An Introduction to Property Assessed Clean Energy (PACE)

Executive Summary

Despite enormous market opportunity, strong interest in corporate responsibility, and improving economics, solar deployment in the commercial and industrial (C&I) sector has been largely stagnant over the past 5 years.

The complexities of opening the C&I sector to broad solar deployment are based on a range of inter-related issues, including: the manner in which U.S. commercial real estate is often leased, which creates a “split incentive” among real estate owners and building tenants; unrated credit among small commercial entities; a lack of “tax appetite” or ability to monetize tax credits and depreciation benefits that are critical to solar project cost-effectiveness; and constraints of cash to invest in solar and other energy production or saving investments.

Property Assessed Clean Energy (PACE) is a financial tool that can overcome many of these barriers. PACE for commercial buildings, or C-PACE, has been approved via enabling legislation in 34 states and the District of Columbia. 40 distinct programs are now being implemented across 19 states.

PACE financing includes a range of benefits:

• 20 Year Financing: PACE allows up to 20+ year financing terms that do not need to be paid-off upon a refinancing or sale of the property.
• Solves Split Incentive: PACE can mitigate the complex split incentive issue common in commercial real estate, particularly in so-called ‘triple net leases’ where tenants pay property taxes, energy bills, improvements, and other costs.
• Property-based Underwriting: based primarily on the property, not the borrower’s credit, which may allow PACE providers to offer better terms than other funding sources.
• Runs with the Land: The PACE lien stays with the property, whereby payments generally transfer to the new owner without issue.
• Frees up Cash: PACE frees up cash so a company does not have to decide between installing solar or investing in projects that are closer to their core business.
• Third-Party Ownership: Entities without a tax appetite can utilize PACE with a third-party ownership structure which allows the developer to monetize tax incentives to subsidize the solar project.
• 100% Financing: PACE can finance 100% of the project costs, including the related improvements such as necessary roof repair and replacement. Soft costs that are not eligible for the solar Investment Tax Credit (ITC) such as legal and broker fees are also includible in the PACE financing.
• Works Well with Other Incentive Programs: PACE can be utilized in conjunction with many existing tax credit and incentivized development programs.

Relative to other financing options, PACE can produce better cash flow on a cumulative and present value basis. In one analysis of a carport project in northern California, where the end-user was able to directly monetize the tax credits, a PACE assessment produced the best economic return among 5 competing consumer finance options. A second analysis, shown in Figure ES-1, also showed PACE as the best financing option for a solar project currently in development in southern California. In that case, the end-user, or off-taker, was unable to directly use the tax credits, thereby limiting the range of financing options to a standard power purchase agreement (PPA) and a PPA via a PACE assessment.

Expansion, Education and Outreach

PACE can be elegant solution to certain market barriers.  But one that requires a significant level of infrastructure development and market education.  PACE requires a high level of education including among developers, real estate owners and realtors, mortgage lenders and capital market investors (i.e., entities that wrote or hold the mortgages), title companies, appraisers and others.   SEIA can facilitate such education and outreach among the organization’s membership and stakeholders that engage with our members to further the solar and PACE markets.

Streamlining and Consistency

Consistent and high quality practices among all actors along the PACE value chain could improve comprehension of and trust in the PACE model, including a faster and more consistent lender consent application and process.  Fragmented legal environments and high variability across programs also represent barriers to the financing model.  SEIA, PACENation, banking and real estate associations, and others could be working together to facilitate a clear and concise lender consent application and review process. 

Additional Capital and Financial Products

Title, bond insurance, and more financiers to offer PACE and to do so at lower financing costs could open opportunities for the PACE financing model.  Participants to the PACE Strategy Summit broadly agreed success will breed success, that as PACE legislation and municipal opt-in is more widely adopted, it will bring more comprehension and interest from stakeholders in the real estate, deployment, capital, and financial instrument space