USDA loans, often tied to the Wall Street Journal Prime interest rate, are designed to support development in rural areas and are highly effective in bringing needed capital to a wide range of property owners. However, USDA loans alone may not cover the entire scope of a project, especially for large-scale commercial developments. This is where the PACE funding program can add significant value.
The overall cost of capital in a PACE loan is typically lower than that of a construction loan. Lenders generally tie construction loan rates to short-term interest rates, which tend to fluctuate more frequently than the fixed rates available with PACE financing. Additionally, PACE loans offer a 12 to 24-month lookback period, meaning that borrowers can cash out with a PACE loan to recover equity they’ve already contributed to a project.
It’s important to note, however, that PACE financing takes full collateral on the property. This means that if the PACE loan goes into default, it will take a senior lien position over other loans, including a USDA loan. The USDA requires three years of payments upfront when considering PACE financing for a property and applies a discount to the overall property valuation in their collateral analysis.
For example, in a collateral analysis, the USDA may discount the property’s valuation by 20%, subtract three years’ worth of PACE payments, and use that adjusted value for underwriting. While this protects the USDA’s interests, it’s important for borrowers to be aware that USDA programs require more scrutiny when paired with PACE funding.