PACE (Property Assessed Clean Energy Act) is an innovative financing program that enables owners of commercial and industrial properties to obtain low-cost, long-term loans for water conservation, energy-efficiency improvements, and renewable retrofits. The PACE statute, Senate Bill 385, authorizes municipalities and counties in Texas to work with private sector lenders and property owners to finance qualified improvements using contractual assessments voluntarily imposed on the property by the owner.
The term of a PACE loan may extend up to 20 years, resulting in utility cost savings that exceed the amount of the assessment payment. As a result, improvements financed through PACE generate positive cash flow upon completion with no up-front, out-of-pocket cost to the property owner. If the property is sold before the full amount of the PACE loan is repaid, the repayment obligation automatically transfers to the next owner because the lien securing the PACE assessment follows title to the property.
Who Can Participate in PACE?
PACE is voluntary. In Texas, any owner of commercial, industrial, or residential property with five or more dwelling units that is located within a PACE region is eligible to participate in PACE financing.
What Types of Improvements Qualify for PACE Financing?
PACE financing may be used to pay for permanent improvements to the property that are intended to decrease water or energy consumption or demand, including a product, device, or interacting group of products or devices on the customer’s side of the meter that use energy technology to generate electricity, provide thermal energy, or regulate temperature. Eligible improvements will vary based on the PACE program created by the municipality and county, but typical examples of qualified improvements include:
- HVAC upgrades
- High efficiency chillers, boilers, and furnaces
- High efficiency water heating systems
- Energy management systems and controls
- Renewable energy systems
- Mechanical system modernization
- High efficiency lighting upgrades
- Building enclosure/envelope improvements
- Water conservation systems
- Combustion and burner upgrades
- Fuel switching
- Heat recovery and steam traps
Why is PACE so Innovative?
PACE enables property owners to overcome market barriers, such as extended payback periods and lack of access to capital, that discourage investment in energy efficiency and water conservation improvements. PACE provides the property owner with upfront financing for 100% of the cost of a qualified improvement, and allows the property owner to amortize the debt over the useful life of the improvement. The improvements will usually reduce utility costs more than enough to cover repayment obligations; therefore, the improvements should prove to be cash-flow positive upon completion of the work. PACE provides a new source of property-secured financing for energy efficiency and water conservation retrofits that does not affect conventional lending sources and does not compete for capital with other investment opportunities.
What are the Benefits of PACE?
The benefits of PACE are multi-faceted, leading to a win-win-win scenario for virtually all stakeholders. Improvements financed with PACE loans will enable commercial and industrial properties to achieve greater energy efficiency and help conserve the state’s water resources. Among other things, these improvements will:
- enhance the value and efficiency of existing buildings, enabling some buildings to become LEED certified
- save substantial amounts in utility costs
- promote local job creation
- reduce demand on the energy grid
- support the state’s water plan
- reduce greenhouse gas emissions
- mitigate split incentive issues between landlords and tenants, as to investments in energy efficiency and water conservation improvements, and
- establish significant business opportunities for engineers, construction contractors, commercial lenders, and investors.
PACE is tax neutral and does not impose a burden on the local government’s general fund. In the aggregate, PACE improvements will promote long-term economic development in Texas by helping the state obtain energy and water security.