The Beginner's Guide to Getting Started with PACE Financing

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March 1, 2017

Property assessed clean energy, better known by the acronym PACE, is a financing mechanism allowing homeowners to fund improvements that will increase the efficiency and eco-friendliness of their property. PACE programs are straightforward, but the financing is a little different than standard home improvement loans from a bank. Given the high-interest rates, expensive closing costs, and other drawbacks of bank loans, the PACE alternative is worth a look.

Why Is PACE Financing a Worthwhile Option?

PACE financing can often be a viable alternative to a standard home improvement loan. What are the positives of PACE financing? Unlike banks, the ultimate goal of these programs is not to earn interest for their shareholders. Rather, PACE options are implemented to help more people afford upgrades that will make their homes more efficient and more resilient.

Rates are generally low, and they do not fluctuate. Best of all, homeowners pay for their improvements incrementally as a line item on their annual property taxes. This allows them to reap the benefits of a more energy-efficient home and then use some of the savings on their energy bills to pay for the project over time.

Not Offered Everywhere

If you decide that PACE financing is a viable option, the first step is determining whether the program is offered in your local area. States must approve the financing programs, and local authorities (either cities or counties) administer them. Though most localities are interested in improving the energy efficiency of homes so that pollution levels are lowered, and there is less strain on the energy grid, not all cities and towns offer PACE financing.

More and more municipal governments are getting on board with PACE financing, but it is a relatively new trend that is still in the early stages of growth. Even if the local area does not have the option now, one could soon be available, especially if the state already has legislation in place to enable such programs.

As of early 2017, PACE financing has been enabled in 33 states, along with the District of Columbia. However, “enabled” does not mean the same as “active.” Therefore, even if your state legislature approved PACE financing, your local government is not forced to offer the program. In addition, some states have approved PACE financing and then placed programs on hold. At the time of this writing, PACE programs are currently active and operating in 19 states (plus D.C.), with residential programs in California, Florida and most recently Missouri. For the most updated list, visit PACENation.

Is Your Project Eligible for PACE Financing?

Some eligible upgrades are obvious because of the energy savings they bring to homeowners:  solar panels, energy-efficient LED lighting, upgraded insulation, low-flow plumbing fixtures, and drip irrigation for gardens and lawns. New windows, window sealing, or even increased shading may also earn acceptance from the local PACE administrators. More efficient heating and cooling systems also qualify in most areas, as should improved duct systems and more efficient venting.

Major efficiency upgrades usually qualify for PACE financing, but smaller improvements could also receive approval providing they meet the savings-versus-cost requirements. Homeowners, therefore, are not required to “think big” when planning their next efficiency project.

Choose Your Contractor Carefully

In a document outlining the guidelines for PACE pilot programs, the U.S. Department of Energy stresses the need for qualified professionals to audit and complete projects. Auditors and contractors should not only have general licenses to conduct business in that given state, but they should also be authorized in the relevant specialty. In states that abide by these rules, homeowners may not be able to hire the cheapest contractor, but they will be certain that a qualified professional will complete the work. Knowledgeable PACE financing experts can connect construction firms and homeowners with specialists who are authorized to work on the projects.

Homeowners should also always be certain that the products and services they receive are warrantied. This is crucial because unforeseen repair costs could quickly undo any energy savings. Obtaining the best warranty could mean forgoing the cheapest price, but, in the long run, the peace of mind will be worth the extra money.

Debt of Property and Ability to Pay

PACE financing is tied to the property, not to the homeowner. This means that the payments for the project are still paid through the property taxes after a change in ownership. The payments are, in essence, sold along with the house. Therefore, a homeowner need not commit to living in a home for the next 20 years to take advantage of PACE financing. That said, in order to obtain PACE financing, most municipalities want assurances that a property owner can make the annual payments for the improvement.

In most cities, this is done by looking at the record of past property tax payments. (As long as you have been on time with your property taxes in the past and are not currently delinquent, everything should be fine on this front.)

How Big Should the Improvement Be?

According to the U.S. Department of Energy (DOE) guidelines, PACE assessments should not exceed 10 percent of the property’s overall value. Also, because there are administrative costs that the local government needs to recover, projects cannot be too small. The DOE recommends that local authorities put a minimum of $2,500 on PACE-funded projects. The goal of these guidelines is to ensure that the financing works for both the homeowners and for local governments. These rules and measures are meant to increase the likelihood of a profitable upgrade.

Banks that offer home improvement loans cannot provide the same kind of risk-to-reward equation – they are only concerned about the borrower’s ability to pay back the loan. States and cities are becoming aware of the economic and environmental benefits of PACE financing. More and more are ready to adopt this idea and offer it to their citizens.

Find out if PACE financing is available in your area – call Ygrene at (855) 901-3999 or email us: