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A New Way to Pay For Energy-Efficient Improvements

Frank Lovece in Legal/Financial on March 8, 2019

New York City

PACE Financing I
March 8, 2019

Energy efficiency can save co-ops and condos money, but it can also require expensive investments. Installing high-efficiency boilers, new lighting systems, and energy-regenerative elevators is beyond many buildings’ means. That may soon change, however, if a City Council bill introduced on November 28 becomes law. The bill, Intro. 1252, “Establishing a Sustainable Energy Loan Program,” would allow New York City to have a type of energy-loan program used in 33 states and the District of Columbia. It’s called PACE, an acronym for Property Assessed Clean Energy.

“PACE is a voluntary, municipally sponsored financing program that allows building owners to get long-term, inexpensive financing to do qualifying types of renovation projects that have a public benefit, which is reduced greenhouse emissions by the building,” says Peter Erwin, an associate at the New York City Energy Efficiency Corp. (NYCEEC), a nonprofit specialty finance company. “You would normally qualify the project by proving there are energy savings, and in exchange get PACE financing.”

Terence Cullen, spokesman for the bills’ prime sponsor, Democratic Councilman Costa Constantides, says, “This creates a real funding mechanism for certain landlords to help them make the upgrades. They are required to reduce carbon emissions. We want to make sure landlords have the capacity to make these upgrades without exceptionally high costs passed on to the residents.”

The money for PACE loans comes from local governments that issue bonds to raise lending capital. Each individual municipality has to pass a statute allowing PACE loans. This is why PACE is available throughout New York State, including Westchester County and Long Island, but not yet in New York City. A partner lending institution then makes loans to finance improvements that reduce an existing building’s energy costs. But instead of repaying the lender, the building makes payments through an assessment on its property taxes (with a corresponding tax lien on the property). This makes it be extremely difficult if not impossible for condominiums, in which each unit pays its own individual property tax, to acquire a PACE loan.

Unlike the 5- to 10-year terms of most bank loans, the length of a PACE loan is tied to the useful life of the improvement, up to 20 years. While that ultimately means higher interest costs, the annual payments are smaller since the loan term is longer. The theory is that the energy savings realized from the improvements will more than cover the repayment costs.

“Because you amortize the cost of the project over a longer period, the energy savings are likely to outweigh the cost of servicing the debt,” explains Robert Fischman, managing director of commercial programming and sustainability strategies at Energize NY, the financing arm of the nonprofit Energy Improvement Corp., which seeks to reduce greenhouse-gas emissions by enabling energy-efficiency improvements.

In addition, a building’s projected energy savings are factored into the loan. “One of the advantages of PACE is that the size of a loan is based on the energy-cost savings of the measures installed,” says Erwin of the Energy Efficiency Corp. “Therefore, lenders may size larger loans” – allowing bigger projects – “and debt service should be offset by operational savings.” There also may be ancillary benefits, he adds, like lower ongoing building maintenance costs, higher property values, and in some cases, lower insurance premiums.

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