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Property Assessed Capital Expenditures: PACE financing
PACE: Quick Fact Sheet
2024 Update:
- We have long term (up to 20 year) loan solutions for solar, energy storage and roofing.
- These are unsecured loan solutions, which fill gaps in the market following the elimination of smaller-scale PACE programs in California.
- Advantages of long term unsecured loan offerings relative to prior PACE programs include: No lien on property; no lender consent required; available everywhere; similar pricing.
- PACE may still be applicable for larger projects, particularly where there is a broader recapitalization, refinancing, and/or construction element to the project.
PACE: Property Assessed Capital Expenditures / Clean Energy
- PACE can be used to finance solar, energy storage and clean energy projects.
- However, PACE is also used as a mezzanine financing structure for all types of commercial real estate.
- PACE can be used to finance building upgrades - including roofing, HVAC, electrical and water. In California, PACE is used to finance seismic retrofits and wildfire resiliency. Pictured at left is a seismic retrofit we financed along with an building rehab for a multifamily developer in Berkeley, California. In Florida, PACE is used to finance storm resiliency measures, including roofing and windows.
- As discussed below, each state that has enacted PACE legislation has its own requirements that result in dramatic state-specific variance in the type of project that can be financed.
Painted Rock Capital specializes in solar energy and multifamily development financing and California PACE financing, although we finance all aspects of commercial real estate across the country. The following discussion spans all PACE states, but is specifically focused on the Golden State - where both PACE and solar energy have the longest & broadest transaction history. For solar projects in other states - particularly New Jersey, New York, Texas, Massachusetts and the Northeast - please call us.
What is PACE?
- PACE is real-estate based financing that is secured by a property tax lien on real property. This "Property Assessed" aspect is the commonality across all state PACE programs.
- PACE financing payments typically appear as a line item on the property owner's property tax bill. PACE liens are generally - but not always - treated exactly like all other property tax payments. PACE assessment principal can be paid off early. However, the PACE line item on the property tax bill cannot be paid individually.
- PACE financing is enabled by legislation on a state-specific basis, and then typically requires authorization on a city and/or county basis. For example: In California, each municipality or county must approve PACE. County approvals in California include only unincorporated areas. In Texas, unlike California, most county approvals include the individual municipalities - although individual cities many also opt-in.
- PACE eligibility, applicability, capital providers, rates and terms vary substantially between states. Key issues to focus on in each state and provider area include: transaction costs and effective minimum project sizes; whether previously-completed PACE-eligible improvements can be financed; and the status of lender entry in to the state. California, for example, is the most developed PACE market. In contrast, New Jersey has passed PACE legislation but lenders are still evaluating how to work within the state rules. Note: We recommend PPA financing for solar projects in New Jersey, as well as private non-PACE loan products there.
PACE financing providers and interest rates
- PACE financing was developed over a decade ago. There are multiple PACE lenders, although for any given market and project size, there are a limited number of viable providers. Each lender has unique focus areas, property types & industry verticals, underwriting considerations, pricing options, and service areas.
- PACE interest rates are typically quoted as a spread to the 10 year or 20 year Treasury. Different lenders have different structure options for pricing. As of late-2024, PACE financing rates vary around the 7% to 8% range - reflecting the significant run up in interest rates since January 2022. Certain lenders offer "rate buydown" or "discount points" structures. These rate buydowns can reduce the annual payment and effective rate - however, they also create an implicit prepayment premium and hurdle to refinancing. Please ask us about our proprietary interest rate buydown breakeven analysis and comparative structure & terms analyses.
- Our view is that interest rates will stay at current late-2023 levels, and possibly rise further as the Fed acts to control inflation. In any event, the rate on a PACE loan is locked in at the time of funding - and remain fixed for the life of the financing. If Treasury rates decline from the mid 4% range as of late 2024, then the rate ranges noted above could be reduced commensurately. We recommend getting underwriting started as soon as possible once clients decide to consider PACE financing.
- Most PACE financing is provided by private, institutional lenders, including banks and specialized funds. In general, PACE is not a government-funded program - although there are a few areas where there are still state or county-funded PACE options.
PACE underwriting and transaction process
Underwriting process and approval timeframes vary by lender. Painted Rock Capital works with a range of PACE lenders, and advises customers through the underwriting process to maintain project timelines. As a starting point, property owners should expect an underwriting request list to include:
- Financials: 3 years, plus YTD.
- Rent-rolls if applicable
- Current mortgage statements
- Bank lender acknowledgement or consent (even if not formally required)
- Environmental review of property. The PACE lender will pull a report such as Veracheck, with publicly available information on the property. Customers with any current or past use of fuel tanks, chemical storage, or industrial processes will typically be asked to provide relevant current information - potentially including permits, inspections, disposal manifests, and photographs. Most of these issues are simply due diligence questions. However, properties with any open environmental issues or significant history or risks should address these points upfront with the PACE lender. Note that all winery, agriculture, golf course and industrial properties should expect these questions. We have successfully financed PACE for all such properties, so we simply advise upfront discussion of these points.
In addition to underwriting approval, the PACE lender will also need to validate that "PACE eligible" measures will be - or have been - implemented. To this end, certain items will be required:
- Construction / installation contract: For a proposed improvement such as solar installation or new roof, the executed construction contract will be required.
- For new development and deep rehab projects, a significant number of measures and construction expenses can be covered by PACE financing. Note that we will request general construction contracts, and specific detail and line item costs for PACE-eligible items.
- PACE eligible construction and rehab items may include: Electrical; roofing; windows and doors; HVAC; elevator; seismic and foundation; water and sewer; lighting, and other.
