How PACE Financing Works
PACE financing allows longer payback periods with lower annual amortization and better terms, making many energy project financeable that otherwise would not be.
Under Michigan's Property Assessed Clean Energy (PACE) financing law counties, cities and townships may work together to form a joint PACE district – hence Lean & Green Michigan™, which is open to all Michigan counties, cities and townships free of charge.
A PACE district allows a property owner to use the property tax mechanism to finance energy improvements. The property owner voluntarily takes on a Special Assessment, which it pays off as part of its property tax bill.
That's a fundamentally different arrangement than a traditional bank loan, in ways that can transform an energy efficiency or renewable project from an engineer's great idea that the company CFO will not approve into a clear bottom line winner for the company. Here's how:
- Since the PACE loan is a special assessment obligation, it is senior to any mortgage – and hence very secure for the lender. (Because of this, if the property owner has a preexisting mortgage, he or she must get the mortgage bank's consent.)
- Up to 100% of the project's cost can be covered under a PACE special assessment.
- The PACE special assessment "runs with the land" – the owner can sell the property and the new owner simply picks up the payments (and energy savings), just as it begins to pay property tax.
- Because of these features, PACE special assessments can be amortized for 10 or 20 years or longer (up to the useful life of the improvements or equipment involved) – many times longer than a traditional bank loan.
Projects may also garner slightly more favorable interest rates.
- Under Michigan's PACE statute, the contractor doing the work must guarantee the energy savings on all projects of $250,000 and up.
- Bottom line: property owners doing PACE projects approved as part of Lean & Green Michigan™ will generally pay nothing down and will generate more money in energy savings than their payments to service the special assessment. The project will be cash flow positive from beginning to end. In fact, under Michigan's PACE law, this savings to investment ratio must be positive on day one as a condition of project approval.
- Many companies also like PACE because their auditors treat it as off-balance sheet for accounting purposes. Most leases treat property tax obligations as operating expenses rather than capital expenses or debts. Special assessments are not accelerated if there is a delinquency or default, and the property may be sold without paying off the assessment. Each company must make its own determination on how to treat PACE for accounting purposes.