If a property owner participating in a PACE program sells the property, then the repayment obligation legally transfers with the property. The benefits of PACE financing include long-term, fixed-cost financing; loans tied to the tax capacity of the property rather than to the owner’s credit standing; a repayment obligation that legally transfers with the sale of the property; and potentially a deduction of the repayment obligation from federal taxable income, as part of the local property tax deduction.
PACE is an innovative means of financing solar electric panels. In areas with PACE legislation in place municipal governments offer a specific bond to investors and then turn around and loan the money to consumers and businesses to put towards an energy retrofit. The loans are repaid over the assigned term (typically 20+ years) via an annual assessment on their property tax bill. PACE bonds can be issued by municipal financing districts or finance companies and the proceeds can be used to retrofit both commercial and residential properties. One of the most notable characteristics of PACE programs is that the loan is attached to the property rather than an individual. This allows property owners to begin saving on energy costs while they are paying for their solar panels. This usually means that property owners have net gains even with increased property tax.
For a city, PACE can play an important role in reducing local greenhouse gas emissions, promoting energy efficiency improvements in its buildings, making the shift to renewable sources of energy more affordable, and reducing energy costs for residents and businesses. Because PACE is funded through municipal bonds it creates no liability to the city’s funds. PACE also enables states and local governments to design and implement such programs in their communities. PACE programs also help to create jobs and thus spur local economic development when local solar installers and renewable energy companies partner with the program. It is also an opt-in program, so only those property owners who choose to participate are responsible for the costs of PACE financing.
PACE enables individuals and businesses to defer the upfront costs that are the most common barrier to solar installation. The PACE loans are paid with property taxes over a course of roughly 20 years while energy costs are simultaneously lower, providing the PACE consumer with net gains. Also, because the solar panels and the PACE loan is attached to the property, the consumer can sell the property leaving the debt to be paid through the property tax assessed on the subsequent owners.
Several problems have been raised regarding PACE. Foremost amongst the problems is the issue of involuntary subordination. Property taxes are superior to all other obligations, including mortgages. In case of default, taxes are paid before other creditors. Since the PACE loan is made after a mortgage is taken out, this in effect acts as an involuntary subordination of the lender’s security. While this point is widely disputed, for this reason both FHFA and OCC have issued guidance that has stopped residential PACE finance programs in most locations. Commercial PACE is, however, still being introduced in a number of jurisdictions. Residential PACE financing is available in eight states, California, Colorado, Florida, Maine, Michigan, Missouri, New York, and Wisconsin, and is on hold in twenty others, pending resolution of the Freddie Mac, Fannie Mae objection.
Assembly Bill 811 (AB811) allows local government entities to offer sustainable energy project loans to eligible property owners. Through the creation of financing districts, property owners can finance renewable onsite generation installations and energy efficiency improvements through a voluntary assessment on their property tax bills.
Property owners benefit by avoiding the upfront installation cost of renewable onsite generation systems and energy efficiency measures and eliminating concerns that they will sell the property before recovering the system investment from utility bill savings. The result is that property owners in participating jurisdictions can finance their greening efforts with a minimal level of financial risk.
Cities benefit from forming clean energy assessment districts by providing options to its constituents to install clean energy technologies. Clean energy investments funded through these programs will assist local governments in reaching the goals of Assembly Bill 32, the California Global Warming Solutions Act of 2006. The PACE mechanism requires little or no investment of general funds and presents very low risk given that the loan repayment is a senior lien on the property, ahead of the mortgage itself.
Lender consent vs. notification: A major legal question in the design of a PACE program is whether a potential borrower should be required to obtain the consent of the building’s existing mortgage holder before entering into a PACE loan (lender consent), or, alternatively, some PACE advocates argue that a potential borrower needs only to notify the lender of the PACE loan (lender notification). Requiring lender consent is widely recognized as a way of mitigating the risk of legal action being taken by existing lenders. Advocates of lender notification feel that such risk mitigation is unnecessary and can hinder the number of projects undertaken using PACE loans.
Lien seniority: When a property owner enters into a PACE loan, that loan becomes the senior lien on the property. Therefore, in the event of a default or foreclosure, the PACE lien would legally be required to be paid before the actual mortgage on the property. This is of primary concern to mortgage lenders and the Federal Housing Administration, and has created a major hurdle to implementation of PACE for residential properties.
Following the passage of AB 811, PACE became eligible to become a first statewide financing program in California. The program enrolled over 100 local governments as participants; however, in May of 2009, Fannie Mae and Freddie Mac announced they would not back mortgages with senior liens (such as PACE liens) attached to the property. In July, 2010, the Federal Housing Finance Administration issued a statement of its position regarding senior-lien PACE programs, effectively killing most residential PACE programs nation-wide. In June 2012, the FHFA reaffirmed its position in a ruling effectively prohibiting Fannie and Freddie from purchasing any mortgages subject to a first-lien PACE obligation. Despite the FHFA rulings, some local governments have decided to go ahead with residential PACE programs.
SCEIP- Sonoma County: “Sonoma County Energy Independence Program (SCEIP)” has been in operation since March, 2009 and has funded over 1,500 residential retrofits as of July, 2012.
Western Riverside Council of Governments (WRCOG) HERO Program: The HERO program is a partnership between WRCOG and Renovate America, Inc. to offer PACE financing to both businesses and residences throughout Riverside County. As of September, 2012 over 300 residential projects have been completed.
PACE financing for commercial properties is significantly less controversial than PACE in the residential sector due to the vast differences in lending practices and customer profiles. The FHFA does not have authority over the commercial sector, and as a result, many local governments are moving ahead with PACE financing for commercial properties. Jurisdictions include Los Angeles, San Francisco, Sonoma County, and Riverside, among others.
Due to the very large number of local governments that signed onto the PACE program it is likely to become a widely adopted model for commercial PACE programs across the state. California recently completed the major step of bond validation in the summer of 2012, a legal proceeding in which parties can launch challenges to the legal standing of the PACE bonds to be issued by local governments participating in the program. With the successful conclusion of the bond validation process, PACE is now up and running in 14 participating counties, including San Diego. As of December, 2012, there were 22 active projects totaling $7.5 million. The majority of projects include solar PV installations, and at least 22% include energy efficiency measures.