In an article published on January 20, 2023 in Law360 Real Estate Authority, Carrie O’Malley provided extensive insight on the financial benefits and different types of Property Assessed Clean Energy (PACE) financing programs, which offer capital for property owners seeking greater efficiency and investors looking to allocate funds for environmental, social and governance (ESG) purposes.
It is widely accepted that the financing terms and environmental outcomes offered by PACE programs extend attractive benefits to the main players in these transactions, including the borrower, the capital provider and the local government. "I'm not sure of any other program where you can put zero down and finance 100%. It's pretty spectacular," O’Malley said. "Then private equity, they want to come in. And guess what? This type of financing falls under the umbrella of ESG," which firms are facing increasing pressures from investors and regulators to address.
O’Malley also highlighted the benefits of the longevity of investments that are commonly backed by PACE financing. "That's the benefit for the equity guys. They get a little higher than market interest rate and a long payout. If they underwrite it the right way based on their incentives, they've got a good investment," she said. "If it's structured correctly, then PACE can be a win-win win for all the stakeholders."
While PACE programs offer significant benefits and incentives, the concept is not without its flaws, especially with 40 states running their own programs with differences that lenders and advisors must understand. "The problem is, like everything in the world, everybody wants to put their mark on it," O'Malley said. “‘I have the best documentation.’ ... ‘We like our structure this way.’"
Further, different types of PACE programs have their own differences, such as the varying sophistication of borrowers for residential and commercial PACE financing. O’Malley suggested that C-PACE loans often go to well-established companies with counsel familiar with the process, whereas R-PACE borrowers may not have the same degree of knowledge, experience or resources. And that lack of experience can make R-PACE deals trickier to close.
"The challenge is every capital provider wants to put their own mark. There's a fair amount of that," O'Malley said. "The one piece of it is trying to marry everything up. … You run into different structures. Some programs have 20 different docs."
"The problem is there is no uniformity," O'Malley added.
For the full article, subscribers to Law360 Real Estate Authority may click here.
Luis F. Ruiz