PACE Financing: What It Is and Where It Works

Property Assessed Clean Energy (PACE) financing helps commercial property owners pay for energy efficiency, renewable energy, and resiliency improvements. Unlike conventional loans, PACE financing is repaid through a long-term property tax assessment. That means it stays with the property — not the borrower — and often doesn’t require personal guarantees.

Let's get into all the details about PACE financing, as one part of our comprehensive commercial property loan guide.

How PACE Financing Works

PACE programs are enabled by local or state legislation, and the capital typically comes from private lenders that specialize in PACE. The borrower repays the funds via a special assessment added to their property tax bill, often over 10 to 30 years.

Because it’s a tax assessment, PACE financing is senior to most existing mortgages — which means the senior lender must approve it. That can be a challenge, especially with traditional banks.

The financing is secured to the property itself, and if the property is sold, the repayment obligation usually transfers to the new owner. This structure can make PACE appealing for owners who plan to sell or refinance after making improvements.

What PACE Can Be Used For

PACE financing covers a wide range of capital improvements, including:

• HVAC upgrades
• Solar panels and battery systems
• Seismic retrofits
• Storm or flood resiliency measures
• Water conservation improvements
• Insulation, windows, and roofing

In many cases, these improvements reduce operating expenses or boost long-term property value. For example, a hotel owner may use PACE to fund energy upgrades that lower utility costs and increase NOI — ultimately supporting a stronger valuation at refi.

How It Fits in the Capital Stack

PACE financing can be layered with senior debt, bridge loans, or other financing tools — but it’s critical to understand the structural implications. Because PACE is treated as a tax assessment, it is typically senior to the first mortgage, which can create friction.

Some lenders may allow PACE as-is, while others may require a subordination agreement or specific structural adjustments. Coordination between PACE lenders, program administrators, and the senior lender is essential — but can be complicated.

PACE can sometimes be used on ground-up construction projects — especially when funding code-compliant efficiency features — but this varies by jurisdiction. In other cases, it’s limited to retrofits on existing buildings.

Loan amounts are usually capped at a percentage of the property’s assessed value (e.g., 20%) or total eligible improvement cost, and there may also be combined LTV or LTC limits.

When It Makes Sense

PACE can be especially useful when:

• The borrower doesn’t want to use their own equity or operating capital
• A traditional lender won’t fund non-structural improvements
• The improvements offer a clear return on investment
• The borrower plans to sell or refi and wants to pass repayment to the next owner

Common Lender Objections

Some traditional lenders object to PACE because of its seniority over the mortgage and the potential for added repayment burden. Others simply aren’t familiar with the structure. To overcome this:

• Engage with lenders early and educate them about the program
• Work with PACE capital providers that have experience negotiating lender approvals
• Use subordination agreements (if needed) to satisfy senior lender concerns

Broker Tips

• Always check if PACE is enabled in the property’s jurisdiction — not all states or cities offer it
• Get senior lender buy-in early
• Watch for closing delays: PACE involves coordination with local government
• Factor PACE payments into the property’s operating budget — they can affect DSCR

Timeline and Process Expectations

PACE closings typically take longer than standard private debt — especially the first time a jurisdiction is involved. Brokers should:

• Expect 45 to 90 days for full processing, depending on the market
• Coordinate with the local program administrator and title company early
• Build extra padding into the transaction timeline to avoid surprises

Final Take

PACE financing won’t work for every deal, obviously — but when it fits, it can unlock capital for improvements that traditional lenders won’t touch. If your client’s deal involves energy or resiliency upgrades, it’s worth exploring.