Here’s how it works… Your air
conditioner is old, inefficient, or maybe one day when the mercury hits 110
degrees it just quits. So you start
calling around getting estimates to have it repaired. Two or three companies come out and take a
look at your system and they advise you to replace it with a new, more
efficient system. Makes sense right? Wow!
Look at your energy savings over time.
Why, at only $10,000 total cost installed, this system will pay for
itself in ten years!
But maybe you don’t have $10,000 to buy a new system. Or maybe you think you might move in a few
years and you just don’t see the benefit of paying $10,000 for a system that
you will only use for two or three more years.
Just then the representative of the heating and air company tells you
about this amazing new program called PACE.
P.A.C.E. stands for Property-Assessed Clean Energy. It’s GREAT they tell you. You can spread out the cost of the system
over 20 years. Best of all, a PACE
assessment is a debt of property, meaning the debt
is tied to the property as opposed to the property owner, so the repayment
obligation transfers with property ownership.
“How awesome is that” you think to yourself. I can have all the benefits of a new system
for as long as I live here. Then, when I
sell the property, the remaining balance of the debt for the system just
transfers to the new owner. Seems like a
no brainer right?... Better think again.
Many if not all of the most popular heating
and air and mechanical companies are using this PACE program to sell systems to
unsuspecting homeowners all over our area.
This goes double for the solar companies. In fairness to some of these companies, the
sales people may not even be aware that the “benefits” of PACE financing that
they are touting are essentially pure fantasy.
Let’s take a look at these “benefits” shall we?
Benefit
Number One – probably the biggest perceived value to
the system buyer is the claim that the unpaid balance of the system that is
being billed with the property tax payment will just transfer to the new
homeowner when the property is sold.
Except in rare cases such as all-cash purchases by a buyer who is
willing to take the property with the unpaid balance still owing on the tax
bill, this will simply not be possible.
The problem is that almost no lender will subordinate their loan to a
PACE bond. For them this would mean
that, in the event of foreclosure, their first mortgage loan would be
subordinated to any unpaid assessment amount from the PACE loan. That means the PACE amount would be paid off
first in a trustee sale. They are just
not going to accept that. So, the buyer
cannot get the loan with the PACE assessment in place. This
means that the seller would have to pay off the PACE bond from their proceeds
at close of escrow. As for that all-cash
buyer I mentioned above, I actually believe that this buyer probably would
never exist except in theory. Think
about it. What kind of all-cash buyer
would essentially over-pay for a property by buying it at market value when it
still has an unpaid PACE balance? If the
comps say your property is worth $250,000, that number would include a working
HVAC system would it not? The buyer is
not going to give you an extra $10,000 for that house by buying it with the
unpaid PACE balance just because it has what it should have had all along.
Remember, no matter what the sales person
tells you, when you sell your property there’s a 99.999% chance that you are
going to have to pay off that PACE bond.
So here’s where you might want to read the fine print.
In addition to a 2% to 3% origination fee, many PACE loans have a hefty prepayment
penalty. On one of our listings the prepayment
penalty was $500 on a $12,300 bond. Oh…
and just to get the transfer paperwork started there is a $100 fee.
Benefit
Number Two – You get to spread the cost of the system
out over 20 years. No exactly. Let’s take the example of a $10,000 HVAC
system. What you are really doing is
tacking on about $2,300 in financing fees to the system. So right there you are at $12,300. Then you get to pay for the money over 20
years billed every 6 months with your tax bill.
By the time you have it paid off you are at about $27,000 give or take. So you are not “spreading the cost of the
system over 20 years. You are spreading
more than twice the cost of the system over 20 years.
I don’t know… it could just be ignorance that explains the
zeal with which the energy industry salespeople are pushing the PACE nonsense. But somebody somewhere knows what is really
going on.
What really pisses me off about this is
that the most vulnerable homeowners tend to be either lower income homeowners
or the elderly on a fixed income.
Homeowners with higher incomes tend to just buy a new system when they
need one. But lower and fixed income
homeowners often jump on these misleading promises only to find themselves
stuck later on.
Is the PACE program wrong for everyone? No. 1) If you NEED a new HVAC system or some
other PACE qualified system ( hello… converting to solar is not something you
need) and 2) if you do not have any other options to pay for that system and 3)
if you plan to stay in your home for the entire term of the repayment schedule
and 4) you understand that you will most likely have to pay off the PACE loan
at close of escrow if you sell your home prior to retiring the principal
balance on that loan… maybe it could
make sense for you.
