A Growing Green Debt?

As PACE takes off, realtors warn that unwary homeowners are complicating their finances

Back Article Feb 23, 2016 By Steven Yoder

Call it the tale of two turfs. In summer 2014, 27-year-old Benjamin Triffo wanted to do something about his dry, unattractive yard. He owns a four-bedroom, four-bath duplex in Elk Grove that he’d bought in 2011, and his sprinkler lines were broken. But with the state passing rules last July that would allow fines for overwatering, Triffo quickly figured out that replacing his system and re-sodding would be like attaching a drain line to his checkbook.

So, he hired a contractor to rip up the front yard and install artificial turf. He also took out his backyard and replaced it with a concrete patio and more sidewalks. Now, instead of a lawn with huge bare patches, he’s got a luscious green carpet and a great barbecue area — and he’ll never have to choose between a brown lawn and a fine.

The project cost $23,000. But he paid nothing up front, instead taking out a loan through a Property-Assessed Clean Energy program with a 20-year repayment plan. “It turned out great — I get compliments on it left and right,” he says of his new landscape.

Triffo went into the deal knowing the implications if he wants to resell: His PACE loan attaches to the property as a lien. If a new buyer doesn’t want to assume the payments, he plans to either lower his selling price or take out equity he’s accrued in the house to pay it off.

But not everyone with a PACE loan knows how it works. Last September, Erin Stumpf of Dunnigan Realtors met with a homeowner in Sacramento’s Tallac Village neighborhood. The owner wanted to sell, and she’d replaced her yard with artificial turf, taking out a $7,000 PACE loan to do it. “Oh, but don’t worry,” the homeowner told Stumpf. “The PACE loan will be transferred to the new owner.”

Stumpf had to explain that wasn’t true. The prospective buyer likely wouldn’t be able to get a mortgage because of the PACE loan  — Fannie Mae and Freddie Mac, which guarantee 90 percent of the country’s home loans, won’t do so for properties with a PACE lien. The seller fortunately had enough home equity and used it to pay off her turf at the time of the sale. Because she cleared her loan early, she was also hit with a prepayment penalty of at least $800, Stumpf says. “The way this was sold to my client and the way that it’s sold to the public in general is really misleading,” Stumpf says.

California has sprinted to a huge lead in residential solar installations compared with other states, and PACE is one reason why. It offers 100-percent financing to homeowners who install energy-and water-saving upgrades like solar panels, better insulation and energy-efficient roofs. It also lets owners pay off those loans through their property taxes. Yet, consumers should know that PACE loans are also first-priority liens on a property. In a foreclosure sale, the PACE loan gets paid first, even before a mortgage lender.

Realtors around the state are warning that these loans may gum up future home sales. PACE programs say they’re adapting to address those concerns, and research suggests the real estate industry might better market green improvements.

Picking up the PACE

The number of homeowners taking out these loans has soared in the last year. Statewide, the number of green upgrades financed through PACE increased from about 7,000 in the July–December 2014 period to almost 13,000 in the January–June 2015 stretch. The PACE program run by Placer County, called mPower, saw the amount of financing it provided per month jump almost 40 percent from 2014 to 2015, based on comparable 10-month periods.

Program supporters say it boosts both homeowners and localities. “If a local government wants to do something on a climate action plan, they have limited options. PACE gives them a way to reduce emissions by making homes more efficient,” says Ellen Qualls of Renovate America, which operates Home Energy Renovation Opportunity, a PACE program in Sacramento County and the state’s largest PACE loan provider.

Lower energy costs also mean less pollution. The mPower program alone has saved 2,570 tons of carbon since starting in 2010. That’s the equivalent of taking almost 500 cars off the road annually, according to program data.

‘Free Money’

Some programs, however, may be covering up the potential risks in their descriptions of PACE. A video on the website of Ygrene Energy Fund, one of two private companies that offer PACE financing in Sacramento, gives this explanation: “If you sell your property, the payments transfer to the new owners just like your property tax, so you only pay for what you use.” But that’s only true if the new buyer agrees to take on the PACE payments and doesn’t need a home loan.

Ygrene does require PACE borrowers to sign a disclosure agreement later in the process. That document warns owners that they might have to pay off their PACE loan when they sell or refinance, according to an October 2014 report by the California Center for Sustainable Energy. Ygrene itself did not respond to requests for comment on how that disclosure document is discussed with customers.

For its part, mPower requires all borrowers and their contractors to attend a one-hour seminar that educates them on how the program works, including the impact on selling and refinancing. And the HERO program’s website is careful in its language, noting that “some lenders and/or buyers require the outstanding assessment balance to be paid off when a homeowner refinances or sells a home.”

But Stumpf worries about something else — that the “no money down” component of the program encourages contractors to overprice their bids. A contractor who recently approached her and her husband to discuss a PACE loan for a new roof on their own house described the program as “free money.” His bid came in at $20,000, almost double what they ended up paying through a non-PACE contractor.

Even Triffo says his own PACE contractor tried to upsell him, initially bidding $60,000 to do the job plus replace his driveway. Triffo told the contractor he didn’t need a driveway, and it took several rounds of negotiation to get down to the $23,000 to which Triffo committed. Triffo says it was “a little weird” to have the contractor know what size PACE loan he’d qualified for, which he thinks created an incentive for the contractor to bid high.

