America’s housing shortage notwithstanding, there exists a complementary impetus to gradually, but decisively, retrofit much of the nation’s existing housing stock to meet the kind of energy performance standards needed to curb the climate trajectory. This applies to old and newer homes alike. Whether vulnerable to the elements and natural disasters, decaying due to age, or related structural concerns, communities in need of impact-resistant measures abound.

Financing resiliency

The data bear out that homes with greater physical resiliency consequently benefit from greater financial resiliency. This is according to the recently published study “Picking Up the PACE: Loans for Residential Climate-Proofing,” co-written by leading business professors from UNC Chapel Hill, Yale University, ESCP Business School, and Erasmus University, which came out last August.

“Mortgage lenders consider two forces when providing a mortgage loan to households: the mortgage’s probability of default and the collateral recovery value,” the authors note in their introduction.

Tipping the scales, as it were, is the presence of PACE (Residential Property Assessed Clean Energy) financing, which the authors concede has been the source of some debate among lenders and policymakers over “how housing markets respond” when loans earmarked for clean energy upgrades enter the picture.

Even armchair economists understand that the higher the lien any financial institution has on a home, the greater the risk of delinquency and foreclosure on that home. If I have limited equity invested in my home that is otherwise secured with a government-subsidized, 30-year fixed mortgage, and I obtain any form of financing on top of that, then sure, my risk exposure increases. But this fails to account for any increase in my home’s collateral value that results from obtaining PACE financing in particular.

As the study’s authors note, “projects financed by PACE loans increases borrowers’ home equity value,” while turnover properties “undergoing PACE-funded home improvement projects experience an average total appreciation in home sale prices of 27%.”

So, this begs the question: what sets apart PACE financing from more standard home improvement loans?

How PACE works  

Broadly speaking, PACE is technically not a loan but an assessment on a home’s projected value once the property has been hardened against the elements. It’s what Mike Moran, executive director of the Florida PACE agency, calls “a sophisticated purchase.”

PACE programs have been in existence since 2008 (California was the first to pass legislation) and represent one of the fastest growing residential green loans in the U.S., having reached $8.5 billion in total loan dollars by the close of 2022. They were created to lessen financial burdens for all stakeholders in the housing game: lenders, governments, and of course homeowners.

PACE programs relax these constraints by, in most cases, giving homeowners the means to lower their energy bills and insurance premiums, and lessening potential losses for lenders in case of default. Consequently, a PACE loan looks much more attractive than the alternative for everyone involved.

Public interest at core

Moran, speaking with GBA earlier this year, highlights his agency’s discretion when it comes to financing beyond people’s means. “We won’t finance more than 90% of the market value of the home, so [homeowners] can’t get upside down on their house. And we’re not allowed to finance beyond the useful life of the product.”

PACE programs are public interest initiatives, first and foremost, aimed at bringing some much-needed stability to housing markets that have been thrown into chaos in one form or another since the 2008 recession. Mortgage supply, rising insurance rates, labor force numbers, material supply chains, restrictive zoning, inflation, and several other factors have all contributed to a housing crisis that, even by liberal estimates, is still years away from being resolved.

Of course, there is no single fix. But with PACE, the programs strive to institute some modicum of sanity and reliability in a marketplace that isn’t exactly known as a bastion of due diligence.

Additional ways PACE differs

On a call with GBA, following the study’s publication, Moran doubled down on PACE financing not being a loan in the strictest sense, but a “non-ad valorem assessment,” the balance of which is added to a homeowner’s property tax bill.

As such, the financing represents secured debt with a lower interest rate (averaging $30,000 at 7%), as opposed to a standard bank loan or credit card, which are neither of those things. There is also no pre-payment penalty. And above all, the money can only be used to finance projects that improve home energy efficiency and/or climate resiliency, so the greater good is tethered to individuals’ personal and financial wellbeing.

“We want to bring private money to serve a public good,” Moran says. To his point, PACE is funded with private dollars, and “there’s only so much” out there that can be funneled into such efforts. Making this paradigm work is no easy feat, especially in Florida.

PACE in the Sunshine State

PACE programs have been established—and approved through legislation—in 38 U.S. states over the last two decades. But only in California, Florida, and Missouri (not exactly your typical trio) is PACE financing available to residential property owners.

Moran sees California and Florida having a shared incentive to harden their constituents’ homes against what ails them most, namely earthquakes and wildfires for the former and hurricanes for the latter. (As for Missouri, flooding and tornadoes are the primary culprits, but I’m otherwise baffled—in a good way—by its inclusion on that small list.)

Since PACE’s inception, its programs have been applied to “a wide range of environmental retrofit and/or climate adaptation projects” aimed at reducing “energy consumption, increasing use of daylight, solar panel installations, or impact-resistant roofing, windows, or door replacements and repairs,” the study’s authors observe.

For its sample size, the study looked at “over 55,519 PACE loans originated for properties located in 40 Florida counties.” Understandably, Florida is an ideal proving ground for such a program. Moran observes that it’s all about “hurricane hardening and energy efficiency … I can’t use this money to remodel someone’s kitchen.” Examples include making upgrades to roofs, windows and doors, flooring, solar panels, air sealing, mechanical/HVAC, EV charging equipment, new insulation, generators, and more.

He also points out a curious oversight. Back in 2012, the way the Florida legislature wrote the law that allows Florida PACE and other PACE lending agencies to exist, “it doesn’t differentiate between residential and commercial” properties. It’s hard to imagine any reason why any homeowner would game that system, but it could make for some confusing paperwork.

PACE today

Moran is continually encouraged by what he sees taking place in his state, and with the support of a state legislature that he says, “believes in the concept of bringing private money to carry out a public purpose.”

A recent legislative session to “modernize the 14-year-old law” resulted in septic-to-sewer connections being added to the list of “qualifying improvements” under PACE, and a complementary effort on the part of his organization help clarify that building seawalls are eligible as well.

Still, what qualifies as a qualifying improvement is left to the states. Or in the case of Florida, left to the counties or individual municipalities. And that is where the logistics of carrying out PACE’s mandate have become sticky of late.

Recently, local county commissioners and tax collectors have taken issue with Florida PACE and refused to place many home assessments on the tax roll, effectively blocking financing for homeowners. In September 2023, the Alachua County tax collector refused to put 52 assessments undertaken by Florida PACE on the tax roll. “These are elected officials trying to take away a voluntary financing option for Florida families,” Moran said in a 2023 press release.

According to Florida’s updated law, Florida PACE and other PACE funding agencies must operate with interlocal agreements in place before agreeing to finance specific projects. (There are several cases currently before the State Supreme Court, with Florida PACE as the plaintiff.) The legislature and likeminded advocates claim the updated law is meant to curtail rogue actors from financing things that don’t need fixing, or not properly disclosing to homeowners the potential impacts of falling behind on payments.

But Moran maintains that PACE financing was designed—and, by extension, his agency—as a non-predatory lending mechanism, and there is no data to indicate homeowners who do obtain that financing are more likely to default on payments. Without PACE financing, homeowners may then rely on their bank for a loan or put everything on a credit card.

“We’re doing everything in our power to clean up the mess that Florida tax collectors have created, and that includes having to go to court,” he says. “The free market needs clarity on this, and I’m very concerned that [customers] will go somewhere else.”

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