PACE Financing - Down But Not Out

Property Assessed Clean Energy Programs Continue Despite FHFA Ruling

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Posted: Wednesday, February 13, 2013 3:16 pm | Updated: 2:36 pm, Mon May 12, 2014.

If you thought PACE financing was dead on arrival, think again! Some jurisdictions are still using Property Assessed Clean Energy programs to help finance housing retrofits, despite a controversial 2010 ruling by the Federal Housing Finance Agency, according to speakers at a Jan. 31 webinar hosted by Applied Solutions.

PACE financing programs allow private property owners to install small-scale renewable energy systems and make energy efficiency improvements to their buildings and pay for the cost over its functional life through an on-going assessment on property tax bills.

While the FHFA ruling means the assessments can no longer be passed on to future property owners without their consent, municipal officials said the financing tool is still viable.

Borrowers need to understand that the loans might need to be paid back if they sell or refinance the home while the debt is still outstanding.

Under the voluntary program, property owners only pay for the cost of their project (including interest) and fees to administer the program. Property owners contract with qualified private contractors for energy efficiency and renewable energy projects. In some cases, the municipality provides the upfront funding for the project through proceeds of a revenue bond issuance, which is repaid through the assessment on property owners’ tax bills. Sometimes, other forms of re-payment are offered.

PACE addresses two barriers to clean energy and energy efficiency installations – the high up-front cost and the possibility that those costs will not be recovered if the property is sold. Under most PACE programs, there is no up-front cost to the property owner and if the property is sold prior to complete repayment, the new owner might voluntarily take over the remaining special tax payments.

Charlotte County, Fla., started looking into the possibility of implementing a PACE program in 2010, when Florida passed PACE enabling legislation.

“Unfortunately, the FHFA passed guidance that blocked the implementation of traditional residential PACE programs in the summer of 2010, which brought the progress on our programs to a halt,” said Jason Stoltzfus, program liaison for Charlotte County.

“Since then, we’ve been working with the surrounding counties in order to try and identify viable alternatives to PACE programs where we could accomplish the same objective without using property tax assessments as a repayment mechanism on the residential side. There have been a number of great ideas and concepts discussed and there are a number of programs in Florida that are being developed, but we haven’t seen anything successfully established in our area since the FHFA guidance was passed.”

In a July 6, 2010 statement, FHFA said the PACE program presents financial risks. “Under most of these programs, the loans acquire a priority lien over existing mortgages, though certain states have chosen not to adopt priority positions for their loans. First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors,” FHFA said. The FHFA statement also said that PACE financing arrangements lack adequate consumer protections and standards for energy retrofitting.

FHFA has proposed a rule that would secure and preserve the right of a mortgage holder to make a mortgage that becomes subject to a first-lien PACE obligation without the mortgage holder’s consent, immediately due in full. The rule also bans the purchase of a mortgage that is subject to a first-lien PACE obligation. FHFA is considering three alternative means of mitigating the financial risks that first-lien PACE programs would otherwise impose.

Dana Fisher, residential program manager of Efficiency Maine, said his state avoids the FHFA problem by acquiring only secondary liens on properties.

"We're frequently asked to sign subordination agreements to primary notes or to refinancing, which we do happily," Fisher said. "It's no problem at all."

Fisher said the biggest obstacle in Maine is that the program requires homeowners to have at least as much equity in their homes as they wish to borrow, along with a 45 percent debt-to-income ratio.

"We have received in the past two years roughly 2,000 PACE applications and we've rejected more than 900 of them ... mostly due to the 45 percent debt-to-income ratio," Fisher said.

Sonoma County, Calif. has a population of approximately 500,000 and about 180,000 households. Before the FHFA guidance was passed, Sonoma County received about $2.5 million of assessment funding each month and the average size of a project was $30,000. The county funded approximately $24 million in projects in the first year of the program, even though the county had originally targeted about $10 million in projects.

“The biggest challenge right now is the FHFA and the opposition to the program,” Liz Yager, energy and sustainability manager for Sonoma County said. “Many people are refinancing now and that can create a hiccup in the process for them.”

The Western Riverside Council of Governments in California focuses on disclosure in order to address the FHFA hurdle for residential programs.

“It’s disclosure, disclosure, disclosure. We inform the property owner in several places on our application and the assessment contract that they may or may not need to pay off the assessment during a sale or refinancing. We’ve had 34 properties go through a sale or refinancing and have had no problems,” said Barbara Spoonhour, director of Energy and Environmental Programs for the Western Riverside Council of Governments.

The PACE program that the Western Riverside Council of Governments has implemented has provided a much needed boost for the construction industry, Spoonhour said.

“This program is a job retainer and creator program,” said Spoonhour. “Our area has a lot of construction. So, when the housing market went down, a lot of people in construction lost their jobs. Doing retrofits has helped a lot of our businesses bring back some of these contractors, put them back to work and retain the people that they were possibly going to lose,” she said.

“So, for us, the priority of our region is economic development and our PACE program really fits that model.”

Founded by local government elected officials in 2008, Applied Solutions was established to provide resource to, and help local governments design and implement projects to diversify their energy and water supplies to save money, increase efficiency, and spur investment in local economies.

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