Retrofitting Program Pays Off, But May Be On Its Way Out

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Under PACE, banks or municipal bond holders loan individuals the entire, immediate costs required for retrofits such as water heaters, insulation and solar panels while homeowners repay the loan over a period of 20 years. Photo: Lori Brown,

First introduced in Berkley, Calif. in 2007, the Property Assessed Clean Energy (PACE) program has been named one of the top 20 ideas that can change the world by Scientific American magazine.

Instead of footing the upfront costs for energy efficiency and renewable energy projects, PACE makes provisions for homeowners to make retrofitting payments through an addition to their property tax bill.

Under PACE, banks or municipal bond holders loan individuals the entire, immediate costs required for retrofits such as water heaters, insulation and solar panels while homeowners repay the loan over a period of 20 years, with the satisfaction of lower electric bills and a reduced home carbon footprint.

Repayment can take the form of taxes, a lease or a long-term contract for electricity, and ends up costing less than the existing utility bill.

This financing innovation is particularly beneficial towards reducing greenhouse gas emissions because buildings in the United States are responsible for 40 percent of total energy consumption. In addition, it increases the demand for sustainable and responsible home upgrades, and therefore, the people that install them.

“What we’re really seeing is a transition in how we think about buying energy goods and services,” says Daniel M. Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley.

According to PACE Creator Cisco DeVries, this option has the potential to become popular under President Obama’s proposed “Cash for Caulkers” program, an initiative that aspires to retrofit 100 million homes and generate a million new jobs while reducing U.S. greenhouse gas emissions by 5 percent over the next 20 years.

But in early July, the Federal Housing Finance Agency (FHFA), which regulates mortgage corporations Fannie Mae and Freddie Mac, effectively discontinued PACE loans for the time being. FHFA expressed concern that “the size and duration of PACE loans […] pose unusual and difficult risk management challenges for lenders, servicers, and mortgage securities investors.”

What worries the FHFA is that should a homeowner default, property tax assessments (like PACE) take priority over the mortgage. Therefore, they see the financing program as a risky investment.

But according to DeVries, energy-efficient homes have significantly lower default and delinquency rates than typical homes. “If you’re Fannie or Freddie, in many ways PACE should be the best tax or assessment you’ve ever seen, because it improves cash flow,” he says. “Homeowners are reducing their energy bills. No other assessment does that.”

Back in January, many U.S. cities and counties, especially those in California, Colorado and New York, showed interest in participating in PACE due to a high level of property owner enthusiasm.

Sonoma County, California, which boasts the nation’s largest PACE program, has also found that retrofitting tends to make homeowners more financially stable, not less. According to Deputy County Counsel Kathy Larocque, “The people in our program are better taxpayers than the general public.”

DeVries expressed irritation with FHFA’s decision to suspend the financing program without testing its success first. “We have an opportunity to test out a model in key communities around the country over the next two years, with tremendous protections in place,” he says. “It could show that it works, that the mortgage lender’s position is improved, that the property owner’s ability to pay is improved, and that property values go up.”

Despite the setback, Long Island Rep. Steve Israel (D) is already working on legislation to reanimate PACE. The DOE, which invested $150 million in stimulus money in PACE, as well as offered a two-year reserve fund to guarantee against losses, also wants the program to triumph.

On the other hand, while you’re waiting to see whether PACE will be restored, there are three different types of federal tax credits for which you may be eligible in association with the Energy Star program. Tax credits reduce the amount of tax you owe dollar for dollar, are applicable to two-year periods and are non-refundable.

Current information as to how to apply is on the website.

Both PACE and tax credits can be used to cover many home retrofits from heating, venting and air conditioning (HVAC) to money and time-intensive solar panels. The biggest difference is that PACE finances retrofits and allows the individual to pay them back gradually, while tax credits reward an individual that pays the initial cost alone and subsequently pays less in taxes. Finally, while PACE can be used towards installation costs, tax credits cannot.

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