The truth about PACE financing

PACE, or the Property Assessed Clean Energy Program, was created in 2008 by Cisco Devries, the former chief-of-staff to the mayor of Berkeley, California.

The original goal of the PACE financing program was to increase access to sustainable and eco-friendly building improvements to low-income homeowners, reduce carbon emissions, and help local economies by generating green jobs. Home solar panels became a popular residential project factored into this program.

With the help of government promotion from big names like former president Barack Obama, the PACE program gained plenty of traction. In 2014 alone, $148.7 million dollars in loans were distributed to residential property owners. Just a year later, that number quadrupled to over half of a billion dollars in loans.

Though the initial intent seems innocent enough, PACE financing has gained a bad reputation because it has been used by bad actors to take advantage of homeowners.

How does PACE financing work?

You're probably thinking: how does this all work?

PACE financing arrangements are set up a lot like regular loans. They usually have a loan-like payment structure, with the borrower required to pay back the principal along with interest. PACE financing is often referred to as “PACE loans” by the media, professionals, and consumers.

So, what makes PACE different from a traditional solar loan? When financing through PACE, you repay the money through an increase in your property taxes. The borrowed amount through PACE financing is attached to the property. Both secured and unsecured loans, on the other hand, are tied to the borrower themselves.

Let's say you get solar panels installed to your home through a PACE lender. Your property taxes will increase, with the increase going towards paying back the borrowed money. Most PACE loans are worth about $25,000, and have terms anywhere between five and 25 years.

PACE has some unique features – such as requiring no money down, having long-term payback periods, and relaxed eligibility requirements.

Where is residential PACE financing available?

Residential PACE (R-PACE) financing is currently offered in the following states:

• California

• Missouri

• Florida

However, plans to expand the program to New York and Ohio are in question, and could be available in the coming years.

There are also PACE programs for larger-scale commercial and multifamily properties, called C-PACE. C-PACE is more widely available than R-PACE so it’s a bit more accessible.

PACE financing vs. cash purchase

Purchasing solar panels with cash will always get you the lowest price and the best long-term savings, as you don’t have to pay any interest. But, not everyone has thousands of dollars on hand, so financing is the most popular way homeowners go solar.

Financing options like PACE and solar loans allow you to still retain ownership of your system and take advantage of incentives without having to hand over $20,000 in cash. It takes longer to see a return on your solar investment when you finance with a loan or PACE, but you still see substantial electric bill savings.

Pros and cons of PACE financing

Like most things in life, there are upsides and downsides to PACE financing. PACE isn’t shy of these – there are plenty of advantages and disadvantages to taking this route when you finance solar or other home projects.

Pros

• Debt tied to property, not the borrower: A PACE loan becomes part of the property assessment and is repaid through property tax bills. It functions as a property lien; this means that loan repayments transfer with the home when it is sold. The new owner becomes responsible for the remaining payments.

• Low, fixed interest rates: PACE financing terms are generally quite attractive, offering fixed rates of roughly 6.5% to 9.0%. Fixed rates are good protection against possible interest rate hikes.

• No money down: PACE loans offer up to 100% percent financing. This is helpful for homeowners who don’t have spare cash on hand.

• Easy to get approved: PACE loans are easy to qualify for because they are based on your property equity, not your personal finances. So, even if you have a poor credit score, you can still be eligible for PACE financing. You are, however, required to be up-to-date on mortgage payments and can’t have declared bankruptcy within the last two to three years.

Cons

• Difficult to sell home: PACE obligations are usually senior or first liens, which means that they take priority over mortgage payments. First liens may cause lenders who insure mortgages like Freddie Mac and Fannie Mae to refuse mortgages for a house with a PACE lien. Potential buyer’s also could be scared off by taking on debt or buying a home with this type of lien.

• Risk of losing your home: Because PACE is secured by your property, if you fail to make payments on time, or you can’t afford them you run the risk of losing your home.

• Borrowing more than you can repay: The easy approval process might not always be an upside. In some cases, consumers opt for projects that they cannot afford but are still approved because of PACE’s structure. Then, they struggle to make repayments and end up in hot water. This has raised concerns among consumer protection advocates.

• Contractors taking advantage of you: Plenty of stories have surfaced of sketchy contractors that push PACE to customers without fully explaining how it works. Because of unsavory business practices, some homeowners get a PACE loan and aren’t entirely clear of how much their property taxes will be raised or the risks of financing through PACE.

PACE controversy: Red flags to know about

There are a few fundamental issues that have created major problems with some customers who finance through PACE. Here are some red flags you should be aware of.

Contrary to what a lot of people think, PACE is not a federal government program. Since it’s often advertised as a government handout, it gives customers a false sense of security. This gives contractors the upper hand to use this as a sales tactic and lure customers in.

On top of this, there is no independent third party assessing these homes for upgrades or improvements. This can lead to PACE assessments virtually telling customers anything they want, coercing people into thinking they need this work done on their house. In Florida specifically, the state does not require PACE providers to explain the cost of improvements to their homes, or even check if the people who sign up for it can actually understand the terms and afford it.

Even worse – PACE loans are not subject to the same consumer protections as a standard loan. There are stories that have surfaced in the news of customers ruining their credit, piling on mountains of debt they can’t pay off, and even losing their homes!

Is PACE financing the right option for you?

We’ll keep it real with you – the best option when purchasing a solar system, or any other eco-friendly home project, is to pay it completely off in cash.

When it comes to going the financing route, you may be better off with a structured and regulated loan option from traditional providers. The truth is, PACE only seems to be worth it for those who own their home and can afford to have their property taxes go up. Those who can’t, seem to be left out of luck and could quickly find themselves in a bad financial situation.

If you don’t qualify for a solar loan, personal loan, or home equity line of credit, there are solar financing options available that aren’t PACE loans. You could get a solar lease or PPA, where you don’t own the system, but you get to enjoy reduced energy bills. With today’s high-interest rates, solar leases and PPAs have the potential to earn similar lifetime savings to solar loans.

We also recommend you do your research – if you live in a state where PACE is an option, be sure to ask your local solar installer for more information on PACE before making a final decision. And make sure your installer is one you can trust! Look through a solar company’s customer reviews, make sure they’ve been in business for at least five years, and get quotes from multiple companies before committing to one.