Time to Embrace PACE?

IPWA Green EnergyThe Property Assessed Clean Energy (PACE) program should be more widely embraced as an innovative way to finance energy efficiency and renewable energy upgrades for buildings as well as water efficiency upgrades for buildings. After all, it is interesting to note that buildings use nearly half of the energy and water consumed in the United States.

Fortunately, the PACE program is?beginning to be recognized around the country as a solid local government and community initiative that creates?permanent private sector jobs and ultimately contributes to the strengthening of both the national and local economies. In fact, a 2011 economic study produced by ECONorthwest indicated that every $1 million of energy efficiency and energy renewal project spending alone results in $2.5 million in total economic output (plus roughly $250,000 in state and local taxes) and approximately 15 new jobs nationwide. The economic output figure and job creation figure is even higher when water efficiency and water renewal project spending is added to the equation.

The PACE program can ultimately help make the country more energy independent and more water efficient while safeguarding the environment by reducing demand for fossil fuels and minimizing water usage waste. More and more states are now acknowledging that the PACE program is not just about energy efficiency but also water efficiency.

Introduced in 2008 via a number of pilot initiatives, the PACE program made immediate sense to energy efficiency advocates across the country. Today, more than 30 states and the District of Columbia have adopted legislation that enables local governments to offer PACE benefits to building owners. It is often recognized that the Palm Desert, Calif. initiative was the first PACE program implemented in the United States. Additionally, Berkeley, Calif. was also one of the first California programs. The latest states to pass PACE-enabling legislation are Texas, Utah and Arkansas.

Cisco DeVries, president of Renewable Funding, LLC is the founder and inspiration of the PACE financing programs in California. As Chief of Staff to Berkeley Mayor Tom Bates, DeVries envisioned and led the initial development of the PACE program. Renewable Funding now helps local and state governments across the country design, administer and finance similar PACE programs.

PACENow, a non-profit foundation, was established in 2009 by Jeffrey Tannenbaum, the founder and president of Fir Tree Partners, a New York City-based global value investment firm.?Jeffrey recognized the power of a pilot program in California that used traditional, municipal land-secured benefit financing to achieve energy efficiency and renewable energy goals, and formed PACENow to broaden the awareness and adoption of PACE programs around the country.

PACENow?s mission includes the promotion of improved energy efficiency (and water efficiency) in buildings and the expanded use of the PACE program. PACENow seeks to serve as a trusted source for information and resources to a growing coalition of PACE stakeholders, including local governments, businesses, industry service providers, labor and trade organizations, environmental groups and private individuals nationwide.

PACENow?provides impartial leadership for a broad coalition of stakeholders, including state and local governments, PACE program administrators, companies providing a range of services to PACE programs, energy service companies, real estate actors, national municipal associations, trade organizations, businesses and business councils, NGOs and private individuals.

Technically, the PACE program is meant to be available for all residential, commercial and industrial buildings. Unfortunately, the residential portion of the PACE program (mainly for single family homes) ran into some roadblocks courtesy of the Federal Housing Finance Authority (FHFA). The FHFA has challenged the validity of the program. To date, Freddie Mac and Fanny Mae have refused to buy any home mortgages from commercial banks that include a ?PACE lien.??The good news is that not all banks involved with the residential mortgage market sell their mortgages to Freddie Mac and Fanny Mae. Some of these banks (mostly local-regional institutions) have agreed to embrace the PACE program for residential single family homes.

While the PACE program for single family residential homes has run into a brick wall in most parts of the country, PACE programs for commercial and industrial buildings are moving forward as well as PACE loans for large residential buildings that do not work with the FHFA.

It is useful to note that the PACE financing mechanism is usually in the form of a municipal bond issued by a city or community. The proceeds are then lent out to buildings with a solid proposal for energy and/or water efficiency retrofits. The loans are then repaid via a property tax assessment for up to 20 years. The initial financial savings achieved from the retrofits will offset the tax assessment. Once the loan is mostly paid off or completely paid off, the building property can begin to enjoy the full energy and water financial savings achieved by the retrofits.??

By eliminating upfront costs often associated with loans for building projects, and by providing low-cost long-term financing and making it easy for building owners to transfer loan repayment obligations (for the energy and water project retrofits) to a new owner upon sale, the PACE program overcomes challenges that have often hindered the adoption of energy efficiency and water-related projects within large buildings in the United States. A PACE program implemented within a municipality can help property owners increase the value of their property with the energy and water efficiency retrofits in place. After all, the PACE program can potentially enhance a company?s cash flow by decreasing energy and water needs, which leads to a reduction in the utility bills.

In addition to job creation, a number of politicians around the country (at the national, state and local levels) publically recognize that a PACE program implemented within a given state or region can potentially drive spending through the installation of the energy and water efficient equipment along with the implementation of renewable energy measures and water reuse measures.

PACE-Enabling Legislation
Moving forward, it will be interesting to monitor the expansion of the PACE program in the United States and to take note of the next collection of states to actively adopt PACE-enabling legislation. Some big questions: When will Pennsylvania and Indiana pursue PACE-enabling legislation that could help finance the implementation of the Great Lakes Compact? When will the State of Arizona embrace PACE-enabling legislation that could help finance their water and energy challenges, particularly of the Mexican border? Ultimately, all U.S. states should seek to implement PACE-enabling legislation.?

Another question to ponder: When will the federal government decide to revisit the development of a PACE guarantee program? A few years ago, a congressman proposed that a U.S. government initiative be put in place that could provide a 100 percent guarantee to a given municipality that did not have a AAA bond rating but was seeking to implement a PACE program via a bond issue at an attractive rate. Will this guarantee the initiative be re-addressed once more states seek to implement PACE-enabling legislation and/or encourage local municipalities to take advantage of current PACE-enabling legislation?

In the meantime, all water industry professionals should focus on the future implementation of the Texas PACE program (which includes a major water component), the evolving Connecticut PACE program, the expansion of the Ohio PACE program, the Minnesota PACE program and the numerous California PACE programs, of which there are at least 12 programs in place. Stay tuned.

Kathy Shandling is the executive director of the International Private Water Association (IPWA) and a frequent contributor to UIM.

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