Property Assessed Clean Energy (PACE): What's going to happen?
As I walked out the front door of a beautiful new home in Central Florida recently
, satisfied with another successful geothermal air conditioning system install, I felt a pang of guilt. This is one of those times where I could not quite put my finger on the root cause of the feeling that nagged me. Maybe it was because so many are out of work as a result of the economic downturn? No, that wasn't it
I have an acquaintance that has 4 kidletts, a wonderful wife, and a 2100 sq ft home. His electricity bill was $540 last month (July 2010). The home that I installed the geothermal system in will pay less than $350 a month for a 5000 sq foot home with a pooland the geothermal air conditioner will last three times the life of that piece of junk on my friend's house. You've heard the phrase, I t takes money to make money"? How about this one: "It takes money to save money." Here's why:
If you want to install a real energy-saving measure into your home or business, you need to spend some money. It's not uncommon to have a $40,000 investment in front of a big cost-cutting measure like solar or geothermal AC. Then Uncle Sam gives a 30% uncapped tax credit of $12,000. A return on investment calculation shows the payback around 10 years using simple mathor if you were going to buy a new heat pump anyway, the ROI will be under 5 years. All these facts don't matter if you don't have $40,000 in cash, or a very high credit score. Not many people qualify. So, those with disposable income are buying renewable energy products by the thousands, and those without resources to invest are in a financial rut that is getting deeper with rising energy costs.
Herein lies the problem that is at the root of my guilt. How do we get the funding for those who could really use it to improve their monthly expenditures for utility bills?
In almost any case, we can prove a net positive cash flow position for anyone able to secure a loan for a period of 10 to 20 years. But with the battle-scarred mortgage landscape, and unsecured lending tougher than ever, there is slim to no chance of funding such a project. That is, until Property Assessed Clean Energy (PACE) Legislation was created.
Property Assessed Clean Energy (PACE) is a form of land-secured financing designed to pay for improvements that are considered to be in the public interest. In the past, land-secured financing may have gone to pay for a storm sewer or a sidewalk for a park in a particular community. But PACE is a little different. As indicated in the name, PACE funding includes energy efficiency, and primarily renewable energy goals. The end results of the implementation of these efficiency measures are a reduction in greenhouse gases, improved energy independence, and a clean energy economy, leading to sustainability. Sustainability implies a wide range of factors, from our current electrical grid infrastructure, to the ability of people to sustain their current comfort levels, i.e. the ability to afford to air condition their homes in the summer, and heat in the winter without undue financial hardship.
Our current power generation sources have to be converted over to more renewable and clean energy sources, such as, geothermal, solar, hydro, wind power and even nuclear energy. By starting at the end of the grid, meaning our homes and businesses, we can make more of a difference than in any other way. Some may immediately think of having to make reductions in comfort, such as setting the thermostat warmer in the summer and cooler in the winter. These are not the essence of the sustainable measures of which I am speaking. I am talking about true renewable energy efficiency measures; clean energy measures as are indicated in the acronym "PACE."
By installing truly renewable energy efficiency measures, such as geothermal air conditioning systems , solar thermal and photovoltaic energy products in our homes and businesses, we can reduce peak demand on our utilities in such a way that the need for additional infrastructure will be offset for a time.
Typically, in order to take advantage of the PACE program once it is implemented, a "district" is formed and managed, then tax assessments are assigned. While some of the land-secured districts have historically been an all or nothing type of program, such as might be the case for installation of a sidewalk in a neighborhood, the PACE program is a "voluntary" property-by-property situation. There are many examples of success in this type of program.
PACE programs reduce mortgage failure risks and provide distinct value for existing mortgage lenders. The Appraisal Journal stated that a $1000 decrease in a home's energy consumption can increase the value of the home by $20,000. Homes that have been rated as green or LEED certified sell for up to 10% more than similar homes with standard efficiency measures. Finally, lowered energy bills decrease the risk of default by a property owner, because the financial expenditures are reduced.
With all of these positives going for the PACE programs, something or someone had to cause a problem. This time it was Fannie Mae and Freddie Mac. They issued a directive to financial institutions to prohibit PACE liens on properties on which they own the mortgage. With 23 states already using PACE, it's not surprising that California had filed suit within about a week. Congress has two bills on the floor to force the mortgage giants to retract the statement.