Concerns about PACE have become important enough among realtors that the California Association of Realtors’ legal Q&A for its members now includes a section warning that PACE loans could complicate home sales. “It’s a hot issue,” says Stumpf.

Could the Real Estate Industry Do More to Market Green Upgrades?

It’s not clear how widespread the problems are that the realtors cite. Qualls says Renovate America’s data so far show that fewer than 2 percent of homeowners nationwide have been caught in situations in which they had to repay their PACE loans because they wanted to resell or refinance.

The company is also taking steps to allay the concerns of Fannie Mae and Freddie Mac by subordinating its HERO liens for customers who decide they want to sell or refinance. That means if there’s a foreclosure, Renovate America would waive its right to use the proceeds of any sale to pay the HERO lien first — the key reason that Fannie and Freddie cite for not backing loans on properties with PACE loans.

More generally, green energy proponents contend that the real estate industry could better market energy upgrades. They cite a November 2015 white paper from the U.S. Department of Energy concluding that improvements like better insulation don’t show up in real estate transactions — in part because home buyers, realtors and appraisers don’t ask about them. And the report notes that few appraisers are qualified to assess green improvements, so appraisals often simply reflect comparable houses that don’t have the upgrades.

All of that could have big implications for the riskiness of a PACE loan. A solar system built with PACE money isn’t just an ongoing payment — program proponents say it’s also an ongoing benefit whose value increases as energy costs rise. If it’s properly marketed, buyers will be more willing to take over the payments or offer a bid on the house that better reflects upgrades, they say.

Beyond PACE

PACE or no, it’s always up to homeowners to dig for details when investing in green technology. It’s not just getting competing bids from contractors — they also should look at the range of options for financing green improvements.

SMUD, for example, offers loans of up to $30,000 to qualified homeowners for a range of energy upgrades — things like duct sealing, new HVAC systems and new windows. Depending on the type of improvement, those may function like PACE loans, taking a superior lien position on the property, says Van Mattison, who manages SMUD’s financing programs.

For some systems, especially solar, leasing is an option. Though, like PACE loans, those can complicate sales since lease payments have to be assumed by a new owner. Traditional home-equity loans can also finance green investments, though those carry the disadvantages of adjustable rates and prepayment penalties, says Mattison. Perhaps at the bottom of the list are personal loans, which have higher interest rates, he says.

Should energy prices rise, more homeowners will consider those options for greening their houses. If that happens, the owner who bought a high-efficiency central air system and sealed the ducts in her home will do more than just feel cooler — she’ll also look cooler and can ask for a premium when it’s time to sell. 


Visitor (not verified)February 23, 2016 - 6:26pm

The thinking expressed about appraised value is out of touch with reality. If you raised the price to a buyer based on the improvements and then had them take over the PACE loan they would be paying for the upgrades twice. Who would want to do that?

Visitor 2 (not verified)February 24, 2016 - 5:23pm

In California, the PACE becomes a mello-roos tax, which is transferable for those who want to purchase the home with Fannie, Freddie, VA, FHA. If the particular bank doe not want to loan on the property because they don't like the mello-roos tax, that's up to the bank, or maybe the home owner paid too much for the improvement and the bank doesn't agree with the value?

Visitor (not verified)March 2, 2016 - 6:54am

Your comments about Fannie, Freddie, FHA and VA allowing the Mello-Roos isn't true. The issue is its a superior lien to the Mortage and guidelines for all four agencies won't allow financing on those properties unless that PACE lien subordinates to the new mortgage loan. It's not a "bank call" it's a guideline issue. That being said I know a few credit unions that will finance properties with that issue but only if the purchaser puts 25% or more down.

Informed Home Buyer (not verified)December 28, 2016 - 8:55am

From a "buyers" point of view this is a HUGE problem. Thank goodness we read small print before we sign anything. We are int the middle of buying a home. 30 pages into the contract is something about "mello Roos". This is an area that has no mello Roos and that is exactly what we were looking for. Of course we do our research and the county assessor disclosed more information than the seller, their agent and our agent. Come to find out the home that we were going to purchase has this type of PACE loan/lien attached to it and they are able to call it a tax. Red flags when nobody else in the neighborhood is paying this crazy high tax! So basically we are being scammed. Being told the solar panels etc are paid for was a selling point. In all actually we would be acquiring a loan/lien that the seller agreed to as a bad financial decision. In the big picture the price of the home, $355,000, is now $445,000! By the time we paid off this second loan/lien, we could be purchasing a home for much more than the listed price. We would definitely prefer to buy our own upgrades for a fraction of that $90,000 this homeowner decided to pay for it. My husband researched before we signed anything. Why would we buy a home with an extra $90,000 attached to it??? We are buying through VA so I'm assuming the finance company would figure it out as well and deny the loan. VA wouldn't risk a poor financial investment either. Absolutely ridiculous! I hope all home buyers would do their homework before signing anything!!! An extra $330 a month in taxes, that can not be written off, is more than you'd be saving is bills that this is all for.