In November, Renovate America, the San Diego-based Property-Assessed Clean Energy (PACE) program administrator, passed a major milestone—funding over $1 billion in residential installations. As of that month, the program was available to over 80 percent of California households and had completed over 50,000 projects. The company now plans to scale up nationally.
According to PACENation, an advocacy organization, Renovate America’s proprietary HERO program is the most widely adopted residential PACE program in the United States, accounting for 95 percent of the established market.
Federal Hurdles to Residential PACE Growth
PACE, a clean-energy-financing mechanism that allows homeowners to pay back the cost of making energy-efficiency and renewable-energy home renovations on their property taxes, has been dogged by federal regulatory obstacles for the last five years.
In 2010 the Federal Housing Finance Agency (FHFA) instructed Fannie Mae and Freddie Mac not to purchase or guarantee mortgages for homes participating in PACE programs fearing that their mortgages would not be given top priority if foreclosures occurred. FHFA has since softened its opposition to PACE programs. However, in the wake of the initial decision, residential PACE projects declined precipitously.
Persistence despite Federal Obstacles
Renovate America, which was founded in 2011, can attribute its growth in part to being one of the few PACE program administrators to push forward despite these regulatory obstacles. According to Renovate America’s Senior Vice President, Ari Matusiak, “The policy position of the FHFA has been consistent… Government-sponsored-enterprise-backed mortgage lenders should not originate mortgages on properties with senior PACE liens.”
According to Matusiak, “This doesn’t prevent PACE assessments from being originated; it just means they may have to be paid in full when the properties are sold if the buyer has a federally-backed mortgage.”
Renovate America has had to further clarify the reality that some homeowners will be required to pay off their PACE loans before selling their properties. Recently, homeowners who have had trouble transferring or refinancing their PACE-financed properties have claimed they were unaware of the requirement.
The company’s explosive growth in residential PACE is also related to the unique regulatory landscape in California. In addition to being the state with most incentives for renewable energy and energy efficiency, California has drought-related water-consumption restrictions that encourage homeowners to conserve. California has also been especially solicitous of PACE financing. In 2014, Governor Jerry Brown established a statewide $10 million fund to cover potential defaults on PACE loans.
Reaction to Home Repair Demand
Renovate America’s business model involves engaging and channeling existing home repair demand toward higher-efficiency options. Essentially, affordable PACE financing becomes a hook to get homeowners who are already planning to make home renovations to make those renovations in the most energy- and water-efficient ways possible.
According to Matusiak, “If a homeowner doesn’t have access to the upfront cash to make the upgrades, they are unlikely to select the higher-priced efficiency technology.” He said this approach to helping homeowners finance upgrades is working. “60 percent of Renovate America’s customers come [to us] when something breaks.”
To insure that the higher-priced efficient technology is cost-effective, Renovate America requires the homeowner to choose the technology from a select suite of products and have it installed by a company-certified contractor. Further, the PACE financing is capped and is designed to be fully amortized within the useful life of the product.
A new Renovate America-commissioned study shows that in California, homeowners are capturing the value of their PACE repairs when they sell their homes. The study, which will be published in Journal of Structured Finance next winter, compared the resale value of homes that have gone through PACE-financed home energy renovations to similar non-PACE-renovated homes.
The study found that PACE-financed homes sold at a premium over comparable non-PACE homes even after subtracting the cost of paying off the PACE assessment. Further, PACE-related home improvements recover more than 100 percent of the project cost at resale while other home-remodeling projects recover less than 70 percent of the project cost.
Another potential differentiator of Renovate America’s model from others is the company’s all-inclusive approach to PACE program administration. The company approaches localities offering a full-service program that defines the suite of eligible products, certifies a network of independent contractors, and maintains a cloud-based software program that eases the process of executing projects.
Matusiak said this all-inclusive approach has enabled the company to bring its PACE offering to California localities quickly – and national expansion may be on the horizon. “We are seeing lots of demand for public-private programs like HERO in states across the country.” Renovate America intends to begin offering PACE products in other states in 2016.
Room for Growth
Renovate America’s $1 billion in funded projects only represents one half of one percent of the projected PACE project potential in California alone. Scaling up nationally would yield much larger market opportunities.
It remains to be seen whether Renovate America is reaching lower-income California homeowners. Although the company tracks aggregate credit scores and home equity – its homeowner participants have an average FICO score of 710 and have 35 percent equity in their homes – it does not currently track homeowner income data. According to recent census data, approximately 30 percent of California homeowners earn less than $50,000 per year.