First PACE Loan Closes in New York City

Breakthrough. After months of anticipation, the first Property Assessed Clean Energy (PACE) loan closed on June 16 in New York City, opening a spigot of cheap money as co-op boards and other building owners scramble to comply with the city’s ambitious Climate Mobilization Act. The inaugural loan of $89 million will help the owners of the office tower at 111 Wall St. retrofit 900,000 square feet of office space, saving $2.5 million in annual energy costs and avoiding $750,000 in annual fines that would have hit beginning in 2030.

Easy money. PACE loans allow building owners, including co-op buildings, to finance up to 100% of the cost of energy-saving retrofits. Unlike conventional financing, long-term PACE loans are repaid in installments through a charge on the subject property’s tax bill. Loans are sized according to projected energy cost reductions, so building owners can begin realizing savings from Day 1 without putting any money upfront.
“This opens the floodgates for all of us,” says Crystal Smith, director of originations in New York for Greenworks Lending, one of the oldest lenders in the PACE program, which is now available in 33 states and the District of Columbia. “Once you have one or two deals done, it takes away some of the scariness and legitimizes PACE loans.”

Looming deadlines. Under the Climate Mobilization Act, all buildings larger than 25,000 square feet will be assigned carbon-emission caps that go into effect in 2024 and then increase in 2030 and every five years until 2050. Buildings that exceed their emissions caps will face stiff fines.
Based on an energy audit, a lending institution makes a PACE loan to finance improvements that reduce a building’s energy costs. The term of the loan is tied to the useful life of the improvement, up to 20 years. The theory is that the energy savings realized from the improvements will more than cover the repayment costs.

Details to come. Since PACE loans are new to New York City, there’s going to be a period of adjustment. The list of private lenders, who must be pre-qualified by the city, has not been finalized; as a result, specific criteria for approving loans, as well as terms such as interest rate and loan-to-value ratio, have yet to be determined.

“Essentially, we’re going to require the same documents as a mortgage refinance, such as the co-op’s historicals, and make sure there are no back taxes or debts owed to the city,” says Gene Quarells, principal of business development at the Rockwood Group in St. Louis.

As the loan program continues to open, size will quite likely matter. Smaller co-ops might find it difficult to secure small loans because they carry higher fees. Greenworks Lending, for example, will not process loans smaller than $500,000. “PACE loans are much more nuanced and difficult to close than a commercial mortgage,” Smith says. “Fees on smaller deals eventually become unattractive to the borrower.”