A New Path to Energy Efficient Homes

Property Taxes are a Solution to Financing the Cost of Home Energy Retrofits


Communities across the country are picking up the PACE.

Short for Property Assessed Clean Energy, PACE programs enable cities and counties to provide loans to homeowners — and in some cases business owners — who want to go green and save green by making energy-conscious upgrades. But not just any loans. These loans are repaid through property tax assessments.

Improving energy performance can be expensive. Overtime, lower utility bills will offset the cost, but people don’t always stay in their homes long enough to make the investment pay. While everybody wants an energy-efficient home, nobody wants to pay full boat if they’re not going to reap the full benefit.

That’s where PACE programs come in. If homeowners borrow from a bank to pay for energy upgrades, they’re on the hook for the entire loan whether they move before the costs are amortized or not. On the other hand, PACE loans — because they’re financed by property tax assessments — are repaid by whoever owns the property. If the property is sold before the loan is repaid, the new owner makes the remaining payments.

The terms are typically structured so that the incremental savings on utility bills are slightly greater than the incremental cost of the loan. In other words, you get what you pay for — and a little bit more — on a monthly basis. When the assessments end in 5 or 10 or 20 years depending on the cost of improvements, the savings are all gravy.

To fund the loans, cities and counties sell bonds to private investors. Some also tap reserve funds and/or obtain grants. One thing all PACE programs share in common: they’re voluntary. Property owners are only assessed if/ when they decide to obtain a loan.

Attaching the loan to the property is the secret sauce that sets PACE apart, but it’s not the only benefit. PACE loans typically offer longer terms than bank loans, generate tax credits and do not rely on or impact a person’s credit score because the debt is not on their personal plate. Plus the interest is tax deductible and the rates are relatively low, although administrative fees sometimes push rates above what a bank might charge.

In many cases, cities and counties are turning to PACE to help them meet goals to reduce greenhouse gas emissions, but there’s plenty to like about PACE regardless of a person’s environmental politics, says Kathy Hayes, executive vice president of the North Bay Association of REALTORS® in Sonoma County, Calif. “If you believe in [climate change], great. If you want to lower your energy bill, great,” she says.

The association is a strong supporter of the Sonoma County Energy Independence Program, which turned to PACE to help it meet an ambitious goal of retrofitting 80 percent of the county’s existing housing stock by 2015. Why support PACE? “REALTORS® need to reflect the values of the community that they live and work in,” Hayes explains. “Environmental issues, energy conservation issues are things that are valued by our community.”

Skeptics wonder whether the assessment will be an anchor on the property if/when the owner goes to sell, but Hayes doesn’t think so because the new owner will “not only get a better house, but the improvements will lower their monthly costs.”

The first PACE program was launched in Berkeley, Calif., in 2007. Since then, the strategy has migrated to 17 states, where more than 200 cities and counties have either started programs or are considering it. In April, San Francisco became the largest city so far to launch a PACE program when it rolled out Green FinanceSF.

The federal government has also jumped on board. The Recovery Through Retrofit plan provides block grants to support the development of PACE programs. “For a little idea in Berkeley, it’s traveled a long ways,” says Cisco DeVries, originator of the PACE concept.

Today, DeVries is president of Renewable Funding, a private company that helps communities develop, finance and administer PACE programs. Back in 2007, he was chief of staff for Berkeley’s mayor and was responsible for the city’s greenhouse gas reduction program. The goal: slash emissions by 80 percent by 2050.

Electric power generation is the nation’s biggest source of greenhouse gas emissions. While electricity-related industrial emissions have remained relatively stable since 1990, residential emissions have risen an average of 1.4percent a year, according to the U.S. Energy Information Administration.

Given that stat, what better way to start reducing greenhouse gas emissions than reducing the power consumed by homes? “It’s is not just low-hanging fruit,” DeVries says. “It’s the fruit that’s fallen on the ground.”

DeVries began to focus on helping Berkeley homeowners install solar energy systems. The stumbling block? The upfront cost. The problem hit home when he sought bids for a solar system for his own house and was stunned by the $30,000 price tag. “I wanted solar on my home, but frankly, I was uncomfortable writing a giant check,” DeVries recalls.

The alternative, getting a loan from a bank, also wasn’t very appealing because it takes many years before the savings from going solar offsets the cost — longer than people typically stay in any one home.

