The purpose of this article is to clarify for readers what Property Assessed Clean Energy (PACE) financing is, and to emphasize that there are two different types of PACE financing, one for businesses and one for consumers.
Both businesses and consumers should know about PACE financing and understand the differences between the two types.
This is because both CPACE1 financing (for businesses) and RPACE2 financing (for residential consumers) are voluntary programs that can reduce risk for both lenders and borrowers, while helping to save money, increase profit and reduce greenhouse gas emissions3.
Neither CPACE and RPACE financing should be controversial… They are simply alternatives to any other type of financing for energy efficiency or renewable energy improvements. They may or may not be appropriate for your business or home.
However, by understanding the differences between the two, and becoming familiar with the savings to investment ratio (SIR) applied in commercial underwriting of CPACE projects, everyone may be able to better evaluate energy efficiency financing opportunities.
What Most Articles About PACE Financing Fail to Mention
I think most online articles written about PACE financing have been critical of it in an oversimplified way. The authors of the most controversial articles (some mentioned in the notes below) not only fail to suggest easy solutions to the issues they raise, but also fail to explain that there is more than one type of “PACE financing”.
What most articles about PACE financing fail to mention4 is that there are two types of PACE financing:
- Commercial PACE financing for businesses (CPACE)
- Residential PACE financing for consumers (RPACE)
The two types of PACE financing programs, CPACE and RPACE, vary by rules and by state. CPACE programs are more widely available, and RPACE is currently only available in California, Florida and Missouri. PACE legislation of some sort is actively being pursued in 33 states plus the District of Columbia and programs are successfully operating in 19 states plus the District of Columbia.
CPACE vs. RPACE
If you own commercial real estate and want to upgrade your building and make it more efficient, CPACE financing may be a good option. CPACE financing can help commercial, industrial, agricultural and multifamily residential5 buildings as well as churches, non-profit organizations, municipalities, universities, schools and hospitals reduce the risk of financing energy efficiency and renewable energy improvements.
CPACE financing reduces risk for borrowers, lenders and municipalities.
CPACE reduces risk for borrowers by helping to increase cash flow from operations. CPACE financing also enables resilience strategies such as distributed energy generation, energy storage and on-site renewable energy.
CPACE reduces risk for lenders by increasing cash flow to mortgagors, reducing credit default risk. CPACE also reduces risk for lenders by applying a thorough, multi-party underwriting process. In addition to a technical review of energy efficiency and renewable energy measures, Commercial PACE financing typically requires building owners who carry a first mortgage to receive consent from their first mortgage lender 6 prior to securing CPACE financing.
CPACE reduces risk for municipalities that support it by enabling upgrades to the local building stock, increasing property values and creating more resilient, profitable businesses.
The Importance of SIR
In order to help ensure positive cash flow, CPACE projects are typically underwritten using a Savings to Investment ratio, or SIR. A SIR of >1 (i.e. a positive SIR) means that the energy efficiency improvements are expected to generate positive cash flow for your building on day one.
You can calculate a SIR by dividing the savings by the cost to amortize the loan or lien over time. The result should be a positive decimal greater than one. So, the numerator = the savings and the denominator is the loan (or lien) amortization payment. Divide the numerator by the denominator and if your number comes out greater than 1 you should be saving immediately. In the example below, the savings from the energy efficiency and/or renewable energy investments produce $500 more in savings every period than they cost to amortize, or pay back.
When doing your SIR calculations, the numerator should include ALL savings you can reasonably achieve, including from tax incentives, tax deductions, REC payments, energy savings, etc.
Your CPACE financing underwriter should present you with at least three performance scenarios for your CPACE project, including “Projected”, “Best Case” and “Worst Case” scenarios. The “Projected” case should have an SIR greater than one or the project should not be approved.7
A successful CPACE financing results in capital being provided for the borrower which is repaid through a tax assessment on their property. The amortization period is pegged to the useful life of the building improvements, up to 30 years in most cases. If the building is sold prior to the financing being repaid, the unpaid portion of the CPACE lien stays with the property as it would with another property tax obligation.
Interest rates for CPACE financing are fixed, but are typically higher than mortgage interest rates today, ranging from 4.95% to 8.39%. Usually the longer the term, the higher the interest rate. The borrower usually has the option to prepay.8
However, unlike a traditional bank loan, there is no down payment required for CPACE financing, and tax returns, financials, FICO or business credit scores may not be required to receive approval. PACE interest rates may be higher, but the longer financing term of up to 30 years results in smaller the tax financing payments.
Overall, there are many benefits of CPACE financing that have been well documented. Among the notable benefits of CPACE financing to borrowers are that it can increase cash flow, reduce waste, reduced greenhouse gas (GHG) emissions, include valuable tax incentives, include accelerated depreciation, offer REC income, low amortization payments, produce greater net operating income (NOI), and result in greater building value and lower cap rates.
If you are a residential homeowner currently living in California, Missouri or Florida, you may qualify to get home energy improvements or renewable energy for your home paid for through RPACE financing.
