A Minnesota city could soon become the first in the state to allow businesses to pay for solar and other renewable energy projects through a surcharge on their property taxes.

Finance & Commerce reports that Edina, a Minneapolis suburb, is scheduled to discuss a Property Assessed Clean Energy, or PACE, financing program at its Nov. 15 city council meeting.

PACE is a funding model in which a local government issues a bond on behalf of a building owner to finance a renewable energy or efficiency project. The bond is sold to a private investor and secured with a special property tax assessment on the building.

“It’s essentially financed by the energy savings,” says Lynn Hinkle, policy director for Minnesota Solar Energy Industries Association, which has led the push for PACE in the state.

PACE financing solves a few problems. It eliminates the upfront expense of energy projects, instead spreading costs out up to 20 years. The special assessment reduces risk to financiers, who have hesitated to fund projects with longer payback times. And because the assessment stays with the property, building owners don’t need to worry about recouping the payback before selling.

The model was developed in 2008 in California and has since been authorized in 27 states. Minnesota passed its law last year along with Michigan and Missouri. Ohio, Illinois and Wisconsin passed laws allowing local government PACE financing in 2009.

Source: PACENow

A statement last year by the Federal Housing Finance Agency has had a chilling effect on residential PACE projects. The agency announced that Fannie Mae and Freddie Mac would not guarantee any mortgage that had a PACE assessment associated with it. At issue is who gets paid first if the borrower defaults.

Commercial PACE projects have continued to move forward, particularly in California and Colorado, where at least 71 projects representing $9.7 million in energy-efficiency and renewable energy investments have been made, according to a March 2011 report by Lawrence Berkeley National Lab. A consortium set up by British entrepreneur Richard Branson announced plans last month to invest $650 million in PACE projects in Miami and Sacramento.

Edina’s proposed PACE program already has a participant and bond-buyer in waiting. Grandview Tire and Auto wants to use the mechanism to install solar panels on its roof that will generate enough electricity to meet about 20 percent of its needs, Mark Anderson reports in Finance & Commerce (subscription required). Clean Fund of San Rafael, Calif., has agreed to buy the bond.

Hinkle says the MnSEIA is working with other cities and counties in the state, too, to encourage them to adopt PACE programs.