A New Way to Finance Energy Upgrades for Co-ops

A bill now before the New York City Council, Intro. 1252, “Establishing a Sustainable Energy Loan Program,” would allow city co-ops to tap into a type of energy-loan program used in 33 states (including New York) and the District of Columbia. It’s called PACE, an acronym for Property Assessed Clean Energy. 

“PACE is a voluntary, municipally sponsored financing program that allows building owners to get long-term, inexpensive financing to do qualifying types of renovation projects that have a public benefit, which is reduced greenhouse emissions by the building,” says Peter Erwin, an associate at the New York City Energy Efficiency Corp. (NYCEEC), a nonprofit specialty finance company. “You would normally qualify the project by proving there are energy savings, and in exchange get PACE financing.” 

Here’s the interesting part: instead of repaying the lender, the co-op makes payments through an assessment on its property taxes (with a corresponding tax lien on the property). 

What are the nuts and bolts of PACE loans? They don’t work the same everywhere, since each municipality has its own needs and other specifics, but the general outlines are similar. Take as a hypothetical example a 60-unit co-op valued at $30 million, with an underlying mortgage of $10 million. The average unit’s monthly maintenance payment is $1,500, with $1,000 of that going for mortgage and property-tax payments and the remaining $500 for operating expenses – utilities, staff, and so on. 

Let’s say this co-op has done an engineering study that finds it can install co-gen – a natural-gas-fueled power plant to co-generate electricity and heat – for $500,000.

Assuming a 20-year loan for that amount, “the monthly payment could be as low as $3,000, depending on the interest rate,” Erwin says. Repaying that monthly $3,000 would normally mean either increasing each unit’s monthly maintenance an average of $50 or issuing a temporary $50 monthly assessment. But, he continues, co-gen typically lowers a building’s energy bills by 15 to 50 percent, “and therefore, the co-op could conceivably finance the co-gen with no [assessment or] increase to residents’ maintenance charges, and without tapping other scarce financing resources such as its existing mortgage or an equity line of credit.” 

Whether PACE interest rates are lower than those of a conventional loan depends on prevailing market trends. Interest rates from Energize NY, the primary PACE lender throughout New York State, move with the market, but recently were 5.5 percent for shorter-term loans and 6.5 percent for longer-term loans. Erwin of NYCEEC – which may be the front-runner to administer PACE loans in New York City – says the nationwide rates range from 6 to 8 percent.

It might be cheaper for co-ops to raise money for these kinds of projects by refinancing the underlying mortgage. But PACE loans at least represent an alternative for comparison shopping. However, the loans are not for all co-ops. The federally backed mortgage-underwriting corporations Fannie Mae and Freddie Mac do not allow PACE financing on properties they underwrite. All other co-ops stand to benefit if Intro. 1252 becomes law.