Started in the green revolution’s holy land, Berkley, California, PACE financing is shorthand for Property-Assessed Clean Energy Financing (Wikipedia entry).
The concept is simple: cities loan money to property owners to install clean energy equipment. The loans are then repaid to the city through annual property tax assessments.
As originally conceived, it’s a win/win/win situation really. Property owners get funds to improve their property, paying back the loan with money saved in the the property’s reduced operating expenses. Cities and communities benefit by upgrading its overall energy efficiency. Businesses and efficient energy investors benefit because the market grows for its products.
All was going very well for PACE Financing. PACE legislation was passing across the country, and President Obama’s administration wholeheartedly supported PACE programs.
This progress came to an abrupt halt in June 2010, when the Federal Housing Financing Authority (FHFA) dropped this news: Properties with PACE loans cannot be purchased by mortgage giants Fannie Mae and Freddie Mac.
Well, PACE loans create a lien against properties similar to a tax lien, meaning that the lien has priority over all other debts (including mortgages). The value of these loans can be between $10,000 and $100,000, and sometimes more. The problem for these mortgage holders is obvious, as they are losing priority on their collateral.
The news from the FHFA caused more than $150m in funding to get yanked by the US Department of Energy, and has some predicting the demise of PACE Financing as we know it. And they may be right.
Can PACE Be Saved?
The question now is whether these PACE Programs can be saved. While I believe they can be, I don’t think the programs will be unaffected by the FHFA determination. Here is a few things that are happening to help PACE stage a comeback, and a glimpse at how this might affect the PACE Programs:
1) California is Fighting It: First, Sonoma County and the California Attorney General have both separately filed suit against the FHFA claiming that the determination is wrong, or that FHFA lacks jurisdiction to make the determination on behalf of states and counties.
2) Legislation is Being Proposed: The US Congress (as well as local reps and senators) are introducing bills aiming to protect PACE financing programs. One such bill is the PACE Assessment Protection Act of 2010.
3) Re-Thinking PACE: States may be ready to re-think the way they structure these PACE programs, and provide some protections for mortgage companies. While not passed in response to the FHFA announcement, Louisiana’s new PACE egislation may have predicted these problems, as it greatly accommodated mortgage holders. The PACE legislation from the 2010 session, for example, requires enough equity in the house to support the loan, and requires permission from the mortgage holder for commercial loans greater than $100k (talked about in this post)
4) Commercial Focus: The FHFA restriction really affects the residential markets only. As such, many states and municipalities may be re-focusing their PACE programs on the commercial market. One example of this is New Orleans, who anticipated launching a PACE district with the help of funding from the US Department of Energy’s America’s Solar Cities program. The city says they plan on moving forward with the district, except it will only be for commercial PACE loans.
Hey, What Does This Have To Do With Construction?
The PACE Financing Programs has a lot to do with construction and construction law. You may or may not know, but our firm publishes two blogs that focuses on green building laws: The Louisiana Green Building Law Blog and the Northwest Green Building Law Blog. I am also a LEEP AP, and focus part of my practice on green building issues.
I recently wrote a blog post called: Think Green Building is Irrelevant? Think Again. The post discussed a report published by NPR saying that green building accounts for 33% of new construction in the United States. That’s a remarkable number. And if these PACE Programs get off the ground, the existing construction green building numbers will be driven up significantly.
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- Green Legislation from the Louisiana 2010 Session (constructionlawmonitor.com)
- Freddie, Fannie reject energy retrofit loans (news.cnet.com)
- CA Sues FHFA Over Efficiency Program (environmentalleader.com)
- Will PACE Financing Damage the Mortgage Market? (cleanenergywonk.com)
- FHFA not so green, sees red: – The agency objects to the… (sf.curbed.com)
- Sonoma County resists feds on home energy loans (sfgate.com)
- What Mortgage Underwriters are Missing about PACE (triplepundit.com)