Friday, March 9, 2012

Opportunity for Banks in PACE Lending

PACE programs are growing because they facilitate long-term financing at commercially-attractive rates for energy efficiency loans in the commercial property market. A PACE loan is secured by a lien on the owner’s property which is repaid via an assessment on the property tax bill. This financial structure allows the energy savings generated through energy efficiency investments to more than offset the additional charge on the monthly property tax bill. PACE loans represent a unique “win-win-win” scenario as the benefits flow to all the parties associated with the loan: the bank making the loan, the building owner who can upgrade the property and improve cash flow, and the community which enjoys a more competitive business climate, as well as local jobs associated with installation of the energy improvements.

Since the lien associated with a PACE loan occupies a priority position, the mortgage holder’s consent is required before PACE applications can be approved and the assessment placed. Much has been said in the development of these programs about potential bank resistance to the priority position of the PACE loan. In my view, there are a number of reasons why lenders should seriously consider the benefits that will accrue to the bank via participation in PACE lending programs.

1. With existing customers, who own property that can readily be made more energy efficient, it is an opportunity for banks to increase their business. Such customers will see particular value in the increased cash flow, increased building valuation and improved competitive position of the building in the market. For the bank, it is also an opportunity to identify and solicit new customers from other institutions that do not participate in PACE programs.
2. Much of the energy efficiency work will likely be associated with replacing energy-consuming systems that have exceeded their useful life and that has been delayed due to the recession. By providing loans to these customers, banks will be protecting their collateral and helping the property avoid obsolescence.
3. Non-acceleration clauses in typical PACE programs require only the low monthly payments be paid by the foreclosing bank, a fact that significantly reduces the financial impact of the PACE’s priority lien on the lender.
4. A secondary market (securitization) for PACE loans is already being discussed. The ability to package loans and sell them on the secondary market would be attractive to banks and add to the bank’s profitability.
5. Federal energy efficiency loan guarantees and/or state energy efficiency loan loss reserves (associated with the PACE program) may be available that will provide credit enhancement.
6. Emerging energy savings insurance which will guarantee the energy savings (from which the lender is recovering both capital and interest) will also provide a credit enhancement.
7. PACE programs support the bank’s commitment to sustainability, creating an opportunity for excellent PR in the community and within their customer base.

Does anyone have any other reasons?

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