There are some fascinating developments around PACE bonds, and apparent obstructionism on the part of Freddie Mac and Fannie Mae, as reported in the New York Times on June 30th, 2010, "Loan Giants Threaten Energy-Efficiency Programs."
Based on some of the issues discussed in recent posts on this site, Freddie Mac and Fannie Mae arguably are actually right to threaten these energy efficiency programs, for to the extent that PACE bonds can be used to extend the fossil fuel franchise, they are suboptimal, and therefore destructive of real estate values.
The smart thing to do would be to have maybe the energy department provide simple criteria to ensure that the energy enhancements are viable renewable energy investments which would in fact enhance property values and therefore provide increased security for any mortgages, so that the technicality of the priority lien becomes irrelevant. After all an investment with a thirty year useful life, and a five year payback, in fact offers twenty-five years of free cash flows from energy "savings," which means a tremendous increase in value of the underlying asset.
This issue goes to the heart of the matter and is very suggestive of a constructive solution. The nation certainly needs some support for real estate values, and the unfortunate fact is that the current confusion of energy efficiency and energy independence based on renewable energy in the rules and incentives, by Energy Star as much as by the ARRA incentives, which in turn depend on the Energy Star programs, is to blame for this confusion. Energy Efficiency only makes sense within the context of a viable renewable energy program, when it comes in the context of a direct trade off against installed capacity, and an improvement of the economics of the project.
Energy Efficiency as applied to extending the franchise of fossil-fuel based energy solutions does not deserve tax credits, or other incentives, it is an operational savings. To emphasize again an issue that I've raised in other posts on this site: Energy Star rated High Efficiency Tankless Hot Water Heaters are perhaps the poster child of federal subsidies for increasing our dependence on fossil fuels, and preventing a switch to renewable energy at a time when numerous viable renewable DHW solutions exist in the market place. They should be outlawed, not subsidized. There are many other examples along these lines, but this one has perhaps more visibility than anything.
If you think of these issues over the typical thirty year life of a mortgage then you'll quickly see that a 30-40% gain in efficiency in water heating with fossil fuels will be eventually offset by energy prices, and perhaps forms of carbon taxation, while solar or geothermal hot water are available and reduce dependence on subscription energy by 80-99%. Energy Efficiency of fossil fuel based systems only possibly makes sense if there is no economically viable renewable alternative. Thus the issue here is "free energy" versus a temporary reduction in energy bills, and the permanently free energy will win the day in most cases if the value of that free energy over the next 30 years is taken into account, and that is a direct enhancement to property values.
The whole issue goes back to focus on payback periods of the investments as if they were independent of the buildings. They should instead be viewed as intra-marginal investments in the building, to ensure that they enhance property values. For society as a whole this will lead to the optimal result.
Freddie Mac did the right thing for the wrong reasons, and the solution lies in a test along the lines suggested here to ensure that such energy investments are constructive and supportive of property values, not a mere green washing that undermines long term real estate values for the appearance of being green.
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