Originations and Issuances, by the Numbers
Commercial PACE (C-PACE) originations have experienced steady growth, totaling $280.8 million in 2018, up 12% from 2017. Cumulative C-PACE financing is now approaching $1 billion since the inception of the program. However, residential PACE (R-PACE) has been a mixed bag. While originations are thriving in Florida, applications for PACE loans declined considerably in California following new consumer protection regulations, which took effect in April 2018. It is estimated that R-PACE originations fell by up to 50% last year.
In 2018, R-PACE securitization volume totaled $693 million – less than half of the $1.5 billion of issuance in 2017. Due to reduced collateral from California, R-PACE deals are comprising more loans from Florida and Missouri. C-PACE securitizations, on the other hand, are gaining momentum – since the first C-PACE securitization in September 2017, more transactions have followed, and investor and lender confidence in this sector is growing. July 2018 saw the first ever 144A C-PACE securitization (CleanFund), and earlier this year, a Greenworks Lending deal became the first C-PACE transaction to receive a ‘Green Evaluation’ from S&P. California, Connecticut and Ohio have the highest concentration of C-PACE deals.
Performance and Practice
Reduced R-PACE financing in California has led to a slight deterioration in credit quality of applicants. However, the effect on performance remains to be seen, as assessments for PACE loans taken out after July 1, 2018 have not yet been incorporated into property tax bills.
Despite California’s new ability-to-repay rules, Renovate America has not seen a change in the number of borrowers qualifying for PACE loans. On the C-PACE side, a report published recently by the U.S. Department of Energy highlights that, while delinquencies do occur, defaults are very rare – since 2008, only one out of about 1,870 completed C-PACE projects has defaulted.
Meanwhile, consumer protection remains a top concern in the PACE industry, and other states are following California’s lead. In June 2019, Collier County in Florida voted to maintain a ban on R-PACE financing, amid reports of predatory conduct by contractors. And earlier this year, the CFPB proposed a rule which would bring R-PACE financing in line with residential mortgage loan regulation by creating ability-to-repay requirements. Missouri has also sought to increase regulatory scrutiny of R-PACE programs via the introduction of two bills, which would bring these loans within the Division of Finance’s oversight.
PACE programs currently only exist in California, Missouri and Florida and with R-PACE financing hindered in California, the focus is shifting to other states. R-PACE loans will soon be available in Ohio, which could be a boon for originations. New York is also anticipated to play a greater role in PACE financing going forward. According to the New York City Energy Efficiency Corporation (NYCEEC), PACE loans will be available to property owners in New York City by early 2020. Legislation enacted in New York outlining significant greenhouse gas reduction targets for large buildings may increase demand for C-PACE financing – potentially creating additional programs, and in turn, more PACE bonds. In fact, in response to growing investor demand for green products, Freddie Mac launched a new commercial mortgage-backed security program, which will securitize energy improvement loans made to apartment building owners under its Green Advantage program.
As we previously noted, the fact that new homes are becoming inherently more energy efficient may actually reduce the need for R-PACE financing. For example, starting next year, solar panels will be required to be incorporated into new residential constructions in California. While these trends could suppress growth in the R-PACE market, we’d expect demand for new construction projects and resiliency improvements to fuel the pace for commercial growth in the near future.
Emily Hatchett, a paralegal in the Insolvency, Creditor’s Rights and Financial Products Group, assisted with this post.