Property Assessed Clean Energy (PACE) financing can be a powerful tool for building owners. Financing an energy efficiency or renewable project in this manner enables the work to be done without immediate payment. The obligation is paid over a period of time – generally as long as 20 years – through an assessment on the property's tax bill. If the building is sold, the obligation is assumed by the new owner.
It can be a win/win. The vendor gets the work and the home or business owner gets the upgrade. That work presumably lowers building expenses, increases performance and/or makes the structure more environmentally sound. PACE funding structures must be approved at the state and local jurisdictions.
The program is raising eyebrows, however. In July, The Federal Housing Authority and the Veteran’s Administration released guidance on conditions under which they would begin to insure mortgages that include PACE financing. FHA and VA backing is a big deal, of course. The bodies had been resistant to PACE financing because they feared that the PACE organization involved in the financing would “have a superior lien position” -- be in line for payment ahead of other creditors – if the property went into foreclosure.
This week, 11 financial organizations sent a letter to U.S. Department of Housing and Urban Development (HUD) Secretary Julián Castro expressing concern about the guidance. The organizations are worried that the wording of the guidance doesn’t protect VA and the FHA from playing second fiddle to all PACE loan obligations. The letter also suggested that HUD’s language is weak:
Moreover, rather than requiring definitive subordination of the PACE loan to the FHA or VA mortgage, the new guidance simply declares that a PACE loan structured as a tax assessment is not a super lien. But this declaration is a form over substance evasion that fails to protect the FHA Mutual Mortgage Insurance Fund and the VA loan guaranty program. are not adequately protected
The details of protecting financial institutions from foreclosures of properties with PACE financing attached isn’t the only concern that bubbled up this summer. In July, the U.S. Department of Energy (DoE) released a draft on best practices on how these programs should be structured.
The DoE released the 14-page document on July 19. Comments on the document – “Best Practice Guidelines for Residential PACE Financing Programs – were due last Friday.
Those ideas have raised some hackles. The main area of contention is the marketing of PACE financing to low income home owners. The National Consumer Law Center, on behalf of itself and 15 other organizations, laid out the objections in a letter to the DoE. The dangers can outweigh the benefits to people in precarious financial situation, the letter read:
While consumer advocates believe cost-effective energy efficiency improvements are important for homeowners and support investment in energy efficiency measures, the loans should not risk loss of the home. Low-income homeowners often can get energy efficiency upgrades at no cost, through DOE’s weatherization program and through similar programs funded by many utilities across the country. Moreover, PACE loans generally carry higher interest rates than home equity loans, which is another financing option for most homeowners.
While the level to which these financing structures are marketed to lower income families doesn’t directly impact energy managers, the overall shape and direction of the program is worth closely watching.
Letters going back and forth between various advocacy groups and the government are par for the course. PACE financing is potentially great asset for building owners looking to upgrade their properties. Subtle changes to the laws and rules, however, can have a big impact on how programs such as PACE work and on their long-term viability. Everybody – from building owners to energy and facility managers – should keep their eyes on how these changes play out.
