Property Assessed Clean Energy (PACE) Loan

A Property Assessed Clean Energy (PACE) loan is a type of financing that’s available for energy-efficient upgrades or the installation of renewable energy sources for private residential, commercial and industrial properties. The PACE Program, which is overseen by the U.S. Department of Energy (DOE), allows local and state governments, as well as inter-jurisdictional authorities authorized by state law to provide funding for the cost of energy improvements on qualifying properties. This funding is then repaid over time by the property owner. 

PACE loan financing can be used for a number of energy-efficient improvements, including seismic retrofitting for homes, commercial buildings or industrial properties located in earthquake-prone areas, hurricane preparedness measures, installation of solar panels or boilers, energy-efficient roofing and LED lighting upgrades. With this type of financing, the property serves as collateral and the debt is tied directly to the property, rather than its owner. Any remaining balance on a PACE loan remains intact when ownership of the property changes hands. 

Unlike a traditional mortgage loan, PACE financing doesn’t require an upfront down payment. PACE loans also lack a regular monthly payment. Instead, these loans are repaid through property assessments, as an addition to the owner’s regular property taxes. These assessments are typically spread out over a specific time frame, which may range from 5 to 25 years, based on the amount of financing involved. Property owners who fail to pay the assessments regularly are generally subject to the same penalties as they would be for non-payment of any other property tax bill. 

PACE financing typically does not involve the same underwriting process as a traditional mortgage. Property owners have the ability to finance 100% of the cost of energy-related improvements and creditworthiness is not a significant component of the approval process. Individual PACE programs are administered by state and local government agencies, which have a certain amount of discretion in setting approval guidelines. This relatively easy access to financing has been compared to the lending atmosphere surrounding the residential housing market during the subprime crisis. 

In July 2016, the Federal Housing Administration announced that it would begin insuring mortgages that carry liens connected to the PACE loan program. PACE loan payments will be escrowed with regular property taxes. Those who purchase a home through the FHA program that has a PACE loan in place will be responsible for any unpaid balance remaining on the loan. 

In terms of size, the residential PACE loan industry is estimated at $3.4 billion, an amount that’s expected to double through 2018 . It has established itself as the fastest-growing segment of the U.S. lending industry. The commercial market for PACE financing is estimated at between $88 and $113 billion. PACE-enabling legislation has passed in 33 states, as well as the District of Columbia (click here to see which states are included).