Conventional wisdom has it that once the Federal Housing Finance Agency (FHFA) issued its now-infamous letter of July 2010, outlining its opposition to property-assessed clean-energy (PACE) financing plans, PACE was—for all intents and purposes—dead in the water.
PACE pioneers such as Palm Desert and Sonoma County quickly shut down their programs, and plans for new programs were put on hold across the country.
But a different and more hopeful narrative emerged earlier this month when 120 local government, business, and nonprofit officials gathered in Palm Desert, California, for the “PACE Solutions” conference. The two-day event focused on the creative approaches being used to circumvent the FHFA restrictions, while rallying the troops for a renewed campaign to break the federal logjam.
“This isn’t about one company or one city,” said Cisco DeVries, one of the original architects of PACE and now president of Renewable Funding, a company that designs and manages PACE and other clean-energy retrofit programs. “It is now about 25 states, each one with legislators and mayors and nonprofit organizations that got behind this idea and made it happen. We’re not forgetting, and we’re not going away.”
In fact, Palm Desert and Sonoma County restarted their programs within weeks of the FHFA action, and Babylon, New York—another early adopter—never closed down. All three are suing the FHFA in federal court.
At the same time, a number of new projects are in the works, using PACE for commercial retrofit projects, an area immune to the FHFA restrictions.
Eric Friedman, a St. Louis, Missouri, developer and Urban Land Institute member who attended the conference, said the whole PACE package—green retrofit with positive cash flow—makes sense economically and competitively.
“It reduces our cost to operate a building; it makes our buildings more sustainable and that fits into making our communities more sustainable and competitive,” he said. “We’re all competing for tenants, for sale of properties, and more and more clients and consumers are asking for and demanding more energy-efficient solutions.”
Conference workshops highlighted current activity in both residential and commercial PACE programs.
Residential: Palm Desert and Sonoma reopened their PACE programs with a new disclosure form in their application packets, warning residents that refinancing or selling their homes would likely require a lump-sum payoff of any clean-energy assessments. Both programs also have model underwriting standards—for example, a PACE financing cap of 10 percent of a home’s assessed value.
Still, the FHFA restrictions have slowed activity. Sonoma’s program—which covers the county’s nine cities and unincorporated areas—is currently financing $1.2 million to $1.5 million in projects a month, down from $2 million to $3 million before the FHFA letter, county treasurer Rod Dole said.
The upside, he said, is that the county has worked with banks to come up with solutions for homeowners who want to sell or refinance a property that has a PACE lien. The key, he said, is the lower operating costs and higher value of retrofitted, energy-efficient homes.
For the sale of a hypothetical $300,000 home, Dole said, “The buyer, seller, and appraiser get together, and they all agree the property is now worth $300,000 plus the value of the assessment. They agree to the higher price because the assessment doesn’t have to be paid off over 20 years. The property can now be sold for $325,000 and the assessment is paid off.”
Commercial: Sonoma County is also leading the pack here. Dole reported on the county’s first public/private partnership, Sonoma Mountain Village, a PACE retrofit project that will turn a former industrial property into a super-energy-efficient commercial park. Private funding will be provided through the Clean Fund, a San Francisco–based PACE consulting firm, with the county handling the administrative and contracting side of the project, Dole said.
Elsewhere, programs appear to be in the “warehousing” stage, building an inventory of potential projects before putting a PACE financing package together with private funding.
“In central Ohio, we have a group of 20 companies . . . analyzing their opportunities for energy-efficient upgrades—air compressors, pumps, drive motors, water recirculation,” said Andrew Mangan, executive director of the U.S. Business Council for Sustainable Development, which is coordinating the project. “There will be a good package of projects in the tens of millions of dollars. The PACE financing model will underwrite future development.”
Alan Strachan of Ygrene Energy Fund, another company focusing on developing privately funded PACE financing, sees a huge opportunity for clean-energy bonds in the commercial mortgage–backed securities market.
“PACE commercial and industrial is the best commercial mortgage on the market,” he said. “This is triple-A paper in front of everything else. If you put commercial PACE bonds out there, responsibly underwritten, the bond market has an appetite for a significant percentage of that.”
