BRADENTON, Fla. — A new Florida agency created to fund statewide Property Assessed Clean Energy improvements filed a complaint to validate the issuance of up to $2 billion of municipal bonds.
The Florida program is forging ahead despite questions raised last year by federal housing agencies over the lack of standard underwriting and energy program requirements among governments with PACE initiatives, in which property owners borrow money to pay for qualified energy-efficiency improvements that are typically repaid through a special tax assessment on the property.
Three federal lawmakers on Wednesday announced legislation aimed at clearing federal hurdles that have prevented many PACE financings for nearly a year.
Meanwhile, a court hearing is set for Aug. 25 on the Florida PACE Funding Agency’s bond validation complaint, according to attorney Bob Reid of Bryant Miller Olive PA.
The law firm is bond counsel to the Florida agency, which was formed recently through an interlocal agreement between Flagler County, along the state’s northeast coast, and the city of Kissimmee, south of Orlando near the center of the state.
The agency is a special purpose unit of local government, authorized by last year’s passage of HB 7179, designed to offer financing for energy conservation and renewable-energy improvements as well as wind-resistance improvements, such as reinforcing roofs and installing storm shutters.
If the judge in the validation case approves the issuance of bonds, and there is no appeal in a subsequent 30-day period, the agency will begin signing up local governments that want to make taxable bond financing available to home and commercial property owners, Reid said.
The PACE financing concept originated in California, and the idea gained traction around the country, though implementation has run into obstacles, particularly at the federal level.
PACE was called into question in 2009 and 2010 by Fannie Mae and Freddie Mac, which told their mortgage sellers and servicers that some PACE-related loans were granting a priority lien over existing mortgages, contrary to their requirements.
In July 2010, the Federal Housing Finance Agency, which oversees Fannie, Freddie, and the Federal Home Loan Banks, said PACE programs with priority lien status were of concern due to the lack of standard underwriting and energy retrofit guidelines among the various programs.
The FHFA instituted tighter restrictions on mortgages with first-lien PACE loans, which halted many financings among the 28 PACE programs around the country, according to Amy Heinemann with the Database of State Incentives for Renewables and Efficiency program at North Carolina State University.
Some states and local governments kept programs open and others have passed clarifying legislation, she said.
“We made sure when the legislation passed it set minimum standards,” said Reid, who helped pass Florida’s PACE law.
Those who take advantage of PACE financing in Florida must have a record of paying property taxes and mortgages on time and payments must be current. There can be no involuntary liens or judgments.
Additionally, the amount of the PACE assessment cannot exceed 20% of the just value of the property unless an energy audit demonstrates that the annual energy savings from the improvement would equal or exceed the annual repayment amount for the assessment.
On Wednesday, a bipartisan group of federal lawmakers introduced the PACE Protection Act of 2011 to propose new standards for administering PACE programs and to overcome objections of the Federal Housing Finance Agency.
Those standards include setting a minimum amount a property owner must have in equity to qualify and imposing limits on the amount of improvements to be made, among others, according to Rep. Nan Hayworth, R-N.Y., who is sponsoring the legislation along with Reps. Daniel Lungren, R-Calif., and Mike Thompson, D-Calif.
“I think it is incredibly important to our national energy security, to our ratepayers who buy energy, and to the creation of jobs,” Thompson said of the PACE program, which does not rely on taxpayer assistance.
The lawmakers said they have proposed the legislation because the FHFA had resisted supporting a solution.
Reid, the Florida bond attorney, said he is not convinced that the objections of the FHFA will be overcome with legislation but believes PACE can succeed without the federal agency. “I think [the solution] will be market-fixed,” he said. “If Fannie Mae and Freddie Mac do not want to take loans on property with PACE assessments, I think there will be other lenders that will be happy to.”
Though the structure of PACE programs differ nationwide, Reid said there are university studies of existing programs that show homeowners’ properties with energy conservation and renewable energy improvements receive a 10% to 15% increase in market value, and that improved commercial rental properties can charge higher rents.
Owners of older properties willing to make improvements are concerned about maintaining and improving their property value, he said, adding, “That’s the kind of property owner you want on your mortgage.”
“Because the program must be self-sustainable, and in order to attract intelligent capital, the program is aimed exclusively at properties and property owners with attractive credit attributes,” Reid said. “This aspect is often overlooked because of the negative consequences of inattention to quality credit over the last several years.”
The default rate on properties with PACE assessments is lower than properties without the improvements, Reid said, adding: “Those property owners participating are the cream of the crop when the market looks and thinks about desirable properties to loan money to.”
The upcoming validation process for bonds to be issued by the Florida PACE Funding Agency is designed to provide certainty for the use of non-ad valorem assessments and for mortgage lenders doing business in Florida, according to Reid.
It also is designed to achieve economies of scale when it comes to paying financing costs.
The agency is seeking the validation of $2 billion of bonds based on an economic analysis performed by RERC Strategic Advisors of Orlando.
It determined that there are more than three million buildings over 20 years old that could be good candidates for retrofitting and energy-related or wind-resistant improvements.
The economic analysis assumed that if only 5% of the owners of 20-year-old buildings applied for PACE funding that the aggregate amount of financing needed could “easily equal or exceed $2.35 billion.”
Some observers have questioned the value of the PACE structure because it requires the issuance of taxable bonds due to the fact that improvements are on private property.
Reid said property owners must look at their options, including bank loans and second mortgages, but as the PACE program builds momentum and demand the cost of funds should decrease.
“The unique feature about the PACE program is that you get up-front cash to have the improvements made and you pay that back through assessments over a period of time,” he said, noting that assessments run with the property and not the property owner. “If you have to sell your property, the PACE assessment is not like a second mortgage that you have to pay off.”
