Energy Efficient Retrofitting – The Emergence of PACE Bonds

by Joe Stampone on September 1, 2010

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Energy-Efficient Retrofitting
One of the great opportunities for building owners in a down economy is energy-efficient retrofits. An owner can quickly increase the value of a building by decreasing utility costs while simultaneously increasing the demand for space.  

However, there are two primary obstacles to energy-efficient retrofitting of existing buildings: the actual and perceived capital requirements and, assuming that costs are incurred, the distribution of costs and potential benefits. The first concern involves the relatively significant upfront capital requirements needed to execute a building retrofit. The second issue involves the questions of who pays the cost, how it is paid, and who receives the potential operating expense savings.

PACE Bonds
Recent legislation has created a financing mechanism that begins to address both concerns. Property Assessed Clean Energy (PACE) bonds are bonds issued by municipality or qualified agency to fund the upfront costs of building energy retrofits. The bonds are repaid by the property owner through a special assessment on the property tax bill that equals the annual energy cost savings. This mechanism eliminates the need for any upfront capital contribution by the property owner, and the subsequent repayment runs with the property, not the individual owner. The repayment can also be passed through to tenants who are responsible for a pro rata share of real estate taxes. This enables owners to execute retrofits without worrying about the prohibitive upfront expense.

To date, twenty-two states have enacted PACE bond enabling legislation. Two areas in particular, Babylon, NY and Berkeley, CA, have taken the lead in implementing retrofit financing programs, with early apparent success.

A report by Pike Research projected that $2.5 billion will be invested annually in financing for commercial properties through PACE by 2015.

Issues With PACE Bonds
PACE has come under scrutiny from lenders, particularly in the residential sector.  When homes go into foreclosure, property taxes must be paid by the lender, which includes PACE financing. This would increase the liability of the lenders. Many homeowners have put their PACE plans on hold, anticipating that mortgage lenders backed by Fannie and Freddie will demand energy liens be paid off before issuing new loans. The bank does not want to be in the second position to anything. The only way this will be solved is through regulation.

PACE bonds have great potential, however we must analyze their potential application to dense urban areas such as New York City, Chicago, and San Francisco, and suggest a model for scaling up the program buy drugs online above the local municipal level.

What issues do you see with PACE financing?

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