- Already-completed projects: In California and certain other states, we can provide cash-out "reimbursement" financing for PACE-eligible measures already completed. This offers an effective means of raising capital for new projects, recapitalizing the balance sheet, or simply pulling cash out of a property.
PACE resources and advice
There are many PACE-focused websites with broad descriptions of PACE financing. We encourage our clients seeking PACE financing to review general information on PACE - although we highlight that many sources are promoting PACE financing specifically - rather than advising on the appropriate financing for a specific situation. The leading PACE industry resource, PACE Nation, can be found here:
Painted Rock Capital Group advises our customers and channel partners across a range of financing solutions, which include PACE along with other solutions - most notably Power Purchase Agreement (PPA) financing for solar energy projects.
The following PACE financing information is based on our deep real-time market experience and the experience of our capital partners. We provide candid commentary on the advantages of PACE - along with considerations for property owners, and alternate financing options.
Our PACE and solar financing expertise
Painted Rock Capital Group arranges PACE financing for a range of project types, including:
- Solar energy projects
- Real estate development projects - multifamily; ADU; full rehab
- Recapitalization of real estate assets
- Building upgrades and rehabs
We work closely with PACE capital providers covering all project sizes and all active PACE states and territories. Painted Rock Capital specializes in financing solar energy projects - and we provide different solar financing solutions tailored to each situation:
- PACE financing
- Power Purchase Agreement (PPA) financing
- Tax credit monetization and Prepaid PPA structures
- Non-PACE loans
- Operating/tax leases
Working with your bank or senior lender
We have advised customers with a range of senior lender relationships - from commercial banks and mortgage providers, to bridge and construction lenders, to private note holders.
We advise all commercial property owners to consider the following when evaluating PACE:
- Take the initiative early in the process to communicate with your bank or senior lender about the solar or property upgrade project you are planning - and why it is important to your business. Note on solar financing: Many bankers outside California are actually not aware that solar projects can improve net operating income (coverage ratios), as well as property value (their collateral).
- Work with your senior lender to ensure it understands and will acknowledge or grant consent for a PACE financing.
- Most PACE loans require the lender to sign off on the financing. Even when the PACE lender does not expressly require it - we recommend seeking senior lender permission in any event.
- Painted Rock Capital offers alternate solar energy project financing that does not require a lien on the property.
Painted Rock and our capital partners are active PACE-industry advocates for building constructive, early-stage conversations with senior lenders - and seeking lender acknowledgement or consent even when not formally required.
There are at least 2 key reasons for this approach:
- Bank relationship: We have worked with customers that did not seek lender acknowledgement or consent, or did not comprehensively understand the nature of the PACE lien - and experienced senior lender concern after the PACE financing was implemented. As the trusted financial advisor to our customers, we seek to ensure that customers will be positioned to refinance mortgages and maintain their bank lender relationships after the PACE financing is completed.
- Interest rate: Once your lender is informed and positioned to allow the PACE financing, it opens up additional capital sources and more competitive underwriting and interest rates. Our most aggressively priced lenders typically require lender acknowledgement or consent as part of underwriting.
Balance sheet treatment: There are compelling arguments on why PACE financing may be considered off-balance sheet financing.
- PACE is a property tax, and property tax liabilities are typically not listed on the balance sheet.
- The PACE financing is associated with the property, not the owner. If the property is sold, the assessment transfers with the property.
- The financing is not guaranteed by the property owner.
Although we do not provide accounting advice, our view is that developing a constructive conversation with your senior lender is a more relevant and practical issue than the accounting. Your senior lender will have reasonable concerns about pro forma coverage ratios, regardless of accounting.
PACE financing is a bank-friendly structure, and proactive presentation to your lender will ensure the proper analysis and conversation occur. Key points to highlight for your bank:
- Senior lender preserves full foreclosure rights. The PACE property tax lien, although technically senior, cannot trigger a default and the principal never accelerates. Although not all banks or senior lenders will permit all PACE transactions - we have not yet spoken to a senior lender that has experienced a property tax foreclosure before the senior lender was able to foreclose on the property.
- PACE principal never accelerates (becomes due) in advance of the scheduled payments - typically a fully-amortizing structure with fixed annual payments.
- No personal or developer guarantees.
- PACE is long term, fixed rate financing.
- PACE enables the property owner to upgrade its property - increasing the value of the bank's collateral. Solar energy projects directly reduce electric utility costs and increase net operating income.
PPA alternative to PACE for solar energy
Well-developed commercial solar energy projects improve property value and cash flow, regardless of the financing solution employed.
Painted Rock Capital and our funding partners welcome the opportunity to advise you, and collaborate in working with your bank or senior lender to approve a financing. We have worked with many banks and bankers to approve and consent to PACE financing. In all cases, this was based on a detailed discussion of the financial benefits of the proposed solar project.
In many cases, the bank nonetheless was not able to consent to a senior property tax lien - even when the financial ratios were all healthy, and even improved with the proposed solar-PACE financing.
In these situations, the Power Purchase Agreement (PPA) option for financing the solar project is often an appropriate solution. Please call us for a specific comparative project quote and discussion. The important advantages of a PPA include:
- No lien: PPA does not place a lien on the property.
- Increase NOI: PPA is a service contract, in which the customer is paying for electricity at a lower rate than it is saving by reducing its direct utility expenses.
- Pay for performance: The PPA investor is paid based on power actually produced. The investor is responsible for the system operations, maintenance, monitoring and warranties to ensure it performs.
We have worked with hundreds of businesses and nonprofit organizations to finance solar projects with both PACE and PPAs.