A Not so New Idea
This whole thing actually started when a local government employee was looking for a practical solution to help residents in his town access financing for rooftop solar. Cisco DeVries was a young assistant to the Mayor of Berkeley, CA and knew how garbage collection and sewers were financed and decided to pass an ordinance to allow solar to be financed the same way. That was really it. PACE was born.
The word innovative is used a lot when talking about PACE financing. Truth be told, however, there really wasn’t anything innovative about it. PACE financing uses exactly the same structure Ben Franklin used to set up the first opt-in fire district in 1736 in Philadelphia. Financing is advanced to complete a project that has a public benefit and those benefited properties agree to pay it over a long period of time through an assessment charge on their property tax bill. The innovation Cisco had nearly 15 years ago was to use something that had worked, time and time again, to finance systems and services that were in the public’s interest and apply it to clean energy. It solved a big problem and came at an important political moment.
The City Council in Berkeley approved the concept in 2007 and by 2008, the PACE program in Berkeley was operational, allowing homeowners to finance solar systems with no money out of pocket and to be paid over 20 years as an assessment charge on their tax bill. A similar program was set up across the country in Babylon, New York.
The timing was perfect – President Obama had just been elected and the country finally seemed to be getting serious about policy solutions to climate change. The inconvenient truth had become a reality that Obama pledged to tackle in his first term.
In September of 2008, shortly after President Obama was chosen as the democratic nominee, Jeff Tannenbaum, a passionate advocate of solutions to climate change and energy independence, invited a group of Obama advisors and policy wizards to his Hamptons home. Jeff had been an innovator in the private equity and hedge fund industries and he hoped this meeting could help drive climate innovation via a “100 Day climate plan” list of policy options and actions that could be implemented if Obama won. For three days leading experts brainstormed together, including Carol Browner, who later became President Obama’s Director of the White House Office of Energy & Climate (“Climate Czar”), John Holdren, who became Obama’s Chief Science Advisor, Mary Nichols who leads the California Air Resources Board, David Hayes who went on the help run the Department of Interior, and half a dozen other experts.
The backdrop of the gathering was that it was September 2008 and the financial markets were in a free-fall. Lehman Brothers, one of the largest investment banks in the world, filed for bankruptcy during the gathering. This made it even more poignant that one of the key topics covered was the failure of the financial markets to embrace building retrofits. Buildings represented 40% of greenhouse gas emissions, but to date there had been little traction for widespread energy related retrofits. The participants talked about this market failure, which Jeff noted, but with no solutions offered up.
The story goes that after Obama won the election, Jeff traveled to DC to meet with many of the folks he hosted who were now cabinet members and to offer up pro bono time for market-based climate solutions. During his meeting with John Holdren, Holdren mentioned that the city of Berkeley was doing something new to help get homeowners to install solar energy (John previously taught at Cal-Berkeley). Jeff returned to NY and chased down the brains behind this new technique, Cisco Devries. On their first of many, many calls, Cisco educated Jeff on the program and all the detailed work and innovations he had pursued to get it going. The wheels in Jeff’s finance brain turning, he understood immediately the power of PACE to unlock financing to retrofit America’s buildings – it could be used for apartment buildings, industrial real estate, offices, shopping centers, hotels and more. Jeff then flew down to DC armed with a PowerPoint to present to Obama’s advisors with a new name he coined, Property Assessed Clean Energy, or “PACE”. This was meant as a sanity check. Could PACE be one of the key missing ingredients to retrofit America? The resounding answer from the meetings was yes.
Soon after, he formed PACENow (the precursor organization to PACENation) as a non-profit dedicated to promoting PACE policies across the country, and secured additional support from foundations focused on combating climate change, like the Rockefeller Brothers Fund, the Energy Foundation, The Surdna Foundation, and The Kresge Foundation. PACENow began convening stakeholders to determine how to effectively advance PACE policies across the country. Over the course of several years, meetings at the Rockefeller estate in Pocantico Hills, NY outlined early best practices and strategies for bringing PACE to more places.
It soon became clear that the Obama administration’s top federal priority would be health care, and action on climate change would have to be pursued at the local level in the first term. That actually boded well for foundation and advocate attention on PACE because it was fundamentally a local policy and program. Local groups were supported – and in some cases created – to advance PACE policies and programs throughout the country.
In 2009, PACE started speeding ahead when Bill Clinton celebrated PACE financing as a key clean energy solution at his prestigious Clinton Global Initiative. Cisco and Jeff used all the public attention to help build further momentum, working overtime to get the word out via press releases and meetings, and engaging with state and federal leaders. Within months, New York, Michigan, Ohio, Colorado, Texas, Maryland, and half a dozen other states had passed legislation (notably, many of these states needed to revise their laws later). The political momentum was strong – and was being matched by the roll out of Residential PACE financing in California.
The tremendous positive momentum culminated when Cisco and Jeff got calls from Vice President Biden’s staff to come to the White House for an announcement. On October 19, 2009, Vice President Biden announced PACE as a key to his “Recovery Through Retrofit” program along with $150 million in block grants from the Department of Energy to serve as a catalysts. On the heels of this, Scientific American named PACE a “World Changing Idea” in 2010.
In a little more than a year, the momentum for PACE was extraordinary. The future for PACE seemed very bright indeed by early 2010. Cisco’s brainchild looked poised to deliver on its tremendous promise for our nation.
