In an exciting development for multifamily apartment-building owners, the U.S. government has now expanded eligibility for PACE loans for all HUD-financed apartments.
PACE, or the Property Assessed Clean Energy program, is focused on energy efficiency and eco-friendly building design. Prior to this decision, apartment-building owners weren’t able to leverage the favorable terms of PACE loans if they also were financed by the U.S. Department of Housing and Urban Development. That meant countless buildings were unable to affordably and effectively implement “green” design features.
However, that has finally changed.
Why the decision is a valuable switch
While PACE is certainly eco-friendly, it is also cost-friendly. At the core of the decision is the ruling that HUD-financed apartments can now use another federal loan program to finance energy-saving improvements – in this case, PACE loans. This is far from double-dipping, but instead a vital way to encourage green multifamily housing that will benefit the environment and building owners’ pockets.
PACE isn’t like many financing options for the multifamily housing industry. Eligible building owners can take out 100 percent financing for energy improvements, like efficient HVAC systems, solar panels, tankless water heaters and other retrofits that lead to water conservation and energy-use reduction.
PACE terms are more favorable than conventional loans in other ways, as well. This includes:
- No down payment
- Tax-deductible interest
- Longer terms (often upward of 20 years)
- Fixed rate
- Transfers with building upon sale
With this said, it is understandable that PACE is beneficial for building owners. Not only will it result in cash-flow benefits from decreased operating costs, but it also makes a project more affordable in the long run, and possibly more valuable. Having PACE-financed improvements means the benefits stay with the project, so the next owner or rehabilitation opportunity is in equally positive shape. Advertising PACE financing during a sale is another great way to attract potential buyers.
Which states have PACE programs?
While the merits of PACE are there, one caveat remains: PACE isn’t yet available in every state. In fact, while PACE laws are on the books in many places across the country, the local approach to PACE financing inherently requires city and county action before HUD-financed owners can utilize the program.
Right now, a number of states have PACE legislation and/or PACE programs in place. For a comprehensive list PACE-friendly states, visit the PACE Now site. However, this list narrows for those that allow PACE to be used in conjunction with HUD financing.
California was the pilot state for the HUD-PACE relationship at the beginning of 2015. Connecticut was next on the list. Those are the only two at the moment, though. HUD will use these states as tests for its nationwide guidance, and the rest of the country will have to wait and see how the projects fare in those locations.
Is your HUD-backed project eligible for PACE?
Determining eligibility comes down to several factors. The most important is location. As previously stated, California and Connecticut are the two states that will have early adoption of HUD-PACE financing. If you are not HUD-financed, you can still utilize PACE programs in additional states.
The criteria for eligibility is as follows:
- Location – Your city or state has a PACE program.
- Financial standing – PACE financing is typically contingent on property equity and non-delinquent tax or mortgage payments.
- Type of housing – While much of PACE is geared toward multifamily housing projects, it can also be used for other commercial and residential construction, such as single-family homes and municipal properties.
For HUD-financed PACE eligibility, HUD’s Green Affordable Housing Coalition outlined its criteria:
- HUD-insured mortgage
- Risk-share loan in first position
- Current HUD rental assistance contract
- Direct first-position loan from HUD
How the ruling came to be
The impetus behind this HUD-PACE relationship was spurred along by California Gov. Jerry Brown and HUD itself.
“The HUD-PACE relationship is beneficial for all involved.”
Back in January, Brown and HUD announced a partnership to incorporate more renewable energy in multifamily housing. PACE was a key part of that. The sticking point was not motivation, but financing. How could building owners afford these eco-friendly changes?
HUD outlined what was at stake with this initiative: Improving the energy efficiency of multifamily housing by just 20 percent could save roughly $7 billion in energy costs per year. That’s no small amount, and it is easy to see why Brown, HUD and PACE supporters were on board with this mutual partnership.
Now, given the ability for HUD-financed buildings to utilize PACE loans, owners are going to be able to leverage the more favorable terms to create affordable, eco-friendly multifamily housing units. Should you have any questions about how to integrate multifamily housing financing options, please contact us at Clark Schaefer Hackett today.