And They’re Off! First PACE Loan Finally Closes in New York City

After months of anticipation, the first Property Assessed Clean Energy (PACE) loan closed on Wednesday 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.

“Today, I want to send a clear message to all building owners in our five boroughs: you have a critical financial tool to redesign your properties for energy efficiency and sustainability,” Mayor Bill de Blasio said. “New Yorkers are depending on you to help us fight against the climate emergency by drastically reducing carbon emissions coming from buildings.”

PACE loans allow building owners, including co-op boards, 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 one. Lenders, meanwhile, are welcoming the long-delayed closing of the first loan.

“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.”

Smith believes the timing of the announcement is perfect, since it coincides with the reopening of the city. “I think people on co-op boards are starting to wake up,” she says. “Focus has been elsewhere for the past year or so, but now they’re starting to have conversations about their buildings’ carbon emissions. They’re starting to realize this doesn’t have to be painful. But since PACE loans are new to New York City, there’s going to be  a period of adjustment. Now that this first loan has closed, people will see it’s real.”

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. 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). The term of a PACE 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.

In addition to the lack of upfront costs, the long term of the loan is an advantage for the borrower, according to Smith. “Co-op boards are able to avoid making assessments or depleting their reserves,” she says, “while the loan’s long term allows shareholders to pay only for what they’re using while they live there.”

As the loan program opens wider, Smith cautions that size will 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 difficult to close than a commercial mortgage,” Smith says. “Fees on smaller deals eventually become unattractive to the borrower.”