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Bring Residential PACE Program Back to Life

With job creation and the renewal of the moribund housing sector increasingly now at crisis levels of urgency, there seems to be a renewed push in Washington to inject new life into the Property Assessed Clean Energy Program (PACE)--a program that some had given up for dead after the Federal Housing Finance Authority created a major implementation hurdle last year.

The newly introduced PACE Assessment Protection Act (H.R. 2599), which already has bipartisan support and endorsement from many organizations, provides at least a ray of hope that there might be a chance that PACE can become an important tool to boost job creation and economic growth in the residential clean energy market.

PACE really took off in 2009 and 2010 when many states passed PACE-enabling legislation. PACE programs are now authorized in 27 states and the District of Columbia allowing their local governments to provide energy retrofits to property owners in a defined financing district or geographic area and be repaid via assessments on the properties. Most of these programs have focused on the residential sector and include a lien on the property that is often senior to the existing mortgage.

However, just as PACE was gathering momentum with other states expressing interest in it, the FHFA declared in July 2010 that PACE programs with first liens posed risk management challenges for lenders, servicers, and mortgage securities investors. FHFA instructed Fannie Mae and Freddie Mac to restrict the kind of loans that homeowners can get if they live in a PACE-designated area.

This essentially froze PACE-related work though several states have tried to find a way around the block. Maine introduced enabling legislation for municipalities to create loans to property owners for clean energy technologies that placed the lien in a subordinate position behind a mortgage. For its part, Michigan passed PACE legislation that limits the tool’s use to commercial and industrial property owners and requires those with outstanding mortgages to show written consent from their mortgage holders. 

Against this background, the PACE Assessment Protection Act offers a way forward. If passed, the legislation would force government sponsored entities to adopt standards that support PACE subject to certain criteria including limits on the total cost of the proposed energy improvement as a share of the value of the property; requirements that the property owner have more than 15 percent equity in the property; and a requirement that PACE-financed projects have positive savings-to-investment ratios.

Such provisions are a welcome proposed compromise--and a timely one. A resolution to this issue would not only create a steady and predictable demand for energy retrofit projects nationwide but also help with job creation by providing a growing demand for both energy efficiency installers and installers of small-scale renewable energy systems.

To see this, check out this study looking at the economic impact of PACE programs in four communities--Santa Barbara, San Antonio, Columbus, and Long Island, N.Y. After modeling PACE implementation in the four communities, the study team found that $4 million in total PACE spending across the four cities would generate $10 million in gross economic output, $1 million in combined federal, state, and local tax revenue, and 60 jobs. Extrapolating from this study, if 1 percent of the 75 million owner-occupied homes were to invest in an average of $20,000 PACE project each, the economic impact would translate into $15 billion in gross economic output, $4 billion in combined federal, state, and local tax revenue, and 226,000 jobs.

The bottom line: PACE has the potential to inject millions of dollars into the U.S. economy to make lasting energy improvements in metropolitan areas.