Overview
PACE (Property Assessed Clean Energy) is a mechanism for financing energy efficiency and renewable energy improvements on private property. An offshoot is CPACE, which tailors programs for commercial buildings. The programs are established and administered by the various states but typically provide funding for energy-efficient improvements, which are backed by assessments on the property.
Property owners typically do not provide the funding. Instead, developers effectively hold a senior claim on the property. The claim cannot be extinguished via a bankruptcy filing, as it is attached to the property, just like a property tax.
A typical transaction is illustrated above, wherein the PACE developer contacts a building owner and contracts (indicated by the two-directional arrows) for improvements on a property. Typical improvements include solar panels, improved insulation, upgraded windows, load-reducing batteries, and other enhancements (see below).
The developer subsequently contacts the PACE Program Manager, who, with the developer, makes an application to the relevant taxing authority for the inclusion of the cost of the improvements in the property tax rolls.
The PACE Program Manager might initially fund some improvements from its funds but typically seeks third-party funding for either initial or subsequent funding. Additionally, the PACE Program Manager, often with the developer, seeks an equipment manager to ensure that the improvements remain in proper working order. Regarding the Building Lessee(s), often minimal changes occur other than a possible reduction in shared operating expenses.
II. Unique Features
The unique aspect of PACE and CPACE financing is that the loans are attached to the properties and are considered by many to be senior to most other funding. In the case of the building owner's bankruptcy, the loans do not undergo the bankruptcy process but rather remain in place until extinguished by any subsequent building owner. Hence, many view the transactions as attractive from a credit quality perspective.
III. Eligible Improvements
PACE and CPACE programs are typically established by various states, which delineate the types of eligible assets and the acceptable structures. Typical improvements include solar panels, batteries, improved windows (to reduce energy consumption), improved air conditioning and heating systems, wind power systems, and other enhancements. The common denominator among these enhancements is that they typically reduce energy consumption and carbon dioxide emissions.
Local tax authorities log the obligations of PACE on their tax rolls and keep track of the status of the obligations.
IV. Typical Considerations
Given that PACE and CPACE funding is typically senior to other types of financing, there are unique considerations. Below is a summary:
Validity of the Program – Has the program been properly established and documented?
Experience and Quality of Participants – Can the Funder rely on the various participants acting appropriately to ensure the obligations are adequately satisfied?
Value of the Property – If the property is poorly maintained and in a marginal area, it is likely to be difficult to recover, regardless of the seniority of the claim.
Value of the Improvements – If the improvements do not perform as expected, the property owners must make adjustments with the Developer and PACE Program Manager.
Diversification – Typically the Funder provides funding for a pool of assets and relies on diversification to reduce risk levels.
V. Subsequent Maintenance/ Support
After the program is established and initial payments are made, diligence is required to ensure that the improvements perform as expected and all parties remain engaged. Failure to properly maintain the improvements can turn an attractive project into a drain on time and resources.