Property-assessed clean energy programs got a huge boost this summer when the White House and the Federal Housing Administration removed a substantial barrier for residential PACE financing.
PACE programs allow investments in water- and energy-efficiency retrofits and distributed renewable generation to be paid back through property taxes, which lowers the risk for both lenders and owners and can potentially open up a far larger swath of the energy-efficiency market.
Before the August announcement, mortgage agencies were uneasy about the fact that most PACE obligations were first in line to be repaid. To solve this, FHA guidance will require PACE liens to be subordinate to FHA single-family first-mortgage financing.
But questions remain. One of the outstanding questions is this: if a home with a PACE lien goes into foreclosure, would the lender be worse off than if the home had no PACE lien?
A new study offers the first answer to this. The study by economist Laurie Goodman compared sales of homes with PACE retrofits to similar non-PACE homes. The study was financed by Renovate America, which has done the vast majority of residential PACE deals to date through its HERO program in California.
Residential PACE is growing quickly. To date, Renovate America has completed more than $1 billion in PACE projects in more than 44,000 homes. The data set used for the study was far smaller, however.
There were about 770 homes that have been sold. Only a few had gone into foreclosure. When compared to comparable homes in the zip code, the researchers found that PACE offered a sale premium of between $200 to more than $8,000.
The smaller figure may be more accurate, as it is the premium for homes within the same ZIP code, rather than the larger figure, which compared homes across a region. Even so, the results at the ZIP code and state level were not statistically significant, suggesting that more research is needed with a larger data set to get to statistically meaningful findings.
Even with the limitation of the small data set, the takeaway is that homes with PACE improvements see a price premium that at least covers the cost of the improvement and perform at least as well as the general market, according to Goodman, lead author of the study. For the few homes with PACE financing that went into foreclosure, they also garnered a price premium.
The finding may be conservative, but it is more impressive when compared to other home improvement data. The researchers found that other renovations, such as a kitchen or bath remodel, recover on average about 60 percent of their cost at resale. By comparison, PACE improvements recover their full cost at resale based on this study.
The study is hardly meant to be the final word, but rather is intended to act as a prologue to more research as the market grows.
Other guidance from federal agencies is also helping to expand the market for PACE beyond traditional and commercial and residential projects. In Washington, D.C., the U.S. Department of Housing and Urban Development (HUD) has approved the use of PACE for a HUD-assisted mixed-finance public housing property for the first time. The Phyllis Wheatley YWCA will receive $700,000 in financing secured through the DC PACE program. Washington, D.C. has already been a leader in multi-family PACE financing, being the first jurisdiction to use PACE for that sector two years ago.
DC PACE will offer financing for a 31-kilowatt solar PV system and deep energy retrofits on the YWCA, including a new HVAC system, upgraded lighting and controls, and a new hot-water heating system. The project is expected to cut energy bills by 24 percent and lower water usage by nearly half.
“This has been a really tough space,” said Jackie Weidman, marketing manager for Urban Ingenuity, the program administrator for DC PACE. "Many PACE administrators are trying to make this work, but it takes a lot of back-and-forth on the policy piece.”
HUD and the DC Housing Authority were part of the process, and both were supportive, but certain conditions had to be met, such as ensuring that the housing would remain affordable in the long term and that the DC Housing Authority had the ability to cure any delinquent payment to avoid foreclosure under PACE.
The increased guidance on how to put together PACE projects from federal agencies such as HUD comes as market players look for ways to expand access to PACE financing, such as Renovate America’s direct-pay service, which removes credit-limit barriers for registered contractors, or Demeter Power Group's recent initiative marrying solar leasing and PACE financing for commercial projects.
Buoyed by market momentum and improved clarity from federal agencies, Renovate America expects to bring its HERO program to states beyond California in 2016.