Instrument Overview
Tax-line financing mechanisms that allow a commercial or private property owner to finance the up-front cost of energy, water or other eligible improvements on a property and then pay the costs back over time via tax or service charges [1].
Why it matters for cities [2]
- Eliminate large up-front costs for energy retrofits
- Reduce concern about investment recovery when the property is sold, because the financing is tied to the property itself rather than to the owner
- Converting an annual or semi-annual payment into a net monthly cost similar to that of other personal expenses (e.g., cable, cell phone service). Note that these are partially or wholly offset by electric bill savings.
- Improving access to credit at a competitive, fixed interest rate
- Reducing the likelihood of a negative impact on the municipality’s credit or obligation risk, and thus, not endangering other municipal programs
- Providing accessible EE and RE information and/or educational programs; moreover, the programs are sponsored by the municipality, which could engender more trust in the accuracy of the information as opposed to contractor-led programs
Key features
- Enables property owner to finance the upfront cost of energy or other eligible improvements on a property and then pay the costs back over time through a voluntary assessment that is filed with the local municipality as a lien on the property [3].
How It Works
Eligibility and terms for tax-line financing mechanisms vary among providers, but generally, it proceeds as follows:
- Program setup: A city or state passes enabling legislation that allows energy, water, or resilience upgrades to be financed through property tax or service charges.
- Financing source: Capital is provided by municipal bonds, green banks, or private lenders, while the city administers the repayment mechanism.
- Property owner participation: Owners voluntarily apply for financing of eligible improvements, which are reviewed and approved under program criteria.
- Implementation: Contractors complete the upgrades, with costs covered upfront by the financing source.
- Repayment through tax bill: The loan is repaid over time as an additional line item on the property tax bill, collected by the local tax authority.
- Lien and security: Repayments are secured as a tax lien, giving the lender strong protection and enabling longer terms or lower interest rates.
- Transferability: If the property is sold, the repayment obligation generally transfers to the new owner along with the benefits of the improvements.
Benefits & Challenges for Cities [1]
Benefits
- This method reduces upfront costs for energy efficiency measures, helping residents and businesses to reduce their energy costs and environmental impact via affordable loans that can be paid off in installments.
Challenges
- Lack of trust and transparency between local governments and taxpayers can be a major obstacle in cities with less developed tax systems.
- In many cases, including within the EU, municipalities lack the legal authority to levy or modify taxes which prevents them from establishing tax-line financing mechanisms without national-level legislation.
Use Cases
Commercial Property Assessed Clean Energy (C-PACE) [4]
Property assessed clean energy (PACE) is a financing tool that allows property owners to finance the upfront cost for qualified energy, water, resilience, and public benefit projects with funding through a voluntary assessment on the property tax bill. Commercial PACE (C-PACE) programs are the most prevalent type of PACE policy and program in the United States and are the focus of this profile.
Green banks and third-party financiers typically provide the capital for PACE projects. Regardless of the financier, the local government typically acts as the payment collector and remitter. Utility cost savings or revenue from renewable energy may help the owner cover the cost of the assessment, and a property lien secures the investment if there is a foreclosure. Like other assessments collected as property tax, in the event of foreclosure, any past due payments related to the PACE lien take priority over the mortgage and other loans. States and local governments develop the legal, regulatory, and procedural framework for PACE and work with specialty program administrators and finance providers to implement PACE programs, with utilities helping to advertise this financing method to their customers.
One of the main benefits of PACE for property owners is that it can be used to cover 100% of the upfront cost of an energy or resilience upgrade. The investments are then repaid over the useful life of the installed equipment. The longer payback period – and lower annual or semi-annual payments – can make upgrades more affordable for property owners. The assessment stays with the property in the event of a sale (assuming the buyer agrees to the transfer).2 Therefore, if the property is sold, the buyer can assume the PACE payments and the benefits from the upgrades. If the buyer does not agree to a transfer, the seller may have to pay off the outstanding amount of the PACE assessment. Because property taxes have high rates of payment, there may be lower interest rates, longer loan terms, or a combination of the two. PACE interest rates are usually between 5% and 10% of the total funded amount and allow for flexible payback terms of up to 20 years.
C-PACE programs may provide financing for commercial projects such as multifamily residential properties, commercial properties, industrial buildings, or nonprofit properties. Programs may vary based on the governmental sponsor (statewide vs. local programs), financing structures, and eligible measures.4 As of 2022, more than 38 states plus the District of Columbia have C-PACE-enabling legislation and 30 states plus the District of Columbia have active programs.5 There has been more than $4 billion in investment in over 2,900 commercial projects as of November 2022.
As an example from the field, the Minnesota PACE (MinnPACE) program funds energy improvements on commercial buildings, multifamily properties with five or more units, and nonprofit buildings. The Saint Paul Port Authority is the primary provider of C-PACE financing in Minnesota. Program funds can be used to purchase eligible equipment, which includes renewable energy systems (e.g., solar, wind, geothermal), as well as energy efficiency upgrades to heating, ventilation, and air conditioning (HVAC) systems, lighting, building envelopes, and energy management systems. The MinnPACE program provides payback periods up to 20 years at fixed interest rates. Financing is limited to 20% of the assessed property value.
When to Use It
This financing mechanism is best used when there is a reasonably well-developed taxation system in place [1]; and when the local government has the authority to implement changes to the tax line system.
References
[4] Commercial Property Assessed Clean Energy | US EPA