Maryland counties are increasingly signing on to an unorthodox program that makes it easier for owners of large office buildings and warehouses to pay for green energy projects.
Under recently enacted ordinances, companies in Baltimore, Harford, Howard counties and Baltimore City can agree to pay more in property taxes to finance solar panels, for example, or energy-efficient heating and cooling systems. The governments would pass the payments along to lenders that front the costs for the improvements.
Known as PACE — which stands for Property-Assessed Clean Energy financing — such programs have spurred $280 million in clean and efficient energy improvement projects around the country. Anne Arundel County was among the first of what are now 11 Maryland jurisdictions that have authorized PACE, and Maryland is among 19 states and the District of Columbia that have active PACE lending programs.
The arrangement aims to encourage energy-saving investments that otherwise wouldn't happen because the loans are considered too risky by lenders or charge interest rates too high for borrowers to handle. Folding project costs into property tax bills gives lenders much stronger legal footing to go after delinquent borrowers, and that security allows them to charge lower interest rates over longer periods — about 6 percent over 20 years, for example.
Politicians see it as a way to reduce demand on the electricity grid, easing greenhouse gas emissions, while also increasing property values.
"It is helping the city become more green," said Eric Costello, a city councilman who represents South Baltimore. "It increases the value of properties, and as such helps build up the tax base."
PACE financing is paying for about 800 projects in commercial buildings around the country, all launched since the program began seven years ago, according to PACENation, a national industry group.
Program administrators and lenders say they hope to see a surge in interest in Maryland as more counties sign on. The state's first PACE-funded project will be finished soon at a Comfort Inn in Gaithersburg, where owners used PACE to fund a $1.4 million project to increase energy efficiency.
The loans are not without risk. Since they are recorded as liens on properties, they expose owners to foreclosure if they don't keep up with payments. Federal housing regulators have expressed concern about that arrangement and have prevented PACE loans on residential projects in most states except California.
But program proponents downplay the risk to commercial property owners, saying projects are vetted to ensure they will generate enough savings on utility bills to cover the costs.
"These are pretty tried-and-true projects," said Jessica Bailey, CEO of both Pace Financial Servicing and Greenworks Lending, a Connecticut-based PACE lender. Counties around Maryland have hired Pace Financial to manage their programs.
Maryland passed laws in 2009 and 2014 that enabled counties and Baltimore City to adopt ordinances for PACE lending in their jurisdictions.
A year ago, only a handful of counties had gone through that effort, but in 2016, the program has grown to cover nearly half the state.
Anne Arundel, Garrett, Howard, Kent, Montgomery and Queen Anne's counties are now ready to accept PACE loan applications. Baltimore City and Baltimore, Charles, Frederick and Harford counties have passed legislation authorizing the program but still are developing the administrative processes to handle it.
Of other local jurisdictions, Prince George's County is exploring its own legislation, but Carroll County officials are not considering joining the program.
Local government leaders say the program is a low-risk, low-cost way for jurisdictions to promote energy efficiency — and potentially generate new tax revenue. The building improvements can raise property values permanently, at least in theory.
"Ultimately, we believe this has a positive effect on property values," Baltimore County budget director Keith Dorsey told the County Council in October.
Some Baltimore County Council members were concerned the program could expose the county to new liability, but Dorsey said that while the government collects the loan payments and forwards them to lenders, it isn't responsible for them.
"In no case will we be stuck," he said. "We didn't loan the money."
At an event this month promoting the program, Howard County Economic Development Authority CEO Larry Twele called PACE a way to be "not only business-friendly but environmentally friendly." County Executive Allan H. Kittleman said it could create jobs by cutting energy costs for employers and adding more work for green-energy companies.
At the Comfort Inn Shady Grove in Gaithersburg, owner Rock Grove Associates LTD Partnership used PACE financing to replace heating and cooling systems, install efficient LED lighting systems and build a new roof. The hotel and PACE officials estimate it will free up $475,000 in cash flow over 20 years and increase the property value by $1.7 million.
PACE Financial officials said they are in talks with about a dozen Maryland commercial property owners interested in loans for projects they're exploring.
For lenders, it's an opportunity for new business with midsize companies and nonprofits that have had difficulty paying for energy upgrades, said Aaron Kraus, director of market activation and policy for Greenworks. Many don't have enough cash for a down payment or face high interest rates because they don't have investment-grade credit.
"That segment of the market represents a large amount of economic activity and a large percentage of energy usage and emissions," he said.
Residential projects have been more difficult to launch because so much of the market for home loans is controlled by the federal government. Federal housing regulators have raised concern that because PACE loans are given a higher legal priority than mortgage liens, they could limit the government's ability to collect if a home is sold in foreclosure.
That has been less of a concern with commercial mortgages, but advocates for commercial building owners still encourage caution.
Nicola Whiteman, senior vice president of government relations for the Apartment and Office Building Association of Metropolitan Washington, said her organization supports PACE lending as "another item on the menu" for owners looking to make energy upgrades.
But the group encourages its members to get consent from their mortgage holders before taking out a PACE loan — something jurisdictions including Montgomery County and the District of Columbia have made a requirement.
"We don't want someone to be in default of their multimillion-dollar mortgage because they've signed on to a $15,000 PACE loan," Whiteman said.
Baltimore Sun reporter Pamela Wood contributed to this article.