $30 million through the U.S. Department of Energy's Better Buildings Program to support the implementation of a statewide PACE program, which was launched in 2011. Over 100 municipalities are participating in this statewide program. While the enabling legislation does not restrict municipalities from determining what type of properties are eligible, in practice, the statewide program supports residential properties.
 
 
Resources

  
 
Notice of Proposed Rulemaking, Federal Housing Finance Agency, June 2012.
 
Policy Brief - Property Assessed Clean Energy (PACE) Financing: Update on Commercial Programs, Ken Hejmanowski, Scott Henderson and Mark Zimring, Renewable Funding, Clinton Climate Initiative, Lawrence Berkeley National Laboratory, March 2011.
 
FHFA Statement on Certain Energy Retrofit Loan Programs, Federal Housing Finance Agency, July 2010.
 
The Constitutionality of Property Assessed Clean Energy (PACE) Programs Under Federal and California Law, Sanjay Ranchod, Jill E.C. Yung, and Gordon E. Hart, Paul, Hastings, Janofsky & Walker LLP, prepared for the Vote Solar Initiative, May 2010.
 
Guidelines for Pilot PACE Financing Programs, U.S. Department of Energy, May 2010.
 
Transferring PACE Assessments Upon Home Sale, Jason Coughlin, Merrian Fuller, and Mark Zimring, Lawrence Berkeley National Laboratory, National Renewable Energy Laboratory, Solar America Cities, April 2010.
 
Policy Framework for PACE Financing Programs, The White House, Office of the Vice President, October 2009.
 
Guide to Energy Efficiency & Renewable Energy Financing Districts for Local Governments, Merrian Fuller, Cathy Kunkel and Daniel Kammen, Renewable and Appropriate Energy Laboratory (RAEL), University of California - Berkeley, September 2009.
 
Property Tax Assessments as a Finance Vehicle for Residential PV Installations, Lawrence Berkeley National Laboratory and Clean Energy States Alliance, 2008.
 
Municipal Property Tax Assessment Financing: Removing Key Barriers to Residential Solar, Claudia Eyzaguirre and Annie Carmichael, Vote Solar Initiative, October 2008.
 
 
 
 
 
Footnotes

[1] Property Tax Assessments as a Finance Vehicle for Residential PV Installations, Lawrence Berkeley National Laboratory and Clean Energy States Alliance, 2008.
[2] Authority to Implement Policies Similar to Berkeley-FIRST in Key States, Sheridan Pauker, Wilson Sonsini Goodrich & Rosati, prepared for the Vote Solar Initiative, August 2008.
[3] Municipal Property Tax Assessment Financing: Removing Key Barriers to Residential Solar, Claudia Eyzaguirre and Annie Carmichael, Vote Solar Initiative, October 2008.
 
 
 

 




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Disclaimer: The information presented on the DSIRE web site provides an unofficial overview of financial incentives and other policies. It does not constitute professional tax advice or other professional financial guidance, and it should not be used as the only source of information when making purchasing decisions, investment decisions or tax decisions, or when executing other binding agreements. Please refer to the individual contact provided below each summary to verify that a specific financial incentive or other policy applies to your project.

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