Plot Twist
In May of 2010, the Federal Housing Finance Authority (FHFA) put out chilling guidance to its immense network of mortgage lenders, to which they provide insurance. Essentially, they said that Residential PACE loans presented a threat to their mortgages and threatened to withhold insurance from any home with a residential PACE loan on it. It was a huge shot across the bow for a nascent industry and the Obama administration’s efforts to support the development of PACE programs around the country. For the most part (more on this later) the music stopped on residential PACE and the industry’s attention turned to Commercial PACE. Huge efforts unfolded to launch Commercial PACE programs in San Francisco, Los Angeles, Ohio, Michigan, Florida, and other parts of the country where the policy had been passed. The conventional wisdom seemed to be that Residential PACE was “dead.” A smattering of Commercial PACE transactions were financed through 2010-2012, but the “boom” expected in the industry wasn’t happening.
Not Dead Yet
While the guidance from FHFA caused most of the PACE community to turn attention from Residential PACE to Commercial PACE, one company forged ahead with Residential PACE financing anyhow. Founded in December 2011, Renovate America created a Residential PACE lending platform, named HERO, and through a network of contractor partners had originated hundreds-of-millions in Residential PACE loans in its first few years. In January 2014, when Renovate issued its inaugural securitization of $104M of Residential PACE assets with a AA rating, the PACE community realized that reports of the death of Residential PACE had been greatly exaggerated. The state of California, somewhat remarkably, agreed to backstop any mortgage impairment due to Residential PACE. Other companies starting raising capital and “the big 3” Renew Financial (founded by Cisco), Renovate, and Ygrene dramatically scaled their efforts at originating Residential PACE loans in California and Florida. President Obama hailed R-PACE as a key piece of his clean energy strategy in 2015, and 2016 saw almost $2B of Residential PACE securitizations.
Meanwhile, the Little Engine That Could
The attention of venture capitalists and institutional investors turned squarely to Residential PACE from 2012-2014, but political momentum remained on the side of Commercial PACE and legislation continued to pass around the country. Notably, Connecticut passed a policy and launched a program through the CT Green Bank in 2012 that became the bright spot in the sluggish Commercial PACE industry. ** Full disclosure, I started the CT C-PACE program ** Using a balance sheet offered by the State of CT, the program scaled quickly and within a year had originated tens-of-millions of Commercial PACE loans. While small in comparison to the rapidly growing residential market, Connecticut showed the rest of the country that Commercial PACE deals could be done at scale. When the CT Green Bank decided to sell the $30M pool of loans to replenish its warehouse, the capital markets started paying attention. By 2013, commercial PACE projects had been completed in seven states. A handful of companies at this point were originating Commercial PACE loans, primarily in CA. CT became an example for other states to fix their policies and establish workable programs and, by 2015, Commercial PACE deals had been closed in a dozen states including Ohio, Michigan, Minnesota, and Florida.
The Tables Turn
The success of Residential PACE fueled investor interest in Commercial PACE and a PACE-educated institutional investor base was hungry for more assets. C-PACE companies found themselves able to more effectively raise money and begin to scale their operations and secure efficient asset-backed finance. Meanwhile, the Commercial PACE policy continued to be popular in both red and blue states, and the Commercial PACE industry was starting to resemble a national offering.
2016 marked the high-water mark for Residential PACE securitizations. A scathing Wall Street Journal article, coupled with a well-organized banking and real estate lobby that was pushing hard against R-PACE, chilled the willingness of lawmakers to pass Residential PACE policy. The same trend ultimately led California – the biggest R-PACE state, to clamp down hard on relatively few, though well-publicized, abuses of the program by contractors and lenders and institute restrictions on the use of R-PACE that continue to hamper the ability of the R-PACE industry to reach its 2016 levels of origination.
The Commercial PACE Industry Matures
The past 5 years of the C-PACE industry have finally seen the growth that those early 2008 advocates thought was possible. Now, available in over 25 states, Commercial PACE continues to grow. 2017 saw Greenworks Lending bring out the first rated securitization of commercial PACE assets and they were followed by other Commercial 
PACE lenders in the following years. There are creative new applications of the financing and it has become more of a mainstream CRE offering with each passing quarter. The issues facing the industry have evolved through the years – early conversations about whether “open market” PACE programs that allowed multiple lenders were superior to “closed markets” with single lender administrators and whether mortgage lender consent was necessary have mostly been resolved, but there are new issues facing this rapidly growing industry. Without question, there is more wood to chop and those who imagined PACE financing could be a meaningful tool in the fight against climate change ought not declare victory quite yet. It has been a remarkable journey for an idea that started with a single government employee in a single municipality trying to figure out how to help a single homeowner finance their rooftop solar system in Berkeley.
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Jessica Bailey is Co-Founder and CEO of Greenworks Lending. Prior to co-founding Greenworks Lending in 2015, Jessica led the design, management, and implementation of the nation’s first successful C-PACE program at the CT Green Bank. In its first two years, the program financed $75 million in clean energy projects and executed the first securitization of commercial efficiency assets – more than doubling the volume of C-PACE transactions between 2013 and 2014. From 2004-2012, Bailey worked at the Rockefeller Brothers Fund (RBF), an $800 million foundation based in New York. As the Fund’s program officer for sustainable development, she co-managed a $7 million portfolio of grants focused on mitigating climate change and promoting clean energy.
Jessica has received numerous awards and positive recognition for her work. Most recently, she was selected for Ernst & Young’s Entrepreneurial Winning Women of 2019 program. In 2014, Bailey was named a “Champion of Change” by the White House for solar deployment. For her work designing the successful Connecticut C-PACE program, The Hartford Business Journal dubbed her a “Green Warrior;” and after co-founding Greenworks Lending and scaling C-PACE nationally, Jessica was named to Connecticut Magazine’s 2018 list of “40 under 40.”
Jessica received her graduate degree from Yale University and undergraduate from the University of Notre Dame. She is a member of YPO and sits on the board of PACENation, the League of Conservation Voters, CT and CTNext.