What About the Accounting & Tax Treatment of PACE Financing?
This summary is not an official opinion. CleanFund is not providing, nor attempting to provide, any financial or tax advice. Individuals and companies reading this webpage are encouraged to consult their accountants and attorneys to come to their own conclusion.
Based on our conversations in the marketplace, many property owners treat property taxes – both ad valorem and special assessments – as an operating expense, deducting their entire property tax bill from adjusted gross income. Of the property owners who have used C-PACE financing, some of them treat their PACE assessment as an operating expense under this same logic. While others (and the most common approach to accounting for the improvements) is to capitalize them and reflect the voluntary PACE lien as a liability.
From the perspective of a CFO, the following should outline the points of consideration in deciding how to treat a PACE assessment.
- While signing the contractual assessment agreement is voluntary, the signed agreement obligates the company to make payments as long as it owns the property.
- If a CFO is interested in booking the improvements as additional cost basis in their property, and depreciating those improvements, it is highly likely that they will need to come up with an offsetting liability. Reflecting the PACE assessment can achieve this. However, if the CFO views those assets as either not belonging to them or not providing ongoing benefits, then they may choose not to record those assets on their financial statements.
- A CFO should be clear about what their auditors might suggest upon learning that the company has agreed to make voluntary property improvements in exchange for signing an assessment contract that binds the company to certain payments as long as it owns the building.
Background on PACE
Commercial PACE financing, or C-PACE (Property Assessed Clean Energy), is secured by a voluntary parcel tax assessment on a specific property to finance clean energy, energy efficiency, water conservation, seismic and/or hurricane protection improvements to commercial properties. PACE assessments are billed and paid via ordinary property taxes. The statutory framework of PACE is built upon current state statutes that allow for property assessment financing. From a respective state statutory framework, the PACE assessment is similar to other non-PACE assessments. For over 100 years, in many states, municipal assessment bonds have been issued to finance property improvements, such as roads and sewers. For example, in California, the main statutory framework for PACE is the California State Improvement Act of 1915.
PACE exists because energy, water, and life-saving improvements are in the public interest, and can be billed and collected like other bond financings that show up on property tax bills. Similar to existing assessment financing, PACE is sponsored by the municipality, with private capital sources providing capital that property owners repay as an additional property tax line item. Proceeds of the PACE financing are used to finance the hard and soft costs associated with eligible energy, water and life-safety improvements for a specific property. To adopt a PACE program, a county or other municipality forms a special Assessment District that places parcel tax assessments at the direction of an individual property owner that serves as collateral for the municipality to issue municipal bonds (state tax exempt).
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