How We Do It.
PACE - Property Assessed Clean Energy - is not some complicated new financial shell game. It is an implementation of a conventional structure used for over 100 years to enable the financing of projects with large upfront costs that serve the long-term public good - things like schools, sewers and under-grounding utility lines. If you pay property taxes, your bill almost certainly includes assessments used to pay off tax liens for these or other infrastructure improvements. PACE uses this same tax lien structure to allow clean energy improvements to be paid off via long-term property tax assessments.
It is the tax lien structure that provides the critical element of strong collateral for a PACE loan. The very low risk of property tax default lowers the cost of PACE capital. This lower cost of capital in turn enables the ROI justification of clean energy projects with longer payback periods. PACE programs typically define the maximum loan term to be the shorter of either the working life of the improvement or 20 years. The PACE finance structure is thus extremely well suited to energy projects that have the objective of yielding long term benefits.
PACE finance is a public-private-partnership. Government provides the legal framework, program structure and the property tax system to provide loan collateral and a collections mechanism. With this structure in place, clean energy projects make excellent economic sense for private sector financial partners. The result is a win-win all around, with governments seeing job creation, healthier businesses and greener energy use. Property owners get financially healthier properties - which means reduced risk for mortgage holders. Investors get secure green energy investments and vendors enjoy increased business.
PACE programs start with state-level PACE enabling legislation. Pursuant to that legislation, a local government establishes a special "clean energy finance district" capable of issuing bonds and enacts a local PACE program. The program will specify what properties can participate and what projects qualify. Most commercial PACE programs will rely on property owners negotiating loan terms directly with PACE finance providers such as Clean Fund. Clean Fund provides the funds to the property owner via the local government (a few local governments with excellent borrowing capacity may choose to use their own funds).
The PACE process for a typical project:
- The property owner commissions an engineering firm to perform a detailed energy audit.
- Using financing terms from Clean Fund, the engineering firm generates payback estimates for the individual energy measures identified by the audit.
- The property owner then decides what package of measures makes the most sense in combination with financing terms from Clean Fund.
- At this point the property owner, supported by analysis from Clean Fund and the project engineer, approaches the mortgage holder for project approval. That approval should readily be obtained for a project that demonstrates positive cash flow (annual energy savings outweigh annual project payment) and a clear contribution to property health and value.
- Mortgage holder approval in hand, the property owner then submits the project to the local government PACE program.
- Once the project has program approval, the local government places a tax lien for the project-funding amount on the property.
- The local government raises that project amount in the form of a micro-bond with Clean Fund.
- The local government provides the funds to the property owner.
- Loan (technically, lien) repayment is accomplished through a special assessment line item that appears on the property's tax bills for the term of the loan. When the local government collects the tax payment, it automatically routes the PACE loan repayment portion to Clean Fund.