Banks Can Make PACE Loans.
Banks can make PACE loans. Not only can banks make PACE loans, but commercial banks ought to actively consider the possibility of making their own PACE loans.
What Are PACE Loans?
PACE stands for Property Assessed Clean Energy. PACE loans are loans that may be used to fund clean energy generation improvements and energy efficiency improvements for real property. Many bankers are familiar with using PACE loans to fund installation of solar panels for clean power generation. However, funding solar panel installation is really the tip of the iceberg for types of projects that can be funded by PACE loans. Pace loans may be used to fund energy efficient improvements like retrofitting or installing energy efficient windows, upgrading insulation for buildings, rainwater collection systems, recycled water use, upgrading HVAC systems, installing more efficient lighting and electrical systems, and much more.
The Case for PACE Lending.
One of the complaints we hear from banks about PACE loans is that a PACE loan takes priority over a senior mortgage position and makes it difficult for the senior lender to secure its position. Usually, this complaint comes as a negative perspective from the senior lender for a real estate redevelopment project. However, there really isn’t any reason why a bank couldn’t turn the tables on the third-party lender and make the PACE loan itself.
Since PACE loans offer an attractive first-lien position and a favorable collection position, banks who make commercial mortgage loans ought to look at the possibility becoming a PACE lender. This way the bank could gain the advantage of a super priority lean and the tax assessment process for collections. These features of PACE loans reduce the overall risk associated with a real estate loan and provide for a steady payment process.
Before tossing aside PACE loans as a possible opportunity, consider that residential lenders and solar installers have had great success in using PACE funding to fund small residential solar improvements. Since it is very much possible to streamline PACE lending for residential purposes, it should be well within a commercial bank’s capability to establish and streamline a PACE lending program for commercial real estate loans.
PACE Specific Items.
The learning curve for PACE lending is not insurmountable. A bank officer who is familiar with commercial lending can readily become proficient in PACE lending. The collateral types and terms for PACE loans are similar to other construction loans. The repayment sources and payment timeline for PACE loans are similar as well. PACE loans can be used in conjunction with traditional senior loans, and escrow accounts may be established to further control risk of nonpayment of PACE loans.
Factors of PACE loans that may be new to traditional commercial banks might include a) learning how the energy efficiency assessment process works, b) becoming familiar with pace lending documents, and c) understanding in greater detail how the property assessment process works.
Since PACE loans are intended to fund energy efficiency improvements, prior to extending a PACE loan, an assessment must be made regarding the value of the proposed energy efficient improvements for a PACE lending project. A third party performs this assessment and produces a report regarding the value of energy efficient improvements. The amount the PACE loan must be based on the assessed improvement value.
The term of the loan must also be tied to useful life of the energy efficient improvements. That is, if a solar panel installation has a life of 20 years come the term of the loan may not exceed 20 years.
Second Senior Lien.
Commercial PACE lending is relatively untouched by commercial banks. In many cases, we think this is because banks usually look at PACE loans only from the perspective of a senior lender. However, any time banks can have a priority lien position that rivals a tax authority, banks should consider the opportunity. Where it makes sense, why not have two senior liens?
Farley Law, PLLC provides regulatory services to banks and financial institutions. We help forward-looking banks and fintechs develop specialty lending programs and noninterest income services. Have a question or comment? Send us a note at banking@farleylawpllc.com, or set up an introductory call using our bookings service.