History is filled with examples of a solution being repurposed to create greater benefits in unintended areas – think, Post-it Notes, the microwave oven and Botox. And often, the goals that spur a specific solution reflect a sea-change of thought that carries across markets. Case in point: Residential Property Assessed Clean Energy financing (R-PACE).
In 2019, R-PACE may have declined but the style of financing is being repurposed to tackle other societal issues and in the ascending commercial PACE (C-PACE) space. Further, its planet-enriching goals have spread across industries as investors are drawn to companies with which they share environmental, social and corporate governance (ESG) values.
Since 2016, R-PACE has plummeted to less than half of its record high of $1.7 billion. Only two publically rated deals were priced in 2019, which is down from three deals in 2018 and seven deals in 2017. Even California and Florida, previous leaders in R-PACE initiatives, are now facing a decrease in applications. In California, ability-to-repay rules imposed upon lenders in 2018 seem to be behind the downturn. There are bright spots, however, as some lenders have not been deterred by recent legislation. For example, Ygrene Energy Fund announced a $315 million transaction mixing residential and commercial PACE assets from California, Florida and Missouri.
C-PACE programs have become a hot political topic as legislators and community leaders seek an environment-friendly reputation and future for their cities. After all, according to the UN Environment Program, the biggest contributors to carbon dioxide emissions are buildings and construction, which emit 39% of the total CO2 emissions released into the atmosphere each year.
Chicago and Buffalo are examples of cities looking to lead the way. Chicago's first PACE program will go toward implementing energy-efficient infrastructure investments including HVAC, windows, lighting, elevators and water-conserving fixtures, with estimated energy cost savings of $3 million over 25 years. Buffalo, already a stand-out climate sanctuary, passed legislation in December 2019 that created Buffalo's Open C-PACE program. The city is expected to authorize the EIC (Energy Improvement Corporation), the non-profit administrator for New York State's PACE financing program, to bill property owners and distribute funds to the capital provider, which would relieve the city of any collection obligation. This authorization is expected within the first few months of 2020.
Meanwhile in Gotham City . . . C-PACE is not currently authorized to fund new construction projects, but instead can be used toward gut renovations, additions, and renewable energy systems that are components of new construction projects. Large building owners will be seeking funding to meet the requirements of the Climate Mobilization Act (CMA), which aims to reduce the city's CO2 emissions by 80% by 2050.
Looking Ahead for PACE
Consumer protections put in place following some abusive practices have slowed the use of R-PACE, but growing environmental concerns should be strong enough to help R-PACE make a comeback, especially if states are able to make improvements in lengthy approval processes. For C-PACE, all signs point toward a period of significant growth as more cities align themselves with a green reputation, attracting lenders to the space.
At this time of increasing sensitivity to societal ills and alarms sounding over a potential (or is it already here?) environmental crisis, local authorities are recognizing the value of the PACE financing form to bring relief in a broad range of areas, from the housing crisis in West Coast cities to seismic retrofits to hurricane preparedness.
At the same time, investors are expressing increased awareness and concern regarding ESG factors, including the impact of climate change on loan performance. As weird and wild weather occurs with more frequency, it may become more commonplace for ABS deals – particularly RMBS and auto – to be evaluated based on the collateral's exposure to natural disasters.
Given this important trend toward broader environmental and social concerns, we are expanding our PACE coverage to all types of ESG investing. Starting in 2020, Credit Chronometer will begin to cover a wider range of sustainability and societal impact concerns as they connect to lending and the credit markets. As more investors make ESG investment a priority – aligning their values with their portfolios – ESG concerns will move markets.
Stay ahead with Credit Chronometer.
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