Property Assessed Clean Energy (PACE)
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
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.
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
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.
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.
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
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
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
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.
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?
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?
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
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
Webpage/Property Assessed Clean Energy (PACE)