A new trend in green building financing has emerged this year — PACE financing. Property Assessed Clean Energy (PACE) financing allows a building owner to pay for energy efficiency retrofits or upgrades through a property tax lien. This assessed fee is typically a fixed payment, at a fixed interest rate, for a fixed term.
Although much of the news surrounding PACE financing has centered on the residential market, a new report from Pike Research (PDF) shows that it could be a booming trend in the commercial sector as well. According to Pike Research, PACE financing in the commercial building market could grow to $2.5 billion annually in the next five years.
If commercial building owners have easy access to funds for green retrofits without interrupting their cash flow, this can lead to job creation. If $2.5 billion in PACE funding is utilized annually, this could create up to 50,000 new jobs by 2015. The funding could also lead to a reduction of almost 8 million metric tons of carbon dioxide emissions due to the influx of more energy efficient buildings.
Of course, there are impediments to reaching this $2.5 billion mark, namely the mortgage companies. Although Fannie Mae and Freddie Mac serve the residential market, they are up in arms about the property tax assessment format. The reason? The property tax assessment gets paid first if the mortgage owner defaults. The primary mortgage lender no longer gets first repayment rights, and this makes all mortgage companies nervous about PACE financing.
Another factor that will affect the adoption of commercial PACE financing is the newness of the program. The first PACE financing program was launched this year and is now active in only a handful of communities in the nation. Right now several states have legislation favorable to PACE financing, but cities within these states must have the program in place before they can begin offering the program to commercial building owners.
There is certainly potential for PACE financing to grow into a multibillion-dollar business over the next five years, but there are some kinks that need to be worked out. However, the ability to offer building owners a way to reduce their building’s carbon footprint, offer energy savings to their tenants, and help get Americans back to work makes PACE financing in the commercial sector look very promising.