Simply put, PACE allows property owners to borrow money to finance
measures which serve to advance a “public good” agenda (typically energy
efficiency and renewable energy measures) and repay the loan through a
surcharge via their property tax bills. Thus, allowing longer term
paybacks and addressing upfront capital barriers that often undermine
measure implementation. The PACE financing (loan) is secured via a tax
lien and is attached to the property itself rather than the property
owner. It therefore in no way affects the credit of the property
owner—another benefit.
The simplicity of the concept belies its power. PACE makes previously
unaffordable or financially unattractive energy efficiency and renewable
energy measures both affordable and desirable.
PACE loans have the following characteristics:
- the loan covers 100% of all costs (soft, hard and associated),
- the term and interest rate are set for the life of the loan,
- the loan is secured by a tax lien and can transfer to the new owner on resale,
- repayment terms can extend up to 30 years, and
- finally, the loan does not accelerate in the event of a tax payment
default or foreclosure, only the outstanding annual tax assessments
become due and payable.
Taken together, these features set PACE apart from other forms of
financing and make it uniquely attractive to both homeowners and
businesses.
PACE financing is applicable to both retrofit existing buildings and
upgrade new construction projects, and to building owners to refinance
existing PACE qualifying measures.
With over 10 years of experience in the field to look back at, it is
clear that PACE’s success is predicated not only on its financial
characteristics but just as significant, on the ecosystem that has
evolved to service and support it. The ecosystem consists of the
enabling legislative framework and the stakeholders:
- borrowers,
- municipalities,
- lenders (PACE Originators),
- consultants,
- subcontractors, and
- administrators.
Each stakeholder has a key role to play and the ecosystem must be
structured to ensure that stakeholders’ needs and wants are met.
Understanding the role of the ecosystem is essential; jurisdictions that
have failed to support the ecosystem’s stakeholders have seen PACE
programs underperform, or worse yet, completely fail.
Keys to Success for PACE Program Development
PACE’s success and the key role it will play in economic stimulus, job
creation and climate change is predicated on creating a market for the
private sector to “pull” the world towards a sustainable future by
harnessing the sustainability sector to the profit motive.
Cisco Devries, considered to be the “founder” of PACE, said the
following at a PACE conference in 2018. “There are only a handful of
ways to structure a PACE program successfully and a multitude of ways to
encumber it to the point of failure”. Given his background and history
as a founder of Renew Financial, one of the largest PACE Originators in
the USA, any jurisdiction considering setting up a PACE program will do
well to heed his words and structure the ecosystem accordingly.
With that in mind, the following are key elements that create a successful PACE program.
Unlimited Capital
Key PACE stakeholders (consultants, sub-contractors, and originators)
will only fully support and promote PACE if they are confident that
there is no limit on the availability of capital to service the demand
they support and create. While private capital comes with what appears
to be a higher interest rate than public funds, public funds are
inherently limited, and private capital by contrast includes numerous
administrative and other costs that are often externalized from public
capital. Most compellingly, private capital is functionally unlimited in
nature, and building PACE programs upon private capital is critical to
the success of these programs. The uncertainty associated with public
funds arising from the limits on capital availability and the risk of
political manipulation has resulted in significant underperformance in
publicly funded PACE programs. Businesses who would actively promote and
service the PACE ecosystem will limit their engagement if they cannot
be certain that their investment (time, HR, capital, marketing) will not
be undermined by a lack of available funds. On the other hand, when
specialized PACE lenders are involved, they use their ability to bundle
and securitize their loans to ensure that PACE capital is always
available to service the demand.
R-PACE & C-PACE
Residential PACE (R-PACE) and Commercial PACE (C-PACE) programs serve
two completely distinct markets and must be structured accordingly.
R-PACE is targeted to the homeowner. R-PACE’s success relies heavily on
contractors’ engagement and proactive participation. Most homeowners who
used PACE to finance a retrofit did not know about or consider PACE
until the contractor brought it to their attention. For this reason,
contractors’ needs must be prioritized in any R-PACE program.
Furthermore, consumer protection measures must be incorporated. Striking
a balance between protection measures, simplicity, approval process and
timing, and ease of use by contractors is key to the success of any
R-PACE program. For example, using RenoMarkTM members as a qualified
list of contractors is a great and simple way to support consumer
protection.
C-PACE is targeted to all other non-R-PACE property owners: commercial,
hospitality, institutional, industrial, etc. The approval process is
lengthy and significantly more involved than R-PACE and requires front
end cost commitments to cover items such as costing, energy modelling,
business case analysis, and mortgage lender approval, none of which are
required in the R-PACE approval process. So while R-PACE approvals need
to be free and quick (minutes to just a few days to confirm ownership,
tax history and sufficient equity) to ensure contractors’ engagement,
C-PACE approvals typically require front end capital investment and two
to six months to prepare.
Originators
These are the PACE lenders and fall into two categories: R-PACE and
C-PACE. In both cases however, the lenders play a key role in seeking
out and creating interested borrowers who become clients. This active
engagement by the Originators plays a key role in PACE’s growth and
development. The higher interest charged by Originators reflects in part
the role they play in marketing and creating PACE projects.
Role of Government
For government, the value of PACE is that it enables property owners to
make investments that are in the public interest (energy efficiency,
water efficiency, GHG emissions reduction, extreme weather resilience,
etc.). To realize this value, the most important PACE success factor is
confidence in the eyes of all other stakeholders (including property
owners, investors, contractors, suppliers, and mortgage lenders):
confidence that the program will remain a going concern, that the only
changes will be to improve and streamline, that the program will be
resilient to changes in political direction, and that risk is minimized
(and, more specifically, that consumers are protected). This is best
accomplished if the role of government is solely to set rules, and to
ensure that those rules focus on ends rather than means.
Where PACE legislation is too specific on means and methods, the
resulting complexity will discourage communities from launching in the
first place; what programs do launch will struggle to contain overhead
costs. Where government serves as funder, the program is subject to
budget scrutiny with each election cycle, and is at risk of cancellation
or disruption in ways that erode the confidence that is so critical for
program success; there is also the risk that the program will grind to a
halt once the allocated funds are fully invested.
By contrast, PACE legislation that is focused on outcomes will encourage
local programs that have minimal complexity and overhead costs, where
the municipality can play as small a role as its elected representatives
prefer. It will also open the door to private sector investment that
effectively has no upper limit, especially if the legislation allows
PACE loans to be securitized (bundled together and sold off) and the
proceeds used to recapitalize the program.
Connecting Capital to Public Good Measures
At its core, PACE programs are most successful when they respect that
the most cost-effective performance measures are implemented when the
ecosystem is designed to attract unlimited capital and deliver that
capital at the lowest cost possible to the borrowers with the least
amount of administrative cost in the transaction. Eliminating any
measure which interferes with this equation yields successful PACE
programs. Washington state’s recent C-PACE legislation serves as an
excellent example; the approval process has been simplified to such an
extent that the role of the 3rd party C-PACE program administrator has
been entirely eliminated and replaced with a simple registration process
that is handled by the existing municipal government infrastructure.
Conclusion
PACE can play a significant role in the meeting Canada’s climate
objectives, and support homeowners in their goals to reduce the GHG
impact of their homes. Further, PACE programs can support the
development of a robust industry supporting energy efficiency in every
local community. This program also has the potential to develop a pool
of patient capital toward energy efficiency and climate change
mitigation. As the PACE model becomes more entrenched, there may be
opportunities to expand the financing model beyond clean energy
objectives, and support other public interest goals, such as creating
more multi-generational homes, and supporting more seniors as they age
in place.