RPACE financing is paid for through a tax assessment added to your home’s property tax bill. To be approved for RPACE financing, a FICO score is not required and you can be approved for RPACE financing based on a percentage of the appraised value of your home, up to as much as 20% of your home’s appraised value.
If you have an existing mortgage on your home, mortgage lender consent may not be required because RPACE financing is not a mortgage. RPACE financing is a tax assessment added to your property taxes. The dollar amount of the tax assessment is equal to the cost of your home improvements and is paid for over 15-30 years. You may choose any financing term that is less than or equal to the useful life of the home energy improvements. The longer the term, the higher the interest rate will typically be.
Interest rates for RPACE financing are fixed and may range from 4.63% to 8.5%. This is higher than mortgage or HELOC interest rates today, but much lower than using a credit card to pay for anything in installments.
If you sell your home after receiving RPACE financing, the unpaid balance of your tax assessment will be paid for by the new owner.
The potential benefits of RPACE financing include energy savings, tax savings and flexibility when paying for home improvements that may increase the value of your home. A 2015 study by the Lawrence Berkley Laboratory suggests that some homeowners are willing to pay a premium for homes that already have solar panels installed.
All energy efficiency investments have a return on investment associated with them by definition. That said, if you are living on fixed income or an extremely tight budget, you should not increase your monthly expenditures by going into debt unless you can reasonably calculate a positive savings to investment ratio, as illustrated above in the CPACE example.
Whether you’re a business or individual in America, if anyone (whether they’re wearing overalls or wearing a suit and tie) is offering you money, it pays to read the fine print. Caveat emptor. Or in this case, borrower beware… Qui mutuum accipit cave.
But by understanding the value of savings to investment calculations, all borrowers can better evaluate their options from PACE programs.
List of PACE Lenders and Financing Options
The following lenders provide commercial PACE and residential PACE financing options in states where PACE programs are available.
Based in Sausalito, CA, CleanFund Commercial PACE Capital is a leading provider of long-term financing for energy efficiency, water conservation, renewable energy and seismic improvements for commercial, multifamily and other nonresidential properties in the U.S. CleanFund makes it easy and affordable to finance energy, water and other vital improvements to commercial properties that increase their value and decrease environmental impact.
Figtree Financing provides PACE financing for commercial buildings. The Figtree OnDemandPACE™ Program provides CPACE Financing to help commercial property owners improve their properties and lower their utility bills with energy efficiency, renewable energy, and water conservation upgrades. Figtree Financing has successfully funded millions of dollars of property improvements with commercial PACE Financing.
Greenworks Lending is a cutting edge private finance company that taps into the power of C-PACE to unlock energy savings in commercial real estate. Founded by the architects of the most successful commercial PACE program in the country, the team at Greenworks Lending has more experience in PACE than anyone in the industry.
Renew Financial offers both residential and commercial PACE financing. Renew Financial was founded in 2008 by Cisco DeVries, who brought together a multidisciplinary team of experts in finance, technology, operations, and government policy to innovate the Property Assessed Clean Energy (PACE) financing model.Contractors interested in working with Renew Financial can apply here.
Renovate America provides both RPACE and CPACE financing. Renovate America is one of the largest lenders of PACE programs for commercial and residential PACE. Renovate America offers traditional PACE financing called HERO through a tax assessment on a property tax bill, and more conventional financing called Benji that is paid for like a traditional loan.
Spruce Financing provides financing for residential solar and energy efficiency improvements that may help homeowners save on power, heating and cooling, and water.
Ygrene provides both commercial and residential PACE financing, depending on the state. YgreneWorks provides immediately accessible financing with no up front payments for energy efficiency, renewable energy and, in certain areas, water conservation, storm and wind protection, electric vehicle charging stations and seismic upgrades.
- The C in CPACE = commercial.
- The R in RPACE = residential.
- There are approximately 5.6 million existing commercial buildings in the U.S. The vast majority of these were built before 1960 and would not be considered energy efficient by any professional energy efficiency standards, such as ASHRAE
- The Wall Street Journal has published a series of articles on Property Assessed Clean Energy, including one this week, focusing on problems related to consumer focused RPACE financing. The articles do not make a clear distinction between CPACE and RPACE, nor do they emphasize the important underwriting differences between the two. The articles often refer to the total number of states where both CPACE and RPACE legislation has been enacted when residential PACE is the focus of the articles and is available in only three states. Many other articles that have been written about PACE also do not mention the differences between RPACE and CPACE.
- Residential properties with greater than five units.
- There are currently over 100 commercial banks that have signed on as consenting lenders to CPACE financing.
- In some states, but not all, the technical underwriting team will present these scenarios to you. A SIR should be done by the borrower in all cases, however. Any of the CPACE lenders listed in this article can help with this analysis for free as part of their marketing process. You can also use a CPACE calculator to run the numbers yourself.
- Prepayment of the tax assessment by the building owner is optional. Prepayment penalties may be incurred depending on the CPACE lender. A declining penalty may be incurred if the financing is prepaid in the earliest years of amortization, with the penalty eventually falling to zero.