3 Misconceptions Regarding PACE Financing In The Industry
There are major misconceptions surrounding Property Assessed Clean Energy loans, which are used to finance energy-efficient upgrades to commercial and residential properties alike.
Unfortunately, these misconceptions have been known to cause property owners to shy away from pursuing more environmentally friendly and affordable renovations. PACE financing is available in 19 states and Washington, DC, according to PACENation, and was designed to incentivize owners to finance energy-efficient and renewable energy property upgrades. PACE funds the upfront costs of such improvements, which the owner then pays back over time, typically within 15 or 30 years.
PACE financing represents the fastest-growing loan market in residential markets, and raised a total of $3.4B by the end of 2016. On the commercial side, PACE adoption is much lower and has raised only $335M, largely due to confusion and misconceptions.
These are some of the largest misconceptions regarding PACE financing, according to a recent Morningstar Credit Ratings report.
1. PACE Loans Stay With The Owner Until Paid Off
Fallacy: Many property owners fear PACE financing obligations are personally tied to them for the entire duration of the term, even after they sell the property tied to the loan.
Fact: PACE financing is tied to the asset, not the owner. That means the obligation to pay should remain with the property. When the property is sold PACE assessments may pass to the new owner. If current owners are worried that obligation will decrease the property's marketability, they have the option to repay the PACE assessment when selling the property.
2. PACE Loans Add Risk To Mortgages
Fallacy: Some developers believe PACE loans will drastically increase the risk of the the underlying mortgage, fearing that even if they default on the loan, they will still owe the entire PACE balance.
Fact: While PACE does increase a property's loan-to-value ratio, it only minimally increases risk to the mortgage. PACE assessments are typically small, usually around 14% of the monthly mortgage payment. In addition, the property improvements the loan pays for could cut property costs and increase the building's value. While PACE payments do take priority over the mortgage lender, if an owner defaults on a PACE loan only the overdue amount is due, not the entire balance. The remaining outstanding PACE obligation may pass to the next owner.
3. The PACE Program Lacks Oversight
Fallacy: Because PACE financing is the result of both public and private organizations, many property owners believe the program lacks clear, sufficient oversight.
Fact: Local governments set guidelines and policies for PACE financing, including interest rates, eligibility criteria and fee structures. PACE programs are continuing to evolve, and laws are increasingly requiring more consumer safeguards and full disclosures to increase program transparency.