Attachment A. Advantages and Disadvantages of PACE
This attachment contains details about the advantages and disadvantages of PACE financing as summarized in Table 1 - PACE Advantages and Disadvantages.
Advantages for Property Owners The PACE model has several advantages for property owners over other financing options, as follows:
Longer repayment period. Commercial PACE programs offer a longer term of up to 20 years, in contrast to the much shorter terms for utility and unsecured loans (2 to 5 years), and in some cases, secured loans (10+ years). The longer term can enable commercial property owners to do more comprehensive work and more closely match their payments with the future energy savings. This means certain projects that would not be cash flow positive under types of loans with shorter terms may become cash flow positive under PACE with its longer term.
Repayment transfers with ownership. Many property owners do not want to invest in energy efficiency or renewable energy improvements if they plan to sell their property in a few years. PACE allows the current owner to invest today, knowing that the repayments and the financed improvements can transfer to the new owner if he or she decides to sell the property.
Information from a trusted source. Trust is a key issue in encouraging property owners (and residents) to act. People are bombarded with information from an overwhelming number of sources—some reputable, others not. Local governments are generally seen as an objective source of information because they have no financial stake in the decisions made nor ties to private-sector profits. Local governments simply provide tools and resources to enable residents and businesses to learn about available programs and weigh the options for taking action. For example, local governments can offer a single source of information on how to get started with clean energy upgrades, and many of them provide educational workshops about the various options available to their constituents.
Low interest rates. Low rates may be available to PACE program applicants thanks to the lower interest on municipal bonds and other sources of financing available to local governments in contrast to conventional (private-sector financing) options. (In some cases, however, administrative fees may push the cost of a PACE program above conventional options.) Senior-position financing, which PACE programs typically have, is likely to offer lower interest rates than subordinated financing.
Tax benefits. A portion or all of the property owner’s repayments may be tax deductible. Property owners are also eligible for the federal income tax credit (FITC), a 30% investment tax credit for solar installations (although this tax credit is subject to change; program planners are advised to verify it is still in effect at the time of program design).
The advantages listed in the previous section make PACE an attractive option for property owners, but there are certain limitations local governments should recognize.
Available only to property owners. PACE programs are available only to property owners; renters cannot access this program directly. The main reason is split incentives—the owner is the one that invests in the improvements, but the tenants generally pay the utility bills (and reap the energy/cost savings). (Grantees should note that there is a type of commercial lease, typically referred to as Triple Net, wherein property taxes flow through to tenants, in which case the split incentive disappears). In some U.S. cities, a significant percentage of the residents and commercial businesses are renters. In such cases, local
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