What Are the Disadvantages of the PACE Program?

Property Assessed Clean Energy (PACE) programs offer financing for homeowners to fund improvements related to energy efficiency, renewable energy, or storm protection. Property owners can undertake upgrades with little to no upfront cost. Repayment occurs through an assessment added to the annual property tax bill.

Nature of the Property Assessment

PACE financing is structured as a property tax assessment, meaning the financial obligation is tied directly to the property rather than the individual homeowner. The repayment period for these assessments often spans 15 to 30 years.

The assessment establishes a senior lien on the property, granting it precedence over other existing liens, including traditional mortgages. This senior lien status signifies that in a foreclosure, the PACE assessment would be repaid before the mortgage lender receives any proceeds. The assessment generally transfers with the property upon sale, unless the outstanding balance is paid in full.

This mechanism differs from conventional loans, which are typically based on a borrower’s credit score. PACE eligibility often relies on the property’s equity and the owner’s history of property tax and mortgage payments. This structure ensures that the obligation remains with the real estate itself, rather than the person who initially incurred the debt.

Impact on Property Value and Transfer

The senior lien status of a PACE assessment can introduce complexities when a homeowner attempts to sell or refinance their property. Many traditional mortgage lenders, including Fannie Mae and Freddie Mac, are often reluctant to finance or purchase mortgages on properties encumbered by a PACE lien. This reluctance stems from the PACE lien’s priority in a foreclosure scenario.

Homeowners may face challenges in finding buyers willing to assume the assessment, or lenders willing to provide new financing. Buyers’ mortgage companies may require the outstanding PACE balance to be paid off before a sale can close, potentially reducing the seller’s net proceeds. Similarly, refinancing an existing mortgage can become difficult if lenders are unwilling to subordinate their lien to the PACE assessment.

Failure to pay the property taxes, which now include the PACE assessment, can lead to severe consequences, mirroring those of unpaid property taxes. Non-payment could result in a tax certificate against the property, and ultimately, could initiate foreclosure proceedings. This outcome is possible even if the homeowner is current on their primary mortgage payments.

Financial Implications for Homeowners

Repayment terms for PACE financing can extend for 15 to 30 years. This lengthy repayment schedule means that the total cost of the improvements, including interest and fees, can accumulate to a significantly higher amount than the initial project cost.

PACE assessments typically carry interest rates ranging from 6% to 13%, with administrative fees around 5% of the financed amount. These rates and fees can be higher than those associated with traditional home equity loans or other conventional financing options.

The PACE assessment increases the homeowner’s annual property tax obligation. This heightened tax burden can strain household budgets, particularly for those on fixed incomes or experiencing financial hardship.

Energy savings from financed improvements may fall short of annual assessment payments. If anticipated savings do not materialize, homeowners may experience a net financial loss, where the cost of improvements outweighs the benefits. This can lead to situations where the investment does not yield the projected positive cash flow.

Consumer Protection and Contractor Issues

Concerns exist regarding sales practices and work quality by contractors in PACE programs. Some homeowners report aggressive sales tactics and misrepresentations about PACE financing terms. In some instances, homeowners were led to believe the program was free or required no upfront payments.

Issues include inflated project costs, unfulfilled promises of energy savings, and contractors failing to complete work to satisfaction, performing shoddy work, or overcharging. Some contractors offered upgrades that did not qualify for PACE financing.

Consumer protection oversight and regulations vary significantly across jurisdictions, leading to inconsistencies in homeowner safeguards. While some areas require oral confirmation of key terms or ability-to-pay determinations, others may have fewer protections. This variability can leave homeowners vulnerable to unfavorable terms or disputes.

Resolving disputes with contractors or program administrators can be challenging once the assessment is in place. Homeowners may find limited recourse if dissatisfied with work or wishing to dispute charges, as repayment is tied to their property taxes. It is important for homeowners to conduct thorough due diligence on contractors and fully understand all terms before committing to a PACE agreement.