“PACE” – Is it the new buzzword? Lately, it seems I keep hearing about securitizations backed by PACE financings. What is a PACE financing program, and what is happening in the securitization market?

“PACE” stands for Property Assessed Clean Energy. Under PACE programs, municipalities and counties form special tax districts to help residential, commercial or industrial property owners finance energy efficient upgrades or renewable energy installations to their properties through payments of additional property taxes. While the specific details vary by state, the basic premise is that the property owner is allowed to finance 100 percent of the cost of the energy property through increased property tax assessments – the “PACE” assessments. The PACE assessments are typically for 15 to 20 years and operate similar to loan payments in that these property tax payments repay the initial financing cost for the energy upgrade. The PACE assessments, however, are legally property tax assessments and, thus, have the benefit of being secured by senior liens against the taxpayer’s property.

The way the financing works is specific to the individual programs, but the funds typically come from some form of private / public partnership, which allows the state or municipality to encourage identified property upgrades to achieve environmental and energy efficiency goals without having to raise funding, and provides investors with new opportunities to invest in a secure asset in the green energy space. The benefit to the property owner is typically the ability to realize immediate cost savings in reduced energy costs while paying for the improvement over a 15 to 20 year period, and also being able to finance 100 percent of the cost.

Currently, 19 states and the District of Columbia have actively operating PACE programs, and there is active PACE-enabling legislation to launch and operate programs in another 24 states.^[1]   There are residential PACE programs in California, Florida, and Missouri.^[2] In a residential program, such as for solar panels, the PACE assessment would typically remain with the home when it is sold and the new owner would become liable for the payments following a sale.

Bonds associated with PACE assessments first began being packaged and securitized in March 6, 2014. ^[1]  This first deal was a $104 million issuance that was backed by a PACE program involving a portfolio of residential solar systems.  The note was rated AA by Kroll, had an 11-year duration and an interest rate of 4.75 percent (as compared to the eight percent interest rate on the underlying PACE obligation).  The advance rate was 97 percent.[2]

On September 22, 2016, this same issuer completed the eighth securitization of its PACE residential program.  This was a $320 million securitization concentrated mainly in California and is currently the largest PACE-backed securitization that has been completed by an issuer.^[3]  The securitization included class A1 and A2 notes rated AA(sf) by Kroll and AA(sf) by DBRS, and which Moody’s Investor Service assigned its highest Green Bond Assessment Rating of GB1.[4]  The issuer reported that the notes were initially secured by PACE assessments with an average balance of approximately $21,310, a weighted annual interest rate of 7.93 percent and a weighted average original term of 14.56 years.[5]

Reporting on several PACE securitizations near the end of 2016, Greentech Media commented that PACE financing is “growing at a formidable clip, with large securitizations coming in more regular succession.”^[6]  Greentech reported two securitizations in the month of November by two other PACE lenders, and both lenders had previously done securitizations of their PACE programs.^[7]  On November 4, 2016, Renew Financial closed a $115 million issuance, which was its third securitization.^[8]  The note had a 3.16 percent coupon and was rated AA(sf) by Kroll.[9]  On November 15, 2016, Ygrene Energy Fund closed a $145 million private securitization, which funded approximately 6,041 energy and water conservation projects for residential and commercial property owners in multiple states, including California and Florida.^[10]

While not reported by Greentech, on November 15, 2016, Ygrene also announced a $184 million public securitization of PACE Bonds.^[11]  This securitization included class A and B notes rated AAA and A by Morningstar and AA and BBB by Kroll, respectively and achieved a 99.7 percent advance rate.[12]  It was Ygrene’s first public securitization and the industry’s first transaction to be rated AAA.[13] The collateral pool was comprised of residential and commercial properties located in California and Florida.  Ygrene plans to expand to at least two new states in 2017,[14] and expects to do PACE securitizations quarterly in 2017.^[15]

The securitized PACE bonds are able to be designated as green bonds because they finance property improvements which achieve a positive environmental impact.[16]  The bonds issued by all three PACE lenders in fourth quarter 2016 were all designated green bonds, and according to Greentech, “the trend to label PACE securitizations as green bonds comes as the green bond market is exploding.”^[17]  In January 2017, Moody’s Investors Service reported that it expected 2017 to mark another record year in the green bond market with global green bond issuances as high as $206 billion, following an increase of 120 percent to $ 93.4 billion of global issuances in 2016.^[18]     

In November 2016, the Department of Energy (the “DOE”) released guidance for PACE residential programs in the form of baseline best practice guidelines to help state and local governments, PACE program administrators, contractors, and other partners develop and implement programs and improvements that effectively deliver home energy and related upgrades.^[19]  The guidelines include recommendations for protections to be included in the programs to protect consumers, as well as for lenders that hold mortgages on properties with PACE assessments. The specific topics addressed in the updated guidelines include:

• enhanced PACE eligibility criteria, including requirements for review of income, existing debt obligations and credit score;
• clear and understandable consumer disclosures of all PACE terms, including interest rates and fees, repayment procedures, and lien requirements;
• additional consumer protections for low-income households, including enhanced screening procedures (e.g., verbal confirmation of PACE terms with the homeowner), written disclosures, and recommendations to structure PACE financing to be cost-effective for low-income participants;
• recommendations for quality assurance, contractor management, and enforcement procedures; and (v) recommendations for access to dispute resolution procedures or other mechanisms if work is performed improperly.

