Property Assessed Clean Energy (PACE) financing, which is seen by many as a powerful way to help owners increase the energy efficiency of their homes and businesses, has a big day ahead as new federal rules take effect.

PACE loans offer 100 percent financing of energy efficiency projects. The loan is paid off, generally over 20 years, by an annual assessment on the owner’s tax bill. As discussed last month at Energy Manager Today, a hurdle for this form of financing was the reluctance of federal agencies to endorse PACE. The reticence stemmed from fears that in foreclosures PACE loans would jump to the head of the line for repayment.

In July, the U.S. Department of Housing and Urban Development and Federal Housing Administration (HUD and FHA) issued guidance under which the FHA would back properties using PACE financing. The rules take effect tomorrow.

That obstacle has been surmounted. New ground rules from the government say that, in essence, PACE financing is nothing out of the ordinary, according to Erika Sonstroem, an attorney with Bradley Arant Boult Cummings LLP. She explained in a post at Lexology:

The FHA guidance stresses that PACE obligations must be treated and follow the same rules as other special tax assessments levied by municipalities. In that vein, FHA will require that only delinquent payments may take priority over a mortgage. A delinquency on a PACE obligation cannot trigger acceleration of the entire loan. In the event of a sale, including a foreclosure, the PACE obligation will run with the land, and the new homeowner will be responsible for payments on any outstanding PACE amounts. In the event of a foreclosure, municipalities or other PACE administrators may allow any priority on the delinquent payments to be subordinated, waived, or otherwise relinquished.
Last week, Anne Alexander at Commercial Property Executive offered a good overview of PACE advantages. Among the benefits PACE provides, according to Alexander, are availability of funds, shorter time to break-even, low interest rates, a balancing of landlord and tenant interests, increased values to the property.

PACE does not have universal support, however. Solar power, which is attractive to businesses because it increases power flexibility, reduces reliance on the grid, cuts costs and is good for a company’s image, is perhaps the easiest and most immediately impactful energy efficiency technique available. At Solar Industry, Open Energy Group Founder and CEO Graham Smith calls PACE useful, but no panacea for the challenges that industry faces:

Limitations with PACE include the fact that financing is deployed only to building owners directly, not to developers or third-party-owned systems. Furthermore, while PACE legislation for commercial property has been adopted in 29 states and the District of Columbia, projects have only been fully realized in a handful of states.

Things seem to be looking up for PACE financing though, as Smith wrote, there are enough questions to keep it from being a cure all for the challenges of financing sometimes expensive energy efficiency and renewables initiatives. The generally upbeat feel is illustrated by announcements over the past few weeks. Energy Manager Today already reported that Ygrene, a PACE financier, will be active in Stockton and Fresno County, CA. PACE financing also has been approved in Pulaski County, Arkansas

There were two pieces of news on the PACE front within the past two weeks.

Baltimore County, MD, announced that it has introduced legislation to enable PACE financing for HVAC and building management systems. The loans, according to the county, would be available to commercial, industrial, agricultural, hospitality, retail and multifamily properties.

U.S. Representative Mike Thompson, from the fifth Congressional District of California, sent a letter to Federal Housing Finance Agency (FHFA) Mel Watt asking that the agency follow the lead of HUD and the FHA and enable Fannie Mae and Freddie Mac to “to fully participate in PACE programs across the country,” according to the Record-Bee.

The benefits of PACE financing are straight forward: Businesses can upgrade and update their facilities with no upfront capital costs and pay down the loan over a long period of time. It will be interesting to see if the new approach by HUD and the FHA has a positive impact.

The full article appeared in Energy Manager Today.