PACE Financing: 60-Second Market Review and Insights

Originations and Issuances, by the Numbers

To date since the inception of Property Assessed Clean Energy (PACE) financing, $5.17 billion has been advanced to homeowners under residential PACE (R-PACE) programs, and an additional $672 million has been advanced for commercial PACE (C-PACE) projects. In 2017, R-PACE originations totaled $1.6 billion, down 6% compared with 2016. In 2018 so far, R-PACE originations have reached $372 million. C-PACE originations, on the other hand, are on the rise, totaling $251.4 million in 2017, which is almost double 2016’s volume. So far in 2018, C-PACE originations have reached $84.8 million.

In 2017, R-PACE securitization issuance totaled over $1.5 billion. This year, R-PACE securitization issuance through June 2018 from Renovate America, Ygrene and Renew Financial sits around the $700 million mark. While R-PACE securitization rates appear to be slowing after having peaked in 2016, September 2017 saw the first C-PACE securitization, issued by Greenworks Lending. We are starting to see more deals that incorporate C-PACE loans. For example, Ygrene’s 2018 securitizations included approximately $37.5 million in commercial assessments. Although more C-PACE securitizations are expected to follow, this asset class will likely be slower to emerge due to more lengthy approval processes for renovations on commercial properties.

Performance and Practice

Strong performance in the PACE ABS market has been marked by very low delinquency rates for R-PACE properties. At approximately 2% to 4% at their highest and declining to below 1% after a year, according to data compiled over multiple tax years, R-PACE delinquency rates are not significantly different, and perhaps less than delinquency rates for general property taxes.

Despite all of the positives, PACE financing has been dogged by allegations of predatory conduct and could now be facing a new round of court challenges. Previous legal actions brought against Renovate America and Renew Financial for Truth in Lending Act and Home Ownership and Equity Protection Act violations have been dismissed. However, a new lawsuit has been filed alleging breach of contract for lack of consumer protections, particularly for the elderly and other vulnerable consumers.

Looking Ahead

The most recent lawsuits followed closely on the heels of the enactment of two bills in California on April 1, 2018, establishing new underwriting criteria related to the homeowner’s “ability to repay” (versus previous guidelines which focused on property valuation). Two additional bills are currently being considered in California that seek to introduce income verification requirements to the PACE financing process.  The winds of change are in the direction of more consumer protection, and any short-term pain, should mean long-term gain for the industry; consumer protection legislation around PACE in California should boost confidence in the sector, creating more certainty for investors around PACE litigation arising over these consumer complaints going forward.

But competition, not consumer protection, may soon have the greatest impact on the industry. For example, new regulations for building standards issued by the California Energy Commission would require solar panel systems for new residential constructions starting in 2020, creating a boon for solar projects.  This makes solar ABS an area to watch to see if investors accept the asset class and the money follows.  Meanwhile, the regulations may actually shrink the need for reliance on PACE financing as more and more buildings are financed with solar power as part of the original construction.