Pros and Cons of Using PACE Energy Financing

Interest in making properties energy efficient and more affordable is growing dramatically as evidenced by the huge increase in the installation of solar panels. But how these improvements are paid for can create problems if you want to sell or refinance your home.

In 2008, California passed a law allowing residents to borrow money for energy-saving home improvements such as solar panels and energy-efficient windows. The program is called “Property Assessed Clean Energy”, or PACE. What makes PACE different from traditional home improvement financing is that PACE loans are billed as a part of the property’s tax bill and are paid along with the assessment. As a result, when a home is sold or refinanced, there is no title lien such as a Deed of Trust to pay off in order to have clear title. The improvements stay with the home and subsequent buyers reap the benefits. Since it’s inception, more than 50,000 California homeowners have signed up.

Yet there really is a loan and it really is secured with a lien it’s just not readily apparent because it is built into the Property Tax Assessment and paid every six months as a part of the Property Tax Bill. As many homeowners have recently discovered, the PACE loan program can create some unanticipated and very difficult problems:

1) Because getting a PACE loan lacked many of the disclosure protections of a lien-based loan, many people paid much higher prices for their energy improvements and substantially higher than market interest rates;

2) Although attaching the PACE loan to the tax bill was thought to make financing of a property easier, in fact the opposite can occur. Traditional lenders realize that this improvement has boosted the tax liability on the home and given the PACE lender in effect a super-priority over purchase and refi lenders. As a result, many lenders – including Fannie Mae and Freddie Mac – will not finance properties with PACE loans;

3) Not all Buyers want to be saddled with the increased tax bill liability so Buyers may refuse to buy a home with a PACE loan or they may demand that the Seller payoff the PACE loan as a condition of purchase which could involve pre-payment penalties. Further, since the value of the energy improvement has likely been factored into a property’s price, isn’t the on-going tax bill assessment the equivalent of paying twice?

4) Lastly and perhaps most importantly, timing issues with PACE loans can extensively delay or even kill a purchase escrow. Typically, when a Purchase Contract has been entered between a Buyer and a Seller, the escrow company sends a Payoff Demand to each lender with a recorded lien. Those lenders are required by law to respond quickly. Not so with a PACE loan. There is no legal process for sending a Payoff Demand to the County Tax Assessor nor any law requiring a response. Thus, the parties may end up waiting up to six months for the next Property Tax Bill to come out so a payoff could be determined. Meanwhile, loan commitments could expire and Buyers could walk-away.

Despite these concerns, homeowners and government authorities remain interested in the PACE program which plays an important role in making our energy needs more efficient and more affordable.

To learn more about the PACE Program, click on this informative Wikipedia Article:

And here is a very recent Sacramento Bee Article addressing concerns with many energy efficiency financing programs, including PACE:
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