Property Assessed Clean Energy (PACE) Loan Headaches and common PACE Loan Questions
Did you just find out what the payment on your Property Assessed Clean Energy (PACE) loan will be?
Haven’t heard of a PACE loan? Me either. I recently read a National Consumer Law Center response that has me very afraid for my clients and the increase of PACE Loans. I wanted to take a few moments to educate and try to help those that are only know learning about this loan type:Do you have a Property Assessed Clean Energy (PACE) loan? Are you finding out what your payment is now going to be? You’re not alone - hundreds (if not thousands) of homeowners have been in the same position you are. This is a newly forming, and potentially disastrous new form of lending which is currently the fastest growing lending and investment program throughout the nation. This form of lending has been compared to the type of sub-prime loans that caused the economic downturn and the foreclosures that still haunt our state to this day.
What is a PACE loan?
A PACE loan, at its core, is a loan program that offered loans for energy-efficient home improvements (solar panels, HVAC systems, and energy-efficient windows). A contractor typically offers this loan and secures it by a property tax lien. The local tax collector (property taxes) then collects the outstanding amount through annual tax assessments. The state of Florida and your local government authorizes these programs, but they are generally run by private corporations with no oversight.
How does a PACE loan work?
Generally, a homeowner will be approached by a contractor or other private individual citing issues with the property. In fact, the PACE program is designed to use a home improvement contractor as the salesperson for the loan product. Even if you are not approached directly door-to-door, it is becoming increasingly more common for a contractor to try to “up-sell” repairs needed to the home (i. e., a new toilet becomes the need for a set of solar panels and water heater). Typically, homeowners are being told that the savings on energy will offset the cost of, or even pay for, the new upgrade to the home.There are minimal criteria for receiving this form of financing: (1) improvements must not exceed 15% of the property's value, (2) the combined mortgage related debt and amount of the PACE loan cannot equal more than 100% of the property's value, and (3) the total annual property tax and assessments must not exceed a percentage of the property’s market value.
What are the risks?
As you can imagine, this is fraught with issues. Gone are the days when the world could be trusted - especially door-to-door salespeople. While the complaints associated with this type of lending are numerous, I’ve gathered a few to help you conceptualize and envision just how scary this type of loan can be:
- First of all, imagine you were convinced to take a PACE loan on your property. You probably know you are going to have a new tax assessment. You know you have the ability to pay it. Imagine the repair starts to show signs of not being done properly (those new solar panels? The roof leaks during the first rain!) The contractor has probably been paid for the work - and now you have to track them down;
- Homeowners are told they can get a tax refund. Generally, there is only a non-refundable tax credit available for this type of loan. Most importantly, consult your CPA and ask about 26 USC 25C/25D;
- The sales person knows the maximum your home can qualify for! It’s pretty easy math that leads to exploitation - they shoot for 15% of the market value of the property. Your $200,000 home can be a $30,000 payday for the contractor;
- This loan isn’t like a mortgage - it is applied as a tax lien. Generally, these loans will take priority over your mortgage - which may put you in default;
- Escrowed Mortgage Payment (where you pay insurance and taxes through your mortgage payment)? Expect an increase in your mortgage payment months after the work has been done. This can be devastating to homeowners on a fixed income. Often times, your escrow payment is calculated around mid year. This means that if you put the solar panels on 6 months ago, it’ll take time to catch up with you;
- Trying to refinance or sell your home? This loan can cause issues with that. Homeowners are being told that if they sell the property, the tax assessment will go on to the new owner. This may be a deal breaker for some buyers. If the buyer finds out about it post contract (and you did not disclose the loan) you can be looking at a lot of headaches in your transaction; AND
- Finally, there is no meaningful review of an ability to pay. This loan is tied to your property's value - not your income. Consequently, it's incredibly difficult for homeowners that are living paycheck to paycheck to budget for.
I have a PACE loan and didn’t know all of this - we need to talk!
Most importantly, if you have recently gotten a PACE loan - or have a contractor that is asking you to get one - meeting with an attorney can be very helpful to you. I pride myself on being easy to get to. You can reach me 3 ways: (1) call my office at 813.252.0239, (2) e-mail me at my firm - we’ll get you set up for a time to speak to me; or (3) schedule a consultation by using my online platform.