While it remains to be seen whether the DOE will continue its efforts to facilitate the development of PACE programs, these programs remain state and local initiatives and thus do not depend on the DOE to remain viable.  Certainly states like California, where PACE programs have thus far been most prominent, will continue to have policies to reduce carbon emissions.  Thus, PACE is an area with tremendous growth potential.  I do think the buzz is in the air.

[1] Adam Tempkin, First energy-efficiency bonds sold to investors, Reuters (Mar. 7, 2014), http://www.reuters.com/article/pace-bond-abs-idUSL1N0M41J920140307.

[2] Id.  There was also initial overcollateralization of three percent and an initial liquidity reserve of three percent of PACE bond principal that would gradually build up to seven percent of principal (or approximately 17 months of interest).  Id. 

[3] Renovate America, Renovate America Completes $320 Million PACE Securitization, PRNewswire

(Sep. 22, 2016 at 17:28 ET), http://www.prnewswire.com/news-releases/renovate-america-completes-320-million-pace-securitization-300332947.html (the “Renovate America Newswire”)

[4] Id.

[5] Id.

[6] Katherine Tweed, PACE Securitizations Top $400M in November, GreenTech Media (Nov. 16, 2016), https://www.greentechmedia.com/articles/read/pace-securitizations-top-400m-in-november (the “Greentech Article”)

[7] The November transaction was Renew Financial’s third securitization of PACE bonds.  Greentech Article.  Ygrene Energy Fund Inc. closed its first securitization in July 2015, which was a $150 million private PACE transaction with a single class of notes rated AA by Kroll, and had a 97 percent advance rate.  Ygrene Energy Fund Completes $150 Million Securitization of PACE Bonds Underscoring Investor Appetite for New Asset Class,” PRNewswire (Jul. 23, 2015, 08:00 ET), http://www.prnewswire.com/news-releases/ygrene-energy-fund-completes-150-million-securitization-of-pace-bonds-underscoring-investor-appetite-for-new-asset-class-300117598.html (“Ygrene Newswire”).

[8] Greentech Article.  See also Renew Financial completes $115 million securitization of PACE bonds via Natixis, Stratton Report (Nov. 4, 2016), http://strattonreport.com/news/renew-financial-completes-115-million-securitization-pace-bonds-via-natixis/ (the “Stratton Renew Financial Article”).

[9] Stratton Renew Financial Article.

Renew Financial completes $115 million securitization of PACE bonds via Natixis

[10] Greentech Article; Ygrene Energy Fund Completes $145 Million Securitization of PACE Bonds with Strategic Insurer, Global Atlantic Financial Group (Nov. 15, 2016), available at https://ygreneworks.com/news/ygrene-energy-fund-completes-145-million-securitization-pace-bonds-strategic-insurer-global-atlantic-financial-group.

[11] Ygrene Energy Fund issues $184 million public and $145 million private securitization deals, Stratton Report (Nov. 15, 2016), http://strattonreport.com/news/ygrene-energy-fund-issues-184-million-public-145-million-private-securitization-deals/.

[12] Id.

[13] Id.

[14] Id.

[15] Greentech Article.

[16] In general, the concept of a green bond is a bond whose proceeds are used to fund projects that benefit the environment.  The World Bank began issuing green bonds in 2008 to fund energy projects related to climate change.  Since then, bank groups and other organizations have developed guidelines and other means to standardize the criteria for bonds to carry this label, including  the “Green Bond Assessment” or “GBA.”  However, currently, there is yet to be a standardized rating criteria for classifying a debt instrument as a “green bond.”  See generally, Christopher Swope, Explainer: What are “green bonds” and why are cities so excited about them?, Citiscope (May 20, 2016), http://citiscope.org/story/2016/explainer-what-are-green-bonds-and-why-are-cities-so-excited-about-them.

[17] Greentech Article. See also Renovate America Newswire.

[18] Announcement: Global green bond issuance could rise to USD206B in 2017 after record in 2016, Moody’s Investors Service  (Jan. 18, 2017), https://www.moodys.com/research/Moodys-Global-green-bond-issuance-could-rise-to-USD206B-in-PR_360880?WT.mc_id=AM~WWFob29fRmluYW5jZV9TQl9SYXRpbmcgTmV3c19BbGxfRW5n~20170118_PR_360880.

[19] Best Practice Guidelines for Residential PACE Financing Programs, Dep’t of Energy (Nov.18, 2016).

[1] http://pacenation.us/pace-programs (last visited Feb. 8, 2017).

[2] Id.

[View source.]