Hero or Villain? A Reckoning with R-PACE
Residential PACE loans have drawn considerable fire. Here’s what conscientious sustainable-housing professionals need to know.
If you work in residential energy efficiency, it’s pretty hard to ignore headlines like this: “I Tried to Make My Home Energy Efficient and It’s Ruining My Life.”
If you work in housing finance — or even if you simply carry a mortgage — this one, too, might have sent a tingle up your spine: “America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis.”
Both pieces, which appeared in Vice and the Wall Street Journal, respectively, in December and January of last year, chronicle horror stories from unwitting homeowners reportedly preyed upon by contractors armed with a slick new sales tool: property-assessed clean energy financing, commonly known as PACE. The Journal adopted a particularly critical stance toward PACE, publishing a series of six articles focused on, among other things, increasing default rates and federal agencies’ interest in the business practices of Renovate America, the largest PACE provider in the U.S.
The PACE model, pioneered by the city of Berkeley, Calif., in 2008, enables property owners to pay for green-energy upgrades through an assessment on their tax bill. Unlike conventional loans, PACE stays with the building, so borrowers don’t pay for benefits after they sell. But because collection of property taxes is prioritized over mortgages in the event of foreclosure, PACE faces considerable opposition from the mortgage industry and its allies.
Outside of California, Missouri and Florida, no residential PACE programs are currently active. But their rapid growth — as of June 2018, R-PACE programs have financed 220,000 projects worth over $5 billion, and created a reported 42,000 jobs — has placed them on the radar of both climate-action advocates and critics who say they don’t offer strong enough protection for consumers.
But despite the limited geographic footprint of R-PACE to date, its colossal financial footprint represents a tantalizing policy solution for jurisdictions considering how to meet ambitious energy and decarbonization goals while promoting economic growth. Most R-PACE dollars (58%) are applied to energy-efficiency improvements, while renewable-energy and water-conversation measures comprise 37% and 4% of average project costs, respectively. Still, several more states have passed legislation enabling PACE than have actually seen programs established and projects funded.
Criticism of PACE centers almost exclusively on residential programs, which collectively dwarf the $647 million securitized by commercial PACE projects. C-PACE programs are far more numerous, with projects funded in well over a dozen states, suggesting that under the right conditions, PACE can and does work, and that the core issue remains homeowner protection. Because commercial property owners are generally better equipped for the diligence required to protect their interests, C-PACE likely presents less of a potential headache for regulators — and less of a political liability for elected officials.
However, clean-energy advocates have not let criticism of R-PACE go unchallenged. In a March 2017 blog post, the American Council for an Energy-Efficient Economy acknowledged that its “meteoric rise … has been surprising even to those working in clean energy finance,” but dismissed the comparison to subprime loans as a misrepresentation of its scale and impact on borrowers’ ability to keep up on their mortgages. More recently, CleanTechnica assailed the Journal’s reporting in a scathing piece alleging its embrace of “the mortgage banking lobby’s anti-PACE talking points.”
So where does this leave sustainable-housing practitioners? Between ethical obligations and the need to move good projects forward, there is an increasing burden on them, especially those who operate in markets where R-PACE is available or may be in the future, to thoroughly understand the fundamentals of home-improvement financing in general and the limitations of particular means and methods for individual projects and borrowers.
Those concerned with the trajectory, image and human impact of the building-performance industry as a whole should be especially vigilant as they navigate the world of ever-expanding retrofit financing products in their day-to-day work, and approach the apparent win-win offered by R-PACE in full view of the alternatives and their tradeoffs. While its transferability and relative ease of client qualification may offer significant upside in some cases, options such as on-bill financing, where available, home-equity lines of credit or even lower-cost conventional loans should be thoroughly explored first.
If the only tool you have is a hammer, as the saying goes, it’s tempting to treat every problem as if it were a nail. At the end of the day, conscientious home-performance firms and advocates should recognize PACE for what it is: a shiny new tool, perhaps, but far from the only one in the box.
