What is PACE?
Property Assessed Clean Energy or “ PACE” programs, also commonly referred to as AB 811 - style programs, allow 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. The assessment district approach adds a powerful new option to the clean energy finance landscape.
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.
PACE for Residential Properties
Early Efforts: CaliforniaFIRST and FHFA
- Following the passage of AB 811, “CaliforniaFIRST” became the first statewide PACE financing program in California. CaliforniaFIRST is a partnership between California Communities (CSCDA, a joint-powers authority) and Renewable Funding. With the promise of funds from both the State and the American Recovery and Reinvestment Act ( ARRA), this program aimed to provide PACE financing to both the residential and commercial markets. 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. Further details regarding the status of CaliforniaFIRST can be found below.
Residential PACE Today:
- Despite the FHFA rulings, some local governments have decided to go ahead with residential PACE programs.
SCEIP- Sonoma County
- Sonoma County’s “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 for Commercial Properties
- 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. Though CaliforniaFIRST (administered by Renewable Funding) was essentially the only PACE program at its inception, recent years have seen multiple PACE providers and programs enter the commercial market with various business models and practices. Some of these include Fig Tree, YGrene, Structured Finance, and Renovate America.
- Due to the very large number of local governments that signed onto CaliforniaFIRST, this program is likely to become a widely adopted model for commercial PACE programs across the state. CaliforniaFIRST 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, CaliforniaFIRST 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.
For updates on participating local government entities, please contact the California Center for Sustainable Energy at (858)-244-1177
Legal Concerns Surrounding PACE
- 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. For more information regarding the lender consent versus notification debate, follow this link: http://pacenow.org/blog/wp-content/uploads/Lender-Notification-or-Consent-11-29-11.pdf
- 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. This is discussed in more detail below.