PACE Financing Steps Up as Federal Incentives Step Back

Published October 6, 2025

As the U.S. accelerates toward its 2050 net-zero goals, the decarbonization of buildings remains one of the toughest challenges. Accounting for roughly 40% of national energy-related emissions, the building sector demands massive capital investment to retrofit aging infrastructure, electrify systems, and improve efficiency. Yet as federal funding cycles waver and many Inflation Reduction Act (IRA) incentives begin to taper, private and local financing models are stepping into the gap. Among them, Property Assessed Clean Energy (PACE) financing is quietly emerging as a durable, scalable solution for building owners seeking to fund deep retrofits without upfront capital.

PACE programs, long known in sustainability and energy-efficiency circles, are gaining renewed traction in 2025. Their model, anchored in property tax assessments, provides long-term, low-cost financing that stays with the property rather than the owner. As federal grants shrink and political winds shift, PACE stands out as a resilient structure to keep decarbonization projects moving forward. This article explores how PACE works, how it is filling the incentive gap, and why it is poised to become a cornerstone of the next era of building decarbonization.

How PACE Financing Works in Practice

PACE financing enables building owners to fund energy efficiency, renewable energy, and resilience upgrades through a special property tax assessment. The key feature of PACE is its repayment structure: loans are repaid via property taxes over 10 to 30 years, transferring automatically to the new owner if the property is sold. This makes PACE particularly attractive for projects with long payback periods such as electrification, insulation, and solar installations.

PACE programs are typically authorized at the state level and implemented by local governments, often in partnership with private capital providers. Two main variants exist: Commercial PACE (C-PACE) for commercial, industrial, and multifamily properties, and Residential PACE (R-PACE) for single-family homes. As of 2025, C-PACE is active in 38 states and the District of Columbia, while R-PACE remains limited due to consumer protection regulations.

The financing model leverages municipal authority to create a stable repayment mechanism. Because payments are made through property tax bills, default risk is low, which allows for long-term fixed-rate loans at competitive interest rates. Benefits for building owners include:

No upfront capital expenditure
Fixed, predictable payments
Financing terms aligned with energy savings payback periods
Transferability upon property sale

For local governments, PACE programs attract private capital for public sustainability goals, stimulate job creation, and support compliance with state and city-level emissions targets.

From Federal Grants to Local Financing: The Shift in Decarbonization Capital

The Inflation Reduction Act of 2022 unleashed historic federal funding for clean energy, yet by 2025 many of its rebate programs and tax incentives are entering a transition phase. With election cycles introducing uncertainty over future funding, project developers and building owners are increasingly turning to durable financial structures like PACE to bridge the gap.

Federal and state grants have traditionally driven early-stage clean energy adoption. However, they often come with limited lifespans and complex eligibility criteria. PACE, by contrast, provides a market-based approach with no dependency on annual appropriations. According to PACENation’s 2024 report, cumulative commercial PACE investments surpassed 5.3 billion dollars, representing over 3,000 projects nationwide. In states such as California, Colorado, and New York, PACE has financed retrofits ranging from high-rise HVAC electrification to community solar installations.

The shift from grants to financing is also reshaping how projects are structured. Many developers now stack PACE funding with utility rebates or remaining IRA credits to optimize capital costs. This hybrid approach allows continuous progress even as federal incentives taper off. Private investors, including pension funds and ESG-aligned asset managers, have increasingly entered the PACE market, attracted by its combination of low default risk and measurable climate impact.

PACE in Action: Retrofits That Prove the Model Works

Across the United States, PACE-backed retrofits are demonstrating that deep decarbonization can be both financially viable and operationally effective. In Denver, a commercial office complex used 12 million dollars in C-PACE financing to upgrade HVAC systems, replace windows, and install advanced controls, cutting energy use by 28 percent and reducing annual utility costs by more than 400,000 dollars. The repayment is structured over 25 years, aligned with the lifespan of the improvements.

In Los Angeles, a multifamily housing developer leveraged 7.5 million dollars in PACE funding to integrate rooftop solar and high-efficiency heat pumps into a 220-unit building. The result: a 35 percent reduction in site energy use intensity and improved tenant comfort. Meanwhile, in Florida and Texas, resilience-focused retrofits are expanding under PACE programs, with properties financing hurricane-proofing measures and microgrid systems to enhance grid independence.

These examples highlight the adaptability of PACE financing. Whether applied to energy upgrades, renewable generation, or climate resilience, the structure allows building owners to act without tying up capital. It also unlocks opportunities for portfolio-level decarbonization strategies, where owners can replicate financing structures across multiple assets. The outcome is a growing network of retrofit projects contributing to local emissions reductions while enhancing property values.

De-Risking Retrofit Investments for Owners and Investors

One of PACE’s most powerful features lies in its risk management design. Because financing is secured through property tax assessments, repayment obligations have the same seniority as other tax liens, providing a high degree of security to investors. This makes PACE debt less sensitive to broader market volatility and credit cycles, a valuable feature amid fluctuating interest rates.

For building owners, the structure reduces perceived financial risk. Since PACE assessments are attached to the property rather than the corporate balance sheet, they do not typically affect borrowing capacity or ownership structure. Many commercial lenders have begun accommodating PACE liens within the capital stack, particularly when energy savings improve the asset’s net operating income.

Institutional investors are also finding new opportunities through PACE-backed instruments. In 2024, several green bond issuances in the U.S. incorporated PACE project portfolios, linking repayment streams directly to sustainable building outcomes. The emergence of blended financing, combining PACE with sustainability-linked loans or energy service agreements, further diversifies funding sources and strengthens investor confidence. Collectively, these innovations are de-risking retrofit finance while aligning with ESG performance metrics.

PACE’s Growing Role in the Post-Incentive Decarbonization Era

Looking ahead, PACE is positioned to become a cornerstone of the post-incentive financing landscape. As municipalities seek ways to sustain progress toward net-zero building goals, local PACE programs offer a scalable mechanism that links private capital with public climate objectives. Digital platforms are also streamlining the application and approval process, reducing transaction times and expanding access to smaller projects.

Nevertheless, challenges remain. State-by-state legislative variations, lender consent requirements, and limited public awareness can still slow adoption. Broader coordination among local governments, mortgage lenders, and PACE administrators will be key to accelerating growth. Policymakers may also explore new structures that integrate resilience and equity priorities, ensuring that PACE benefits extend to underserved communities.

Despite these hurdles, the trajectory is clear: PACE financing is proving itself as a durable, market-driven instrument capable of carrying the building decarbonization agenda forward even as federal incentives fluctuate. Its alignment with property value, energy performance, and investor stability makes it a critical pillar in the evolving climate finance ecosystem.

As the federal spotlight dims, local solutions such as PACE are ensuring that America’s decarbonization journey continues, one retrofit at a time.