Property Assessed Clean Energy (PACE) programs allow property owners to finance investments in renewable energy and energy efficiency with a loan that is repaid through their property tax bill. The loans are attractive for borrowers because energy investments often require more capital than would otherwise be available to many residents or commercial property owners. Lenders are willing to offer attractive interest rates because their loan is secured by a tax lien on the property. PACE financing is now available in more than 800 U.S. municipalities and over 80 percent of the country’s population live in states that provide PACE financing.
A 2010 Federal Housing Finance Agency (FHFA) decision jeopardized the impact and availability of PACE. Because the FHFA was concerned about the senior status that PACE liens have over a mortgage in foreclosure proceedings, the agency advised Fannie Mae and Freddie Mac to avoid buying homes with these liens. This decision has limited the use of PACE for financing residential energy efficiency improvements. In 2015, the Department of Housing and Urban Development announced that it is coordinating with the FHFA, the Consumer Financial Protection Bureau, and the Department of Treasury to provide new PACE guidance.
Some states have authorized the development of PACE programs, but residential PACE has yet to take off in the state. The uncertainty caused by this federal decision has made it difficult to establish new PACE programs. States could overcome these barriers by adopting innovative ideas from other states, specifically loan-loss reserve funds and model guidelines for program development.
States such as California and Rhode Island have eased banks’ concerns by creating a loan-loss reserve fund. Under this design, any money lost by a bank in a foreclosure will be repaid with money from the PACE loan-loss reserve fund. Only a small amount of initial funding is needed to establish a reserve fund. In 2013, Rhode Island used federal stimulus funds to set up a $1 million loan-loss reserve. Since creating a $10 million PACE loss reserve fund, California has experienced a $300 million influx in private financing to create a new multi-county PACE program. According to the California PACE Loss Reserve Program Office, no funds have been used from the state reserve fund, indicating a low level of risk from PACE borrowers. States could facilitate market certainty and stimulate private investment by creating a PACE loss reserve.
With greater financial security provided by the reserve fund, each state could also facilitate the development of residential PACE programs by providing tools and model guidelines for communities. Texas has led the way on this front with the creation of the “PACE in a Box” toolkit. The Texas toolkit project was seeded with $200,000 from the Texas State Energy Conservation Office and $800,000 from foundations and PACE stakeholders. With that funding, the program researched best practices and developed a uniform, scalable, and turnkey program, which includes details such as bond requirements, uniform lending documents, model municipal resolutions, and underwriting and technical standards. The Texas toolkit is online and its availability should enable states to write their own high-quality toolkit for a fraction of the cost. States could also seed the project with minimal funding and look for partners to provide the bulk of the capital.
By establishing a PACE toolkit and a loan-loss reserve fund, states could empower their local governments to quickly and efficiently implement residential PACE programs, stoke in-state solar demand, attract private investment to the state, and create good-paying, skilled jobs for residents.