Lender Perspectives on Property Assessed Clean Energy (PACE) Loans | Seyfarth Shaw LLP

Property Assessed Clean Energy (“PACE”) financing is a fast-growing source of potential capital available to developers and property owners nationwide. Available for use with commercial properties (in which case they are usually referred to as “C-PACE” loans) and residential properties, PACE financing allows homeowners to obtain long-term financing at generally low rates to help cope the initial costs of “green” upgrades to increase the energy efficiency of buildings. Typical projects eligible for PACE funding include cool roofs, energy-efficient HVAC upgrades, lighting, insulation, windows, and even solar panels, among others.

Characteristics of the loan

C-PACE loans are authorized by state and local legislation, and currently more than two-thirds of states have passed legislation authorizing some form of C-PACE loans. Although the terms of C-PACE loans may differ from state to state, most C-PACE loan structures share the following common characteristics:

Term: C-PACE loans are longer-term loans, typically 15-20 years, with terms up to 25-30 years.

Remedies and security: C-PACE loans are secured by the property on which the improvements are located and are often non-recourse to the borrower. The C-PACE loan lien runs with the property, even after the property is transferred to a third party as a result of a sale (including a foreclosure sale).

Privilege Priority: C-PACE loan appraisals have a lien priority similar to property taxes and business improvement district appraisals and therefore have priority over existing registered mortgages and subsequent mortgage deeds and financings.

Acceleration: PACE loans cannot be accelerated, even if there is a missed assessment payment. In the event of foreclosure of a PACE loan, only the amount of outstanding dues would be due at the time of foreclosure. Future appraisals remain due and payable in the future, and the property remains encumbered by the C-PACE loan for the remaining term of the C-PACE loan.

Lender Considerations

When considering lending on a C-PACE-encumbered property or agreeing to the placement of a new C-PACE loan on a property already encumbered by a pre-existing mortgage, mortgage lenders should evaluate several important steps. Among other things, mortgage lenders should:

  • obtain an independent energy efficiency audit of thirty parts of the collateral property which details the operating cost savings expected from energy efficiency improvements,
  • compare projected cost savings with assessment payments to determine a borrower’s ability to make ongoing assessment payments and what effect, if any, assessment payments will have on a borrower’s ability to make ongoing assessment payments. to make its debt service payments in a timely manner and to pay other operating expenses and to bear the costs of collateral assets,
  • obtain an as-built appraisal to identify the potential increase in value of the secured property due to energy efficiency improvements and the corresponding effects on the LTV ratio, and
  • consider any programmatic and/or investor requirements for super-priority liens on collateral.

Although C-PACE loans can reasonably result in increased long-term property values ​​and lower ongoing property operating costs, due to the super priority privilege given to their appraisals, mortgage lenders should carefully assess, among other things, a borrower’s ability to make future valuation payments on a timely basis. To protect its priority of lien, as a condition of granting a mortgage that will encumber a property already encumbered by a C-PACE loan, or consenting to the placement of the C-PACE loan on the property already encumbered by its mortgage , lenders may wish to consider, among other things, an ongoing valuation reserve for payment of future C-PACE loan valuations, entering into an intercreditor agreement with the C-PACE lender, or both.


In the current environment of rising interest rates, due to their low interest rates, C-PACE loans are likely to become more attractive to borrowers than at any time in recent memory. As such, lenders must be prepared to respond to requests from borrowers to allow C-PACE loans to be added to the capital stack.

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