U.S. Department of Energy Energy Efficiency and Renewable Energy

Disadvantages of Property-Assessed Clean Energy Financing

Property-assessed clean energy (PACE) financing can be an attractive option for property owners, but there are certain limitations local governments should recognize.

Available only to property owners. PACE programs are available only to property owners; renters cannot access this program directly. The main reason is split incentives—the owner is the one that invests in the improvements, but the tenants generally pay the utility bills (and reap the energy/cost savings). (Grantees should note that there is a type of commercial lease, typically referred to as Triple Net, wherein property taxes flow through to tenants, in which case the split incentive disappears). In some U.S. cities, a significant percentage of the residents and commercial businesses are renters. In such cases, local governments will need other targeted energy efficiency policies and incentives for rental properties in addition to the existing low-income weatherization programs.

Cannot finance portable items. PACE programs cannot finance portable items, such as ENERGY STAR-qualified lightbulbs, refrigerators and appliances, and other products because they can be easily removed when the current owner leaves. Local governments must find other ways to encourage the purchase and use of these valuable upgrades.

Requires dedicated staff time. Administering a PACE program requires time on the part of local government staff. The local governments with existing PACE programs generally have dedicated staff with the time and motivation to run a proper program, as well as support from their local mayors, council members, and other government officials.

High legal and administrative set-up expenses. Now that there are several live programs in California and Colorado, replicating PACE will be easier and likely less costly for grantees just getting started. Local governments may also choose to work together to pool their limited resources and create countywide or regional programs. Still, the concerted effort needed to pass statewide enabling legislation where it is lacking, gain local approval, as well as design and administer a commercial PACE program should not be underestimated.

Not appropriate for investments below $2,500. High origination and administrative costs make PACE programs inappropriate tools for financing investments below a certain cost threshold, typically $2,500.

Some resistance by lenders whose priority in foreclosure may be reduced. If a property should go into foreclosure, typically any assessments that are past due (including incremental PACE assessments, as opposed to the entire PACE-financed amount) would have to be paid off first, thus making existing lenders/mortgage-holders “second in line.” Lenders/mortgage-holders may be resistant to having their existing claim on the property (in foreclosure) become subordinate to PACE.