If Fannie and Freddie had just kept quiet, thousands of tradesmen would be on the job right this minute. They would be installing geothermal heat pumps, drilling wells, installing solar hot water piping and digging trenches, running controls and electrical wiring. Investors would be pouring money into high-yield municipal bonds for the PACE programs nationwide. Energy raters, architects, engineers and building officials would be working overtime to keep up.
Would you like to know what the sticking point is for Fannie and Freddie? They don't want PACE to have first lien rights. Let's take a quick look at just how PACE impacts a mortgage:
Properly designed PACE finance programs actually reduce risks and provide value for existing mortgage lenders.
Clean energy improvements raise property values.
A *study found that energy efficient homes sold for 510% more than similar homes without energy improvements.
Lowering energy bills decreases the risk of default.
Because participating property owners' utility bills will decrease, funds will be freed up that can be directed towards other obligatory payments, such as a mortgage payment.
*The Appraisal Journal, October 1998, Nevin/Watson: Evidence of Rational Market Valuations for Home Energy Efficiency
Even in the event of a foreclosure of a property with a PACE lien in force, the effect on the mortgage holder is negligible.
If homes with PACE assessments are foreclosed, in most states, the mortgage holders would have to repay the County only the back tax lien payment. This is because in a foreclosure, most state laws provide that the assessment lien is not accelerated' at foreclosure or transfer. Only delinquent assessments are due, not the entire lien. The next property owner will inherit the remainder of the PACE assessment.
Thus even if 10% of PACE homes in a portfolio went into foreclosure (national foreclosure rate is under 5%) with an average $40,000 lien, the average loss to the mortgage holder would be $340 per property.
Now to sum up the irony of the whole situation with Fannie Mae and Freddie Mac's refusal to let PACE move forward:
The very classes of Americans that are likely being pushed into another round of foreclosures in the coming months are by and large those that could be on the job this minute if not for the delay . PACE legislation, together with federal tax incentives for renewable technologies, has the potential to create more jobs for the working class unemployed in the US than any other stimulus measure.
EGG Geothermal is among the fortunate contractors in the US right now, enjoying a good portion of work with those who have enough disposable income to fund these projects. We have been involved with legislators and planners in the counties of Florida that are attempting to set in place the necessary programs and contractors so that there will be little delay when the impasse is resolved.
In Washington, Congressman Mike Thompson (D-CA) was joined by 29 other members of Congress in introducing
legislation to protect clean energy initiatives that are important to homeowners in California and the rest of the country. The "PACE Assessment Protection Act of 2010" will order lenders to adopt standards that support Property Assessed Clean Energy (PACE) programs, rather than stymie green energy efforts.
"These guys don't want to pick a fight with Congress," Thompson said of Fannie and Freddie. "There's no value in that. I've been absolutely mystified as to how they've come to the conclusions they've come to, and I'm not sure why they're doing what they're doing. I think they're way off base and I'm hopeful we'll be able to bring them back into this universe."
When Congress meets again on September 13th, Harry Reid (D-Nev) plans to facilitate quick passage of the Home Star program. Home Star has just enough teeth in it to make a couple of good things happen for states that have qualified loan repayment programs, such as PACE Legislation (repayment through property tax assessment):
On utility-bill repayment
Tax assessment or other form of property assessed financing
In plain English, that means if a state already has PACE-type legislation approved, a portion of the $5 billion in proposed federal funds may be used to provide loans through the electric companies, or through a property tax assessment. (Page 370 of the Home Star Bill)
The Boston Globe summed it up by saying, "Both Home Star and the renewable energy standard are two-fers: They reduce reliance on carbon-emitting fossil fuels and put Americans to work. That should guarantee each the 60 votes needed to overcome a Republican filibuster." (Boston Globe Editorial, August 7, 2010). This could provide a way to finance clean energy upgrades for just about anyone who rents or owns a home and wants to save money on their energy bill.
Take-Aways
PACE legislation is a way to provide funding for those who would otherwise be unable to afford efficiency upgrades.
Current PACE funding programs have been stopped by statements from Fannie and Freddie which effectively refuse to allow the associated property liens.
Home Star provides an alternative to PACE; on-utility-bill repayment of renewable energy improvements to homes.
PACE has the ability to impact the economy and potentially reduce foreclosures.
Geothermal air conditioning has the fastest return on investment (ROI) of any renewable energy efficiency measure; and it is the only AC technology eligible for federal incentives as of 1-1-11.
Jay Egg, Founder of Egg Geothermal
www.egggeothermal.com Property Assessed Clean Energy (PACE): What's going to happen?
By: Christina Egg
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