John Brown (Green Energy) "PACE Bonds" – July 2010
This month another important clean energy concept is explained.
Property Assessed Clean Energy “PACE” Bonds
By John Bown
Tucson Green Times – July 2010
A PACE bond is a bond where the proceeds are lent to commercial and residential property owners to finance energy retrofits (efficiency measures and small renewable energy systems) and who then repay their loans over 20 years via an annual assessment on their property tax bill. PACE bonds can be issued by municipal financing districts or finance companies and the proceeds can be typically used to retrofit both commercial and residential properties.
The PACE bond market has the potential to dramatically accelerate the energy retrofitting of America’s building stock due to the below advantages.
PACE Impact: Property tax lien oriented financing that dramatically improves the economics of energy retrofits (efficiency measures and micro renewable energy)
Advantages of PACE Financing:
Nationally:
- Significant job creation
- Accelerates movement toward energy independence & reduces GHG emissions
- Very low fiscal cost & high probability of success
Property Owner:
- Lower energy bills and substantially reduced upfront costs for energy retrofits
- Improved return on investment/positive cash flow on retrofits (annual savings > cost)
- Increased property value – according to the Appraisal Institute, for every $1 in annual energy savings, a home goes up $20 in value
- Non-profit organizations can participate including churches and schools
- Seniors that do not qualify for non-refundable tax credits can participate
States, Cities & Municipalities:
- Immediate green job creation, local economic development
- No credit or general obligation risk
- Obligation is liability of real estate owner
- Greenhouse gas reductions/energy independence
- Opt in: Only those real estate owners who opt in pay for it
Existing Mortgage Lenders:
- Borrowers cash flow/credit profile improves (energy savings > annual tax cost)
- Property/collateral value increases – according to the Appraisal Institute, for every $1 in annual energy savings, a home goes up $20 in value.
Lender:
- Virtually no risk of loss as property tax liens are senior to mortgage debt
- 97% of property taxes are current & losses are less than 1%
The ability for our nation to finance energy retrofits with PACE bonds emerged in 2008 with the passage of enabling legislation in California. In recognition of the large benefits of PACE finance, the following states have recently passed enabling legislation: Colorado, Illinois, Louisiana, Maryland, Nevada, New Mexico, Ohio, Oklahoma, Oregon, Texas, Vermont, Virginia, and Wisconsin, and legislation is pending in Arizona and New York. Florida and Hawaii have existing ability to launch PACE programs. The first PACE bond was issued by Berkeley, CA in January, 2009. Please see: www.pacenow.org.
America’s largest mortgage guarantors, Fannie Mae and Freddie Mac have told federal regulators that the senior lien status of PACE liens is not acceptable. This declaration comes despite recent articles highlighting the minimal impact of PACE liens on lenders’ balance sheets, White House and DOE support for the program, and the 23 states who have enabled Property Assessed Clean Energy Financing. Fannie Mae and Freddie Mac say they plan to release additional guidance on this issue. In the meantime, PACE has come to a screeching halt all over the country while we wait for clarification. According to Grist.org, Obama administration officials have failed to resolve this problem. It appears that Congress will have to pass legislation addressing it.
Next month I will explain “decoupling” which removes the financial disincentive for electric utilities to support conservation and the implementation of clean energy.
Author: John Brown is the president of Green Directions, a local sustainability consulting firm.
