New York's Cooperative and Condominium Community
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What is a PACE loan, and why can it be complicated to get one?
Figuring out how to comply with the Climate Mobilization Act is on every board’s agenda — what has to be done, when and how to pay for it. One option is a PACE loan. What is it and how does it work?
It’s short for Property Assessed Clean Energy, and it’s to enable boards and property owners to meet the goals of the Climate Mobilization Act, which is to reduce the city’s carbon emissions by 40% by 2030 and 80% by 2050. In order to get there, you’re asking property owners to undertake a huge amount of work in the next several years for all the energy retrofits that are going to be required if we are going to meet these carbon reduction goals.
A PACE loan is non-accelerating and non-recourse, and they’re paid for through deductions on your property tax bill. You get an audit from a certified professional who recommends a certain retrofit, like a solar roof pump or what have you, and tells you what the useful life of this thing will be, typically 10 or 20 years. Then you can get a check on day one to pay for that, and It’s paid back over the lifespan of the improvement. Although these PACE programs have been around for at least 10 years in different jurisdictions, they’re new to New York City. It’s a way to finance a hundred percent of energy retrofit improvements without much upfront. So it can be very useful.
Are there roadblocks to getting one?
I wouldn’t say roadblocks necessarily for certain types of properties, but more like headwinds, because I think that there are things that can be dealt with and strategized around. The first issue is lender consent. So if you have an underlying mortgage on your property you are required to get that lender’s consent to the PACE loan because it will have priority over your mortgage loan. It’s treated like a municipal tax lien. What happens if there is a mechanics lien and an unpaid contractor or subcontractor places a hold against your property? Traditionally mechanics liens come before municipal tax liens And that is a huge impediment for a lot of lenders. In fact, the knee-jerk response is going to be, “No, we won’t consent to that because it puts our loan at risk.”
Do you see lenders changing their stance on PACE loans?
There’s some experience being built up over time in different jurisdictions with PACE lenders. Their thinking is, “Well, actually you’re reducing energy costs, which is good. You’re enhancing the value of the property, which is good for their loan. And because it’s not accelerating, the risk of default is pretty low.” And even if the PACE assessment goes into default, you’re only talking about that year’s assessment, plus whatever arrearages there are. So there’s less risk than you might imagine to taking a PACE loan with a lot of potential upside. Still, it’s an issue with lenders, and not one that can be cured by fiat. Lenders are less flexible traditionally, and that’s a real challenge. Fannie Mae has said that they are uncomfortable with PACE loans. You have to sort of convince the lending community that this is something that they would be interested in. I don’t know how that’s going to happen, but I do think that mortgage lenders’ reluctance to consent to PACE loans is something that can change over time. But we’ll see.
Until that happens, are there options for financing energy retrofits?
It’s a competitive market out there for money and financing. Money has been relatively cheap, so there are a lot of options that buildings have. I know that a lot of my co-ops just refinance their first mortgage. And it’s very turnkey, very easy to do. Everybody understands how that works. With NYSERDA and Con Ed, there are all sorts of programs available to get money to finance green energy improvements. So I think any PACE lenders coming into the New York City market just have to compete with those programs.
Given the uncertainty and also the promise, how should boards today be thinking about funding their various energy projects? The timeline is pretty short.
Any boards looking at this have to start with Local Law 97, the carbon emissions reductions, and you have to understand where your building is. If you need to be undertaking work today in order to comply by 2024, your options are going to be different than if you have some leeway to comply by 2030. So that may dictate the sort of improvements and financing you’re looking for. But boards don’t have the expertise to really make that evaluation, so you need to retain an energy consultant. They can advise you as to what sort of improvements are feasible, what is most disruptive, how to pay for it. And sometimes you want to do that not just with a PACE loan, but in tandem with other programs that will basically pay for improvements.
Realistically, will many buildings be paying fines in 2024?
Most buildings will not, but the majority of buildings — I’d say 70 percent — will in 2030. And 2030 is coming sooner than you think. As a board member, are you comfortable with going to residents and saying you’re going to commit perhaps hundreds of thousands of dollars now for a 2030 goal? I hope so, because I think that’s the better course of action. You never want to be the first person through the door. But if you try and get a permit to do the work in 2029 behind 37,000 other buildings, you’re going to be in big trouble. The lure of PACE loans is that you can tell your shareholders, “Yes, we need to do X, Y, and Z, but you’re never even going to notice it,” because it’s administered on the building’s property tax bill and there will be no assessments. And that’s a big selling point.
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