The median age of housing stock in the US is 37 years old, according to the National Association of Home Builders. More than half of the country’s housing stock was built before 1980 and 38% of it was built before 1970. No wonder environmental improvements and sustainable renovations need to be made to our aging housing resources.
To help improve financing options for developers making environmental improvements to aging housing stock so renovated houses can meet tougher, cleaner standards, Property Assessed Clean Energy or PACE funding was created in 2008. For purposes specific to making environmentally sustainable building repairs and improvements, PACE funding is cheaper than traditional financing, has fixed interest rates often between 6-8% (mezzanine debt typically comes in at 12%) and has longer loan terms (20-30 years compared to the typical 3-5 year years attached to traditional improvement loans.) As importantly, PACE financing becomes an assessment on the property paid annually along with one’s real estate tax bill and that assessment is transferred to new owners when the property is sold.
“Now that PACE financing has emerged from relative obscurity,” writes Joe Gose for the New York Times, “PACE funding has been used to finance $660M of sustainable building improvements from 2016-2018…” according to PACENation, a non-profit tracking this financing.
Additionally, 36 states and the District of Columbia have passed legislation that. According to Gose, “…allow the use of PACE financing for commercial properties.” Since states and cities are pressuring commercial real estate owners to improve their properties to comply with tighter environmental safety standards and regulations, Jessica Baily, co-founder and CEO of Greenworks Lender (a PACE lender) believes, “PACE is a carrot to the stick that gives property owners a way to finance more energy-efficient systems.”
While banks generally finance 60% of a project’s cost, developers can borrow up to 20% of that cost in PACE funds. Combined with traditional banking financing, federal and state tax credits for historical buildings, tax abatement, etc. PACE financing can certainly bridge the money gap in order to make sustainable improvements.
Just like commercial mortgage-backed securities, according to Gose, PACE loans are now being bundled, graded and sold as bonds to institutional investors. One such institutional investor, Nuveen (the asset manager for TIAA), now has PACE loans to the tune of $225M.
Chris Miller, a director of private investments with Nuveen, told the New York Times, “PACE checks a lot of boxes – it’s a secure, safe investment and it’s long-term duration is a good match to help fund our long-dated liabilities.”
