How PACE Financing Works: Super-Priority Liens and Tax Assessments

PACE financing works by letting a property owner pay for energy efficiency upgrades, renewable energy systems, water conservation, or resilience improvements through a special assessment added to the property tax bill, rather than through a conventional loan. The assessment is repaid over a term that can stretch up to 20 years, and the obligation attaches to the property itself rather than to your personal credit. Around 40 states plus Washington, D.C. have passed some form of PACE-enabling legislation, though active programs differ sharply depending on whether the property is residential or commercial.

The Basic Mechanics

PACE stands for Property Assessed Clean Energy. The program relies on a local government’s authority to levy special assessments on properties that benefit from specific improvements, the same mechanism cities use to fund sidewalks and sewers. A municipality creates a PACE district under state enabling law, private capital providers fund the improvements, and the property owner repays through an annual or semi-annual charge on the property tax bill. The local tax authority collects the money and forwards it to the financing entity.

Two features flow from this structure. First, because the obligation runs with the property, lenders look at the property’s value and projected savings rather than putting primary weight on your credit score. Second, the assessment survives a sale. If you sell before the balance is paid off, the remaining assessment transfers to the new owner in most cases, subject to whatever the buyer’s lender demands at closing.

Residential PACE and Commercial PACE Are Not the Same Program

The residential and commercial versions operate very differently in practice, and the differences matter before you sign anything.

Residential PACE (R-PACE) has enabling legislation in 19 states plus Washington, D.C., but only a handful of states have had active residential programs, primarily California, Florida, and Missouri.¹ Residential PACE has drawn heavy scrutiny over aggressive sales tactics, thin disclosures, and costs that left some homeowners worse off.

Commercial PACE (C-PACE) has spread more widely and generated fewer consumer complaints. C-PACE borrowers are typically businesses, developers, and commercial property owners, and one procedural difference is significant: C-PACE transactions require the existing mortgage holder to consent to the assessment before closing, which functions as an added check on project viability.² Residential programs have not consistently required that consent, which is part of why federal regulators have raised concerns.

What You Can Fund and What Property Qualifies

Residential programs cover single-family homes and multi-family buildings where those programs are active. C-PACE programs cover office buildings, retail spaces, industrial facilities, hotels, and similar structures. Every funded improvement has to be a permanent fixture attached to the property. Portable equipment and temporary installations do not qualify.

Common eligible improvements include:

Energy efficiency: high-efficiency HVAC, insulation, lighting, automated building controls, and upgraded boilers or furnaces.
Renewable energy: solar panel arrays, battery storage tied to them, and small wind energy systems.
Water conservation: low-flow plumbing fixtures, efficient irrigation, and drought-tolerant landscaping.
Resilience and safety: seismic retrofitting, wind-resistance upgrades including storm shutters and reinforced roofing, and flood-proofing in eligible areas.

Project size varies. One C-PACE program requires a minimum project cost of $20,000 and caps financing at 20 percent of the property’s assessed value.³ Residential programs generally accommodate smaller projects starting at a few thousand dollars. Minimums and maximums are set locally.

What You’ll Need to Qualify

Requirements vary by program, but most applications share the same baseline. You will typically need proof of ownership through a recorded deed, current property tax payments with no delinquencies over the past 12 months, and a current mortgage with no recent notices of default. Many programs require the property to carry at least 10 percent equity. A recent bankruptcy filing may disqualify you depending on the program. You will also need a detailed written estimate from a licensed contractor or an energy audit outlining the scope of work and projected savings. For C-PACE, written consent from your existing mortgage lender is required before the deal closes.

Repayment Through Your Tax Bill

PACE repayment does not look like a standard loan. Instead of monthly payments to a lender, the financed amount is added as a special assessment on your annual property tax bill. Your county tax collector collects it alongside regular property taxes and remits it to the financing entity. If you have a mortgage with an escrow account, your servicer will likely fold the PACE payment into your escrow, and your monthly mortgage payment will rise accordingly.⁴

Terms generally run up to 20 years, intended to match the useful life of the improvement. Interest rates typically fall between 5 and 10 percent of the funded amount.² One federal study found an average PACE interest rate of 7.6 percent, substantially higher than most home equity loans and lines of credit over the same period.⁵

Fees and Capitalized Interest

Beyond the stated rate, PACE financing carries costs that push the total repayment higher. Administrative fees and recording charges are assessed upfront and typically rolled into the principal rather than paid out of pocket. There is often a lag between when the assessment is finalized and when it first appears on a tax bill, and interest accruing during that gap is usually capitalized, meaning it is added to your balance so you end up paying interest on interest. Over a full 20-year term, the amount repaid can significantly exceed the original project cost.

