City Mulling a New Way to Finance the Greening of Co-ops

A bill now before the city council would allow New York City to have a type of energy-financing program available in the District of Columbia and 33 states, including New York. 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. 

The money for PACE loans comes from local governments that issue bonds to raise lending capital. A partner lending institution then makes loans to finance improvements that reduce a building’s energy costs. But instead of repaying the lender, the building makes payments through an assessment on its property taxes, with a corresponding tax lien on the property. This makes it extremely difficult if not impossible for condominiums, in which each unit pays its own individual property tax, to acquire a PACE loan. 

The loans do face hurdles. The federally backed mortgage-underwriting corporations Fannie Mae and Freddie Mac do not allow PACE financing on properties they underwrite. And some co-ops have mortgages that may not allow secondary financing. 

That second hurdle is easily cleared, according to Robert Fischman, managing director of commercial programming and sustainability strategies at Energize NY, which finances energy-efficiency improvements. A PACE loan, he says, “is not a secondary mortgage, it’s a tax charge.” Even so, mortgage-holders still must provide consent since PACE loans, being repaid via property taxes, are placed ahead of mortgages in case of foreclosure.

So why would a mortgage holder ever consent to being second in line to collect a debt? “This is a question we get all the time,” Fischman says. “Ninety-nine out of a hundred times we get consent since a PACE loan project upgrades the property, improving the energy performance of that property and therefore its cash-flow. You’re improving the value of the underlying asset that the first mortgage company has the note on. If for some reason a property runs into a bind and ends up being foreclosed on by the mortgage company, the property is worth more than it would have been.” 

Erwin of the Energy Efficiency Corp. concurs. “The value of the building increases, and the loan-to-value on the mortgage decreases,” he says. “Operating expenses remain the same or decrease, so the co-op’s ability to make mortgage payments is not affected, and the PACE charge is a tax assessment on the property, not a debt liability. So if the building was ever sold or foreclosed upon, the PACE assessment would carry over to the next owner – instead of having a big balloon payment come due before the mortgage lender could be repaid.” 

One quick note: this is all untested as far as New York State co-ops are concerned. While some co-ops elsewhere in the country have taken out PACE loans successfully, no New York State co-op has so far. A number of rental-property landlords have done so.