PACE Loans: Whose Lien Comes First Matters

Getting the green light. As New York City continues to compile its list of approved lenders offering Property Assessed Clean Energy (PACE) loans, co-op boards and other building owners are eager to secure this low-cost financing for clean-energy retrofits as they scramble to comply with the city’s ambitious Climate Mobilization Act. These loans are attractive because they require no upfront cash outlay and are paid off over time through assessments to the building’s property tax bill. While specific terms set by private PACE lenders may vary slightly, there is one requirement that all buildings must meet in order to qualify for financing: written consent from their existing mortgage holder.

First things first. “Most mortgages have a provision that precludes owners from voluntarily placing a lien on the property that’s ahead of the first mortgage position,” explains Michael Karlosky, the principal at MSK Resources and a PACE financing expert. “With a consent document, the mortgage bank is saying that they are fully aware of the lien and that they don’t consider a PACE loan as an event that triggers default of the mortgage.”

Hard sell. Many lending institutions are wary of PACE loans because the lien it places on the property may make it difficult for them to sell the mortgage on the secondary market to a federal mortgage agency, including Fannie Mae, or to banks that create mortgage bundles — known as Commercial Mortgage Bank Securities (CMBS). Buildings that have Fannie Mae or CMBS mortgage loans will also have a hard time securing PACE financing. “Fannie Mae offers its own green financing that it likes to promote,” Karlosky says. “And the problem with CMBS lenders is that it’s not clear which entity has the legal position to grant lender consent. That’s why they haven’t warmed up to PACE loans as quickly as the rest of the lending market.”

Seal of approval. There are currently more than 300 mortgage lenders nationally that have consented to PACE loans. (Visit c-pacealliance.com for the most recent list of consenting financial institutions.) But even for co-ops that currently have mortgages with those institutions, getting approval for a PACE loan is not guaranteed because it’s very much on “a case-by-case basis,” Karlosky points out. “That’s why co-op and condo boards should consult with PACE experts to help them make the right choices when it comes to getting money for energy retrofits. It’s complicated.”