How Does PACE Financing Work?

Michael Tobias
3 Minutes Read
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    Property Assessed Clean Energy (PACE) programs offer financing for residential and commercial building upgrades. Their loans have low interest rate and a much longer repayment period than conventional financing options, and payments are collected along with property taxes. The PACE financing scheme minimizes the risk for all parties involved, and PACE programs have been deployed successfully in many states.

    PACE financing is managed by multiple program partners, and there are both residential and commercial options. Commercial PACE financing is more widespread, and there are active programs in 21 states. On the other hand, residential programs are only available in California, Florida and Missouri as of December 2018. Some PACE partners only offer residential financing, others focus on commercial financing, and there are partners that work with both sectors.

    Before proceeding with any building upgrades, the best recommendation is getting a professional assessment of your site, to identify the energy efficiency measures that work best. Since every building is unique, the solutions that work in one property may be ineffective in another one.

    Identify the best building upgrades with an energy audit.

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    Advantages of PACE Financing for Building Upgrades

    PACE programs provide low-risk financing and a long repayment period. Conventional financing options normally have a term of around 10 years, while PACE loans can have a repayment period of 20 to 30 years. As a result, PACE financing is viable for building upgrades and energy efficiency measures with a longer payback period.

    The best way to explain the benefits of a long repayment period is with an example. Assume a building owner is considering an energy efficiency measure with a cost of $1,000,000 and yearly savings of $100,000, achieving a payback period of 10 years. However, developers normally take loans for large investments to avoid spending a lot of capital upfront.


    If a loan is available with an interest rate of 6% and a term of 10 years, the annual payment is $139,105. Since the project only saves $100,000 per year, the building owner has to pay $39,105 for ten years before achieving savings. This option is not attractive because the building owner must pay $391,050 over 10 years, and then wait another 4 years to achieve net savings. In other words, the payback period is extended to 14 years.

    On the other hand, if a PACE loan offers the same interest rate with a term of 25 years, the annual payment is reduced to $81,981. In this case, the project savings can pay the loan by themselves and still leave $18,019 in savings starting from the first year. This financing option is more attractive, since it allows immediate savings and a net cost of zero. In other words, the project pays for itself.

    Why PACE Financing Is Considered a Low-Risk Option

    As described above, PACE loans are paid along with property taxes, and the loan is bound to the property and not the user. This is very convenient if the property is sold, since the loan is transferred to the next owner. In the case of commercial PACE loans, if a company closes and the building is purchased by another company, the loan is transferred as well.

    Not paying a PACE loan brings the same legal consequences as not paying property taxes, which means that building owners are unlikely to fall behind. This gives confidence to the private funding sources that work with PACE programs.

    Which States Have Residential PACE Funding Available?

    As of December 2018, there are only three states with active PACE programs for the residential sector:

    • California - 7 programs
    • Florida - 3 programs
    • Missouri - 2 programs

    Georgia has a residential PACE program in development, but it has not been launched yet.

    Which States Have Commercial PACE Funding Available?

    As of December 2018, the following states have active PACE programs that work with the commercial sector:

    • Arkansas - 2
    • California - 11
    • Colorado - 1
    • Connecticut - 1
    • Washington, D.C. - 1
    • Florida - 5
    • Kentucky - 1
    • Maryland - 2
    • Michigan - 2
    • Minnesota - 2
    • Missouri - 3
    • Nebraska - 1
    • New Hampshire - 1
    • New York - 1
    • Ohio - 5
    • Oregon - 1
    • Rhode Island - 1
    • Texas - 2
    • Utah - 1
    • Virginia - 1
    • Wisconsin - 2

    The states with PACE programs still under development are Delaware, Georgia, Illinois, New Jersey, Nevada and Philadelphia.

    New York already has one PACE program, called Energize NY, which covers all municipalities except New York City. Building owners in New Jersey and Chicago do not have access to PACE financing yet, but this will change when the corresponding programs are developed and launched.


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    Tags : Building Upgrades project financing PACE financing PACE loan

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