Then, while DeVries was working on a seemingly unrelated issue, a light bulb went on. A Berkeley neighborhood wanted to bury utility lines and was trying to form a local improvement district to pay for the project — a common approach to funding public improvements that relies on property tax assessments that become the new owner’s obligation if the property is sold.

Wait a second, thought DeVries. If property tax assessments can be used to finance underground utilities, why can’t they be used to finance solar energy systems? “I was pretty sure somebody would have thought of it before, but they hadn’t,” he recalls.

That epiphany led to the creation of BerkeleyFIRST (Financing Initiative for Renewable and Solar Technology).Launched in 2008, BerkeleyFIRST has made 38 loans totaling $1 million to help city residents solarize their homes, blazing a trail for other cities and counties that want to establish PACE programs of their own.

BerkeleyFIRST focuses on solar energy systems, but other PACE programs fund a wide range of energy upgrades such as insulation, storm doors and new furnaces. Some even include water conservation measures. In any case, they must be permanent improvements to the home. Appliances, for example, are not eligible.

A number of programs require energy audits to determine which upgrades are eligible for a loan. Maximum loan amounts vary. Some are based on a percentage of a home’s value and some are capped at a fixed amount.

“There’s no one PACE model that says you have to follow this protocol,” says Ben Taube, executive director of the Southeast Energy Alliance. “The market hasn’t had enough time to establish a template for this. We are creating it as we go.”

ClimateSmart in Boulder County lists 40 eligible upgrades ranging from tubular skylights to reflective roofs to radiant heating — each with a minimum efficiency standard and a requirement that they have a useful life of 15 years. “That assures us that people will get a good bang for the buck in terms of payback on these things,” says Susie Strife, sustainability education specialist with the county. Launched in 2009, ClimateSmart has made more than 600 loans.

In most cases, states must pass enabling legislation before PACE programs can get off the ground. That’s because existing statutes don’t provide for cities and counties to collect a property tax assessment to pay for energy upgrades.

The main opposition to PACE programs comes from mortgage lenders. Existing statutes typically treat property tax assessments as senior to a home’s mortgage debt. Whether the same holds true for PACE assessments depends on each state’s enabling legislation. Mortgage lenders worry that if PACE assessments are considered senior to mortgage debt, they’ll take a bigger hit in the event of a foreclosure.

While not absolutely fatal, losing seniority diminishes the appeal of PACE bonds to investors. “We’re having good, but sometimes difficult, conversations with mortgage lenders,” DeVries says. His argument: only the amount that is in arrears — typically a year’s worth of assessments — is paid ahead of the mortgage when a home is foreclosed on, not the entire balance. Plus, PACE actually lessens a lender’s risk because it raises the value of the home and puts a few extra bucks in the pockets of homeowners teetering on the financial brink, he says.

Another question is whether property owners who are underwater on their mortgages should qualify for PACE loans. The feds have published guidelines for PACE based on best practices. Cities and counties that accept federal funds to support PACE programs must follow them. One of the guidelines states property owners must have equity rather than simply be current with their property taxes and their mortgage payments.

In today’s environment, that will exclude an awful lot of homeowners, Hayes says. “We need to make the program as flexible as possible so as many homeowners as possible can take advantage of it,” she says.

DeVries suspects the “equity test” may disappear once PACE establishes enough of a track record to show that equity is not a factor in predicting whether a borrower has trouble paying the assessments. “This is a strange situation and time in the housing market and [PACE] is just getting started,” he says. “The idea is to be a little conservative and see over time what’s needed.”

Some local governments don’t have to worry about how to fund PACE programs because they have the wherewithal to make the loans directly. That’s how the Long Island Green Homes Program in Babylon, N.Y., works. The town put energy waste in the same basket as solid waste so that it could fund loans through its solid waste reserve account.

Since the program began in 2008, more than 250 homeowners have upgraded their homes with PACE loans and another 140-plus are in the process of doing so, says Sammy Chu, program director. Saving money and reducing emissions is not their only reward. “People who’ve been in the program speak to how much more comfortable their home is,” Chu says. “They don’t have to wear wool socks to watch TV in their den anymore.”

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A free, semi-annual magazine published by NAR, On Common Ground presents a wide range of views on smart growth issues, with the goal of encouraging dialog among REALTORS®, elected officials, and other interested citizens.

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