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Property Assessed Clean Energy (PACE)

Updated:             June 5, 2018      

With the emphasis on the environment and climate change, PACE is seen by many as a way to finance energy efficient, renewable energy, and water conservation upgrades to buildings. This includes new and more efficient heating and cooling systems, lighting improvements, solar panels, water pumps, insulation, and more for almost any property

Simple Idea

                Promoted as "free" money which will result in energy savings plus add to the value of the home upon resale. State and local governments sponsor PACE financing to create jobs, promote economic development, and protect the environment. PACE pays for 100% of a project’s costs and is repaid  for up to 20 years with an assessment added to the property’s tax bill. The anticipation is that the PACE financing stays with the building upon sale.

Potential Problems

                While PACE may prove to be an effective way to pay for energy improvements for homes, and help local governments achieve important environmental goals there are several potential complications.

                Part of the problem with PACE in the residential portion of the program is that priority lien holders (the first trust deed lenders - conventional and government lenders) are not notified nor given an opportunity to object to this financing. Another concern is that these are financing programs secured with Real Estate where lenders do not follow the same type of regulations that traditional lenders securing real estate must follow. Therefore there is a concern that borrowers are not properly informed of the implications of obtaining this financing.

                Home owners have at times been  uninformed and/or misinformed that such financing will be paid with the existing tax assessment. In reality, once the financing has been obtained the assessment on the property taxes will increase according to the terms and size of the financing obtained.

                Upon sale of  home, it is easy to overlook that there is a PACE lien in place. Unless fully disclosed a new buyer could be surprised at the increase in the tax amount. The result could be disappointment accompanying legal action for undisclosed information.

Will Improvements Pay for Themselves

Since California is generally considered a mild climate. critics suggest that the cost of he PACE recommended improvements will not be recouped via savings. Complaints about high interest rates and exaggerated contractor costs persist. Other alternatives may be better options. Replace inefficient appliances with Energy Star® rated replacements, check local energy producers for free offers to replace old appliances or simply personally use inexpensive caulking and weather stripping to acquire energy savings. Home owners may find that using an equity line loan or acquiring a local, regional, state or federal grant for energy improvements will be a more economic alternative?

Newest Developments

                For the past several years FHA, Fannie Mae and Freddie Mac have consistently expressed concern that PACE represents a lien that could precede their first lien position. Under this circumstance, the PACE financing would require being paid off or need to be subordinated to any new institutional financing upon sale of the property. Homeowners continue to be bombarded with information regarding how easy it is to acquire energy efficient upgrades and defer payment over 20 years via their tax bill.

In light of this reserve (noted above), FHA initially agreed to insure homes containing PACE financing only to reverse that opinion in late 2017. Fannie Mae and Freddie Mac continue in their opposition to the financing while VA in late 2017 indicated their willingness to guarantee property that included PACE loans.

Increase in Home Value

                Any perceived increase in home value will need to be recognized by lenders and verified via the appraisal. There is no current measure by which appraisers can identify the value of said upgrades beyond documentation of the actual costs of having made the improvements. Measuring cost savings of such improvements is mostly a new development.

                Anticipation is that a new purchaser will pay an increased amount for a home with existing energy upgrades based upon the expectation of energy cost savings. It occurs to this writer that the seller expects a new buyer to pay a premium price for the home with the upgrades while also expecting the new buyer to assume the original debt which has attached to the homeowner's tax bill. It appears that the new buyer is paying twice for the upgrades?

                Under such circumstances, when the new buyer is made aware of the tax assessment s/he may require the PACE loan be paid from the seller's proceeds obtained by the buyer's increase in sales price?

Title Insurers:

                Licensees may believe logically that title insurers will disclose any additional encumbrance and the buyer will be thus informed. An easy assumption would be that title insurers will be responsible should such a lien not be disclosed or if a new buyer later is distressed over not having been fully aware the increased liability via the taxes. Be careful! It remains unclear how any of us will know that a PACE loan has been filed. Title insurers may protect themselves by exempting themselves from any obligation for said disclosure but merely warning potential buyers that such a lien might exist.  Buyers don't often read the entire preliminary title report and may not understand such an exemption.

Proceed with Caution

                If PACE financing continues to grow in popularity it will become more important for buyers and sellers to clarify such improvements and the accompanying financing encumbrances. This may be an issue that must be clarified regarding how any PACE debt will be resolved – paid in full at close of escrow or assumed by the buyer?


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