PACE stands for Property Assessed Clean Energy. PACE programs offer financing for energy efficiency, renewable energy, and water efficiency upgrades to the property. The types of projects covered include solar panels, heating and cooling equipment, insulation, efficient windows, landscaping, and more.
PACE loans have some interesting features: they are long-term, require no money down, and have relaxed eligibility criteria. The loan is attached to the property, and not the borrower. Repayments are made through the property tax bill.
Using PACE financing for solar panels is a popular choice. Because home solar panel system offers big financial savings, they allow for PACE-financed projects that are cash flow positive from year one. In other words, solar immediately reduces your electricity bill by more than the PACE assessment on your property tax bill.
PACE programs for residential properties are currently active in California, Florida, and Missouri. Where it's available, local solar companies can present you with options and process the paperwork for a PACE loan for solar panel installation.
What is a PACE program?
PACE was pioneered in 2008 in Berkeley, California. It is a financing model that operates through state legislation and local government participation. In other words, the state is responsible for passing enabling legislation, and where this exists, the local governments have the choice to participate in the government.
The role of local governments and municipalities here is key. If they decide to opt in, they:
Issue municipal bonds to fund the loans;
Partner with local companies to administer the program; and
Allow repayment through property tax assessments.
Why were PACE programs introduced?
PACE programs are designed to address multiple goals at once:
Assist property owners to make sustainable and eco-friendly building improvements. The owner gains financially from energy savings which are greater than the loan repayments, as well as through an increase in the property’s value.
Reduce carbon emissions by financing initiatives that result in either reduced electricity usage through energy efficiency, or by the production of electricity through renewable energy sources.
Help the local economy by generating local solar installation and green home improvement jobs.
R-PACE vs. C-PACE
PACE is divided into two subcategories, R-PACE and C-PACE. R-PACE stands for residential PACE, and it refers to the financing of energy efficiency projects for homes. C-PACE, which stands for commercial PACE, is solely for commercial property.
PACE loans for home improvements such as solar panels have been a big success in terms of number of loans disbursed. As of May 2018, an impressive 220,000 home upgrades were paid for through PACE loans, according to PACENation.
PACE loans: how do they compare with solar financing options?
A quick editorial note: PACE financing is not technically a loan. A traditional loan is tied to the borrower/property owner; but with PACE, the amount is attached to the property instead. However, PACE does usually have loan-like structure of repayment, i.e. principal plus interest. More importantly, it is commonly referred to as a loan in the media and common parlance. As such, we use the term ‘PACE loans’ along with ‘PACE financing’.
Residential PACE programs offer loans from between $5,000 to $100,000. The average PACE loan, however, falls towards the lower end, at $25,000 each. Payback periods are flexible, depending on the size of the project as well as its functional life. Typically, the timeframe for repayments is 5 to 20 years long.
PACE programs have some unique features compared to other solar loans. Here is what you need to know:
PACE loan highlights
Debt tied to property, not borrower: This is the biggest difference between a PACE loan and a mortgage or home-equity based loan. 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 then becomes responsible for the remaining repayments.
Easy to get: PACE loans are easy to qualify for. You can receive a PACE loan even with poor credit scores. You do, however, have to be up-to-date on mortgage payments, and can’t have declared bankruptcy within the last 2-3 years.
PACE loan risks
As with any major financial commitment, it is important to be aware of possible downsides to PACE financing:
Senior lien position: PACE obligations are usually senior or first liens, which means that they take priority over mortgage payments. Because of this, lenders who insure mortgages with Freddie Mac and Fannie Mae may refuse mortgages for houses with a PACE lien.
Higher interest rates: PACE loans are generally offered at rates of around 6.5 - 9%. By comparison, a Home Equity Line of Credit (HELOC), a common way to finance solar panels, charges roughly 4-6% interest. However, PACE loans are cheap when compared to other credit sources like credit cards.
Borrowing more than you can repay: This is actually a good rule of thumb when taking any sort of loan, really. In some cases, consumers opt for projects that are not cost-effective and then struggle to make the repayments. This has raised concern among consumer protection advocates.
PACE loans for solar: making it work for you
Solar panels for your home are an effective way to save money and earn a great return on investment. But is getting a PACE loan the right way to finance them in your circumstances? Be sure you’re making the right decision by following these steps:
#1 Calculate how much you will save
Use a solar calculator to see a forecast of the costs and savings of solar panels over a 25-year period. The estimate takes into account your energy needs, the rates offered by your utility and all applicable incentives and rebates. It will tell you:
You will now have a clear idea of how much much money you save with solar panels.
#2 Check your financing options
Compare the PACE loan with other solar financing options. You can usually a get a lower interest rate with a HELOC or home equity loan. However, if you a have less-than-stellar credit score, or have only built up limited equity on your home, a PACE loan might be easier to get.
#3 Use a vetted local installer
Hire reliable solar installers with good reviews; SolarReviews is a great resource for this. You should also shop around by getting multiple quotes and comparing solar panel prices online. This way you can be confident of getting a good deal that matches your needs.