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A simple way to pay for green buildings

This is one of the smartest ideas I’ve seen:

PACE is a bipartisan local government initiative that allows property owners to finance energy efficiency and renewable energy projects for their homes and commercial buildings. Interested property owners opt‐in to receive financing for improvements that is repaid through an assessment on their property taxes for up to 20 years. PACE financing spreads the cost of energy improvements such as weather sealing, insulation, energy efficient boilers and cooling systems, new windows, and solar installations over the expected life of the measures and allows for the repayment obligation to transfer automatically to the next property owner if the property is sold.

How it works: The key innovations of PACE finance involve materially lengthening the repayment period for energy retrofit loans and structuring the loan repayments as annual property tax surcharges. These innovations result in large benefits to property owners (positive cash flow in the first year on energy retrofits), municipalities (no fiscal burden yet large job creation), existing mortgage holders (borrower cash flow improves and the property value increases), and to PACE bond holders/investors (virtually no risk on investment because the PACE lien is senior in right to mortgage debt). Specific benefits are as follows:

  • Property owners benefit from large cash savings as efficiency savings exceed the annual financing cost: Instead of large required upfront payments by property owners for energy retrofits, the capital is lent to property owners and repaid over 15-20 years via an annual property tax surcharge. This long term repayment mechanism results in annual energy savings that greatly exceed the annual property tax cost, making PACE finance highly attractive to home and building owners.
  • States/Municipalities create jobs and have no added credit risk: States and municipalities benefit from immediate job creation and the fact that PACE finance creates no credit or fiscal burden as the entire liability resides directly with those property owners who opt in to receiving PACE loans.
  • Appeal to existing mortgage holders: PACE finance improves the cash flow of property owners (annual energy savings > annual tax surcharge cost) and increases the property’s overall value all of which increase the creditworthiness of the existing mortgage
  • PACE bond holders/investors benefit from a highly secure investment: PACE bonds have strong appeal to investors given that they are secured by long term tax liens that are senior in right to mortgage debt.

Here’s the full article by Jack Hidary from Harvard Business Review.

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