What Happens If You Miss a Payment

Missing a PACE assessment triggers the same penalties as missing property taxes: late fees, interest on the overdue amount, and eventually a tax lien sale or foreclosure. There is one meaningful distinction from a traditional loan. PACE assessments do not accelerate. A missed payment means you owe the delinquent installment, not the full remaining balance.¹ C-PACE programs generally allow early payoff of the full balance without a prepayment penalty, though confirm this with your specific program before signing.

The Super-Priority Lien

The most consequential feature of PACE financing is its lien position. Because the assessment moves through the property tax system, it carries a super-priority lien that takes precedence over other debts secured by the property, including the first mortgage, in the event of a foreclosure or tax sale.⁶ If the property is sold at a tax sale, the PACE obligation gets paid before the mortgage lender sees anything.

This priority is why some programs can offer PACE without a traditional credit check. The lien position makes the investment relatively safe for the financing entity. But it creates friction with mortgage lenders, whose first-lien position is effectively subordinated. The Federal Housing Finance Agency has stated that PACE programs “threaten to move existing Fannie Mae and Freddie Mac mortgages to a second lien position.”⁶

Selling or Refinancing With a PACE Assessment

If you want to sell before the assessment is paid off, expect complications. Most mortgage lenders will not issue a new loan to a buyer while a PACE lien sits on the property, and most will not refinance your existing mortgage while the obligation remains.⁴ That can shrink the buyer pool and force you to pay off the PACE balance from your sale proceeds at closing.

Fannie Mae will not purchase loans secured by properties with an outstanding PACE assessment that has priority over the first mortgage. If the PACE obligation is structured as a subordinate lien or unsecured loan, which is rare, standard underwriting guidelines may apply. For borrowers who cannot qualify for a refinance with enough proceeds to clear the PACE balance, Fannie Mae allows the obligation to remain in limited circumstances, but the PACE payment must be included in monthly housing expense and debt-to-income calculations.⁷

Before signing up, think through how long you plan to stay in the property. If a sale or refinance is likely within a few years, the lien can create obstacles that outweigh the value of the improvement.

Federal Protections for Residential PACE

On March 1, 2026, a Consumer Financial Protection Bureau final rule brought residential PACE transactions under the Truth in Lending Act and Regulation Z.⁸ The rule imposes requirements that previously applied to mortgages but not to PACE.

Under the rule, residential PACE providers must:

Make a reasonable, good-faith determination that you can afford the payments, based on income, assets, and current debt obligations verified through third-party records.¹
Provide a Loan Estimate and Closing Disclosure similar to what you would get with a mortgage, labeling PACE payments separately from regular property taxes, disclosing all fees, and warning that your escrow payment will increase if you have a mortgage.¹
Include a “Selling the Property” section in your paperwork that warns the buyer or the buyer’s mortgage lender may require you to pay off the PACE obligation as a condition of sale.¹

You also have a cancellation window after signing. Several states with active residential programs provide a three-day right to cancel, and California extends this to five days for older adults.¹ Under the new Regulation Z rule, residential PACE transactions are also subject to TILA’s three-business-day right of rescission.⁸

The ability-to-repay requirement is the most significant change. Before the rule, many residential PACE programs approved financing based mostly on the property’s value and equity, not on whether the homeowner could actually afford the payments. These federal protections apply to residential PACE only. Commercial PACE transactions involve business borrowers and are not covered by Regulation Z.

1
Federal Register. Residential Property Assessed Clean Energy Financing (Regulation Z)
2
US EPA. Commercial Property Assessed Clean Energy
3
Property Assessed Clean Energy (PACE) Financing Program Manual. Property Assessed Clean Energy (PACE) Financing Program Manual
4
Consumer Financial Protection Bureau. I Am Considering a PACE Loan for Home Improvements. What Should I Keep in Mind Before Signing Up?
5
Consumer Financial Protection Bureau. Response to the Academic Research Councils Review of the Property Assessed Clean Energy (PACE) Financing and Consumer Financial Outcomes
6
Federal Housing Finance Agency. Statement of the Federal Housing Finance Agency on Certain Super-Priority Liens
7
Fannie Mae. Property Assessed Clean Energy Loans
8
Consumer Financial Protection Bureau. Residential Property Assessed Clean Energy Financing – Regulation Z