Florida PACE Bonds Face Legal Challenges

solar-panels-istock-357.jpg
photovoltaic panels

BRADENTON, Fla. - More than four years after Florida passed a law opening its doors to PACE project financing, billions of bonds face legal challenges before the state Supreme Court.

Three appeals of lower court cases validating $2.7 billion in bonds for property-assessed clean energy programs around the state are pending before the high court.

Such PACE programs allow property owners to finance energy efficiency or other improvements through property tax assessments that can be used to repay bonds.

One case, on behalf of banks underwriting mortgages in the state, raises a constitutional challenge of the 2010 PACE legislation signed into law by then-Gov. Charlie Crist, authorizing the assessment structure to pay for energy-saving and hurricane-hardening projects.

Despite recent legal problems, bonds for PACE projects in Florida have been successfully validated based on the 2010 law.

At least two issues have remained unchallenged, including $2 billion for the Florida PACE Funding Agency in 2011 and about $500 million for the Clean Energy Green Corridor in 2012.

More bond capacity could be on the horizon.

A Leon County circuit judge was scheduled to hear a request Wednesday validating another $2.5 billion in PACE bonds. So far, no legal challenge has been filed in that case, according to court records.

The recent spate of entities seeking to validate bonds generated new legal challenges in the slowly maturing PACE program across Florida, which has been aided by well-known, for-profit companies based in other states.

Legal arguments pending before the Florida Supreme Court have included objections about the structures used to establish new bond financing programs, while others allege that procedural missteps occurred when validation requests were pending.

The most recent appeal involves a $2 billion statewide PACE bond program sponsored by the Florida Development Finance Corp. The FDFC is a state-created agency that issues bonds for economic and industrial development for nonprofit and for-profit companies. The corporation can issue debt for projects within the state's 67 counties through interlocal agreements.

The Florida Bankers Association, an industry advocacy group with more than 250 members, has raised constitutional issues in its appeal before the state Supreme Court.

FBA has argued that the assessment structure is not legal because it puts the mortgages they underwrite in a second-lien position behind PACE loans taken out by homeowners and businesses. Those loans are repaid with assessments on property tax bills.

Bill Spivey, executive director of Florida Development Finance Corp., said PACE assessments do not jeopardize the status of a mortgage.

He also said that given Florida's statute, FDFC believes that the special assessments are above the lien on mortgages.

Spivey said that PACE assessments are similar to assessments imposed by community development districts, which are created in Florida to finance infrastructure such as roads, sewer and water services.

CDDs are most commonly used in subdivisions initially owned by developers. They are authorized by law and created as an instrumentality of the state - a governmental distinction that ensures CDDs meet public purpose requirements of the Internal Revenue Service, and allow for the issuance of tax-exempt bonds for financing qualified improvements.

There's a key difference between assessments for government-sponsored infrastructure projects and assessments for PACE loans backed by private companies, said Florida Bankers Association attorney Virginia Townes with Akerman LLP.

"The [PACE] statute says private entities can be involved," Townes said. "In this case, a private entity is administering the investment dollars for its own benefit, so you know they are doing it for a profit.

"The opposition argues this is an assessment like those for sewers and sidewalks, except that this is not a government being reimbursed," she said, noting that entering into a PACE agreement is voluntary.

Townes said the main legal issue that caused the FBA to file an appeal with the Florida Supreme Court deals with the legal position banks are placed when homeowners or businesses with mortgages voluntarily enter a PACE program such as that being offered by Florida Development Finance.

"PACE says that without the consent of the bank, the borrower can go to the PACE bond authority and borrow up to 20% of the value of that property, and that loan will take precedence over the banks' interest," she said.

For banks, problems arise when they must take back the collateral on the loan, such as for nonpayment, and the leverage exceeds the mortgage's value.

"It puts banks in a regulatory vice, and it puts banks in a business vice," said Townes.

She also stressed that the legal challenge is not about the "laudable" goals of the PACE program in which legislators and others sought to implement a program to help property owners, resurrect the economy, and advance a green program that supports the environment.

"When the rubber hits the road, this impairs the rights of banks and in fact makes it impossible for banks to lend for economic recovery," Townes said. "It's a law of unintended consequences."

She also said that the main reason banks failed during the great recession is that the ratio of loans-to-value, and reserves, was "out of kilter."

"Seventy-one banks in Florida failed," she said. "This [PACE program] is a statutory recipe for bank failures, and we just don't need any more."

In the case before the Florida Supreme Court, briefs are being filed and oral arguments have not been scheduled.

Meanwhile, Florida Development Finance has partnered with California-based Renovate America Inc., to bring its PACE concept to Florida through Renovate America's Home Energy Renovation Opportunity, or HERO, financing program. Renovate America is registered in Florida as a foreign profit corporation, meaning its home is in another state or country, according to the Florida Division of Corporations.

Renovate America requested that the Florida Development Finance Corp. become a conduit for the PACE bonds now under scrutiny by the state Supreme Court, said Spivey, who added that FDFC financing is available to any PACE provider.

The bonds FDFC sought for validation are labeled for the "Florida HERO Program" because Renovate America was the only company to request conduit financing at the time the legal process began, he said.

Since then, Ygrene Energy Fund, another California-based PACE company, also asked FDFC to serve as a conduit issuer. The company is registered with the state as Ygrene Energy Fund Florida LLC.

Spivey said representatives of the Florida Development Finance Corp. traveled to California to see Renovate America's operation, and were impressed.

"We kicked the tires and made sure we understood how they do things because it's going to be our name on the bonds," he said. "The nice thing about this is that Renovate America is a working product and we get the benefit of their success."

It will also stimulate economic development and create new jobs, he added.

Spivey said FDFC wants to get its PACE bond program under way as soon as possible.

"It's unfortunate we have to go through this delay process," he said.

PACE financings will be sold as taxable bonds, and likely as private placements.

"We're excited about the potential for this program, and less excited about the litigation," said Spivey.

For reprint and licensing requests for this article, click here.
Bankruptcy Florida
MORE FROM BOND BUYER