The acronym PACE stands for Property Assessed Clean Energy. PACE programs are a popular talking point with many solar companies as well as other contractors who install drought tolerant landscaping energy upgrades such as insulation, dual pane windows, Low flow toilets and other efficient plumbing devices as this is a convenient way to finance conservation upgrades; however, what most people do not understand is that this form of financing is an assessment against the property much the same as a tax and can render the property difficult to sell in the future as it goes with the property in most cases so that a buyer will have to qualify for this assessment on top of the purchase price.
Improving water and energy efficiency and adding renewable energy features (conservation improvements) to homes are common goals of many California homeowners in order to both reduce utility bills and help the environment. These improvements can be costly and thus the State of California has instituted various financial programs to assist homeowners in making these energy and water conservation improvements with the environment also in mind – PACE is the most common.
The amount that can be financed by a PACE lien is limited by both state law and the administering program. The combination of the assessment for the PACE lien and the property taxes for a property cannot exceed 5% of the market value of the property when the PACE assessment is initiated. However, there is no relief in case a decline in value should occur after the assessment is made.
PACE financing can be much easier to obtain compared to getting a home equity loan or doing a cash out refinance as many programs do not consider credit scores or employment history. PACE financing is 100% financing as a homeowner usually does not have to contribute any money to “closing” the loan as fees and other costs are usually bundled into the financing. PACE liens can also be transferred to a qualified buyer, unlike most mortgages.
One disadvantage of PACE financing is that interest rates and costs are generally higher than mortgage loans. Current interest rates on PACE programs are in the range of 6-9% compared to the 3%-5% range that many borrowers are currently enjoying. Costs and origination fees can be also be high.
The C.A.R. residential purchase agreement requires a seller to disclose to the buyer whether any items in are subject to a lien or encumbrance, so sellers need to disclose the presence of PACE financing, plus, a person with a PACE lien, which has “super priority” (as do taxes) will not be able to obtain refinancing with a loan which conforms to current Fannie Mae or Freddie Mac guidelines, which would represent the vast majority of conventional refinancing. Fannie Mae and Freddie Mac policies are prohibited from purchasing a mortgage with a PACE lien on it. This greatly limits the ability of a borrower to refinance the property if there is a PACE super priority lien meaning that the owner will most likely need to pay off the lien. Owners who invested in costly improvements might find paying of the lien to be a significant hardship as well as a deterrent to selling a home.