What Is a PACE Loan and Is It Right for You?
By: Charles D. Nostra, Esq.
Property Assessed Clean Energy (PACE) programs provide an alternative way for Florida property owners to finance certain energy efficiency and wind resistance (i.e. hurricane hardening) improvements. This no money down, 100% financing program is being heavily marketed in Florida ( especially South Florida) by telemarketers, mailings, TV & radio commercials and direct door-to- door solicitation.
Florida’s PACE program allows participating counties, municipalities, and certain other entities to assist property owners in making upgrades to their properties. The costs are 100% financed and the repayment of such improvements is secured by a recorded lien and the repayment is made in yearly installments paid through non-ad valorem assessments on the property tax bills with repayment schedules up to 20 years.
The qualifying improvements allowed to be financed under the PACE program are quite broad and include:
Energy conservation and efficiency improvements which include, but are not limited to, air sealing; installation of insulation; installation of energy-efficient heating & cooling systems; replacement of windows; solar energy and wind energy.
Wind resistance improvements which include, but are not limited to, improving the strength of the roof deck attachment; installing wind-resistant shingles, gable-end bracing, storm shutters or other opening protections, and secondary barriers to prevent water intrusion; and reinforcing roof-to-wall connections.
The PACE programs are financed through the issuance of municipal bonds and are administered by third-party administrators on behalf of participating counties, municipalities, and districts.
Currently there are five PACE programs operating in Florida:
Alliance NRG (Florida Pace Funding Agency (FPFA)) is available to any subscribing municipality in Florida. It includes both residential and commercial properties (the commercial program is administered through Counterpoint Sustainable Real Estate). The program currently serves over 29 counties.
Ygrene Energy Fund I (Ygrene Works) is the exclusive administrator of the Clean Energy Green Corridor District which currently includes over 85 member municipalities.
Solar Energy Loan Funds (SELF) is a non-profit community development financial institution. It administers St. Lucie County’s commercial PACE program.
RENEW PACE provides both commercial and residential funding in partnership with local governments.
Leon County Commercial PACE Program was created by the Leon County Energy Improvement District; it provides for both residential and commercial property owners.
When a property owner chooses to take part in a PACE program, they sign a financing agreement and a lien agreement with the plan administrator. This lien agreement is typically recorded in the official records and will reference that the agreement is part of the PACE program.
The PACE liens and payments are fully assumable and the repayment period can be up to 20 years. The lien stays on the property and the yearly assessment continue on the tax bill until paid. While the sales pitch may be the agreement is “easily assumable by Buyer” or “lien stays with the house” or “your home pays for the improvements” there are some drawbacks that have been discovered in practice.
Many consumers may not fully understand that the amount financed will be added to their tax bill in yearly assessments. This installment will cause an increase the tax bill by the amount of the assessment. Property owners who do not plan for this increase in tax bill may be surprised in November. Also, if there is an existing mortgage on the property and the lender escrows for taxes, the escrow will be short the amount of the first year’s assessment (as the lender will be unaware of the Pace lien until November). This could result in a demand that the property owner pay the entire escrow shortage to the lender or the lender may increase the escrow amount required to cover the initial year’s assessment and the next year’s assessment (which could substantially increase the monthly mortgage payments). If the property owner has not planned for or cannot meet the higher tax burden (or higher escrow payments) they may experience financial difficulty.
For certain property owners this is a good way to make improvements to their homes and spread the costs out over 20 years, but if you plan on selling (and believe this is a good way to increase the home’s value) or refinancing in the near future, it could cause some unintended consequences
First: Florida law requires the seller to disclose the existence of a PACE lien to a buyer in the contract or other written communication BEFORE a contract is signed. The required disclosure language can be found in Florida Statutes Sec 163.08 (14).
Second, a buyer may not agree to assume the PACE agreement in which case it will have to be paid off at sale. Also, if you increased the sale price because of the improvements, they have not yet been paid for and the sale price may be inflated (particularly if the buyer will assume the PACE agreement).
Third, many lenders, including HUD, Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) have indicated they will not allow their mortgages to be subject to the PACE liens. This has led to the requirements that these liens be satisfied as a condition of approving a mortgage (new or refinance loans). This may limit the benefit the property owners realize using the program as there may be substantial pre-payment penalties.
So while PACE provides another resource for property owners to finance improvements to their property, they should carefully consider the Program and their future plans and weigh the costs and benefits of the PACE program accordingly.