Upfront costs of efficiency retrofits present a significant hurdle for many building owners, even when upgrades would provide a clear return. Energy upgrades may have payback periods that are too long for self-financing, and building owners can be hesitant to pay for upgrades if they are uncertain whether they will own the property for the entire payback period of an investment.
Lien-based financing structures are an innovative means of overcoming owners’ concerns about upfront costs and about selling a property before the end of a loan term. A lien-based financing structure allows a building owner to repay an energy upgrade loan through property taxes via a new lien on the building. Green Banks can use liens as a means of securing energy efficiency loan repayment streams. It works like this:
- A lender provides capital to a building owner to implement energy efficiency
- The owner uses the loan to pay for the energy efficiency upgrades
- The tax-collecting agency puts a lien on the building equal to the loan repayment
- That repayment is collected by the taxing agency and remitted to the lender
Both property owners and project investors benefit from lien-based financing. This structure allows building owners to pay back loans for energy upgrades over a longer period of time, and repayment obligations travel with the building (where savings from energy upgrades are actually realized) rather than an individual or company. Liens for commercial building upgrades typically sit senior to all other non-tax liens on a building, including the mortgage, significantly reducing repayment risk for investors.
Thanks to the lien, the obligation to repay the loan is attached to the property, not the owner, so owners retain the flexibility to sell their properties. Investors like lien-based financing because the repayment mechanism is embedded in the property taxes, which reduces the risk of default.
Lien-based financing in the United States is generally known as property-assessed clean energy (PACE) financing, and is rapidly increasing in popularity.
Below are two examples of lien-based commercial energy efficiency financing products.