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PACE Bond Financing for Energy Projects Gaining Favor, Adopted in New York

By David Abromowitz and Yuanshu Deng
January 2010
Practice: Green Business, Public Law & Policy, Real Estate
People: David Abromowitz, Yuanshu Deng, Max Friedman

Property Assessed Clean Energy (“PACE”) finance is an innovative financing approach gaining favor around the country to promote improved energy efficiency in buildings as well as on-site power generation from alternative or renewable sources.  PACE programs access a new source of up-front financing:  proceeds of municipal bonds for residential and commercial building owners alike, with repayment coming from local property tax assessments over an extended period.  The elimination of up-front capital raising by the owner and the use of deductible property tax payments that may be passed through to tenants make the PACE approach of particular interest to commercial property owners.

Within the past year, more than a dozen states have passed enabling legislation for PACE programs, and the trend is expected to continue.  New York is the most recent adopter, with legislation passed in November 2009 (click here for more information).  The new statute allows municipalities to grant loans to building owners, using federal grant assistance or municipal bonds backed by a federal loan guarantee.  The Obama Administration recently indicated strong support (click here to view "Recovery Through Retrofit:  Middle Class Task Force Council on Environmental Quality").

Repayments of PACE loans come from an annual assessment on an owner’s property tax bill for a term of years to be determined by the local or state government, typically 15 to 20 years, and interest on the loan is likely to accrue at below-market rates available to government agencies.

The funding agency receives a senior tax lien on the real property benefited by the loan, rather than just a lien on the renewable energy system or energy-efficiency improvements.  This feature, potentially of concern to pre-existing lenders, is often accompanied by certain limitations on the amount of the lien relative to value or through some other mechanism designed to address lender concerns, particularly in the single family residential market.

The decades-long term for repayment of PACE loans, coupled with savings from lower energy bills, allows for positive cash flow on renewable energy systems and energy retrofits.  In addition, recipients of PACE loans may be eligible for certain other tax benefits such as being able to deduct the interest portion of the repayments and claiming federal income tax credits for the cost of renewable energy facilities.  Please click here for an overview of green building federal tax incentives.

In the commercial real estate context, many landlords under typical leases may be able to pass through the incremental increase in annual property tax payments to their tenants as part of common area charges, while the tenants benefit from reduced energy costs.  Because it is secured by property taxes that run with the real property, PACE financing is intended not to be “due on sale,” which helps owners seek payback periods lasting beyond their particular ownership.

Goulston & Storrs is following developments in the various state PACE programs in multiple jurisdictions, most still in their incipient stages. For questions about the information contained in this advisory, please contact your usual Goulston & Storrs attorney or any of the following attorneys:

David Abromowitz
(617) 574-4016
dabromowitz@goulstonstorrs.com

Max Friedman
212-878-5124
mfriedman@goulstonstorrs.com

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

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