LOS ANGELES — California is pressing ahead with PACE programs despite the hurdles created by federal housing administrators, according to speakers at The Bond Buyer’s symposium on sustainable energy here Tuesday.
Financial advisors to programs up and down the state said their programs have maintained momentum despite the Federal Housing Finance Agency’s 2010 decision not to buy loans with PACE liens.
In a PACE, or “Property Assessed Clean Energy” program, a property tax lien is used to finance clean energy improvements, such as solar panels, for a property.
It is seen as a promising way to finance such investments, but the FHFA decision had a cooling effect on the adoption of the PACE legislation — and stopped many programs in their tracks.
Federal courts are now hearing challenges to the FHFA decision.
Meanwhile, Sonoma County, considered a leader in the PACE world, continued to move forward.
The northern California municipality started its program in 2009 that encompasses the entire county, said Mark Li, a vice president with KNN Public Finance, the financial advisor to the Sonoma program.
“The FHFA was a big hurdle to PACE,” Li said.
While the agency halted progress across the country, Sonoma County leaders deemed it important enough to carry on “full-speed ahead,” Li said.
“Things have gone extremely well,” he said. “The momentum is the key here. PACE programs have the ability to generate a huge amount of momentum.”
The county has funded over $55 million of assessment representing 1,415 residential projects and 90 commercial projects, Li said, and received over 2,300 applications for over $95 million in projects.
Li said the program has come far enough that the county needs to plan a long-term financing to take out the original financing through the county’s investment pool, and has hired RBC Capital Markets to do so in the next year or two.
Options are many, according to Li, but the big choice is between using a traditional municipal-assessment revenue bond structure, which has a long track record, or an asset-backed security structure, or ABS, in which the investor class is more accepting of the prepayment possibility built into the PACE assessment structure.
Either way, Li said, PACE is an attractive credit structure because the cost of energy improvements is small as a percentage of the entire property.
“The lien-to-value ratio is very low,” he said.
In western Riverside County, where the program was launched in February, structured asset investors got the program off the ground, said financial advisor Laura Franke, senior consulting manager at Public Financial Management Inc.
After the FHFA decision, county officials wanted Franke’s firm to continue working on the PACE program, telling her: “We want the jobs,” she said.
But the recession-wracked region could not capitalize the program directly, which is where the ABS investors came in, Franke said.
The Western Riverside Council of Governments program uses “micro-bonds” for each project and property, and has developed separate investor pools for its residential and commercial programs.
“ABS investors like this kind of product,” Franke said.
“The asset-backed market is very deep right now,” said panelist Joseph Lau, director of securitization at RBC.
The financial structure of PACE has only been in existence for a few years.
The upside to this is there are smaller rating agencies that specialize in it — so typically issuers will only seek one rating — rather than going for the usual trifecta from the major rating agencies.
That can save money on the deal, according to panelists.
