CHICAGO — With an expanded PACE program now in place, some Ohio issuers are saying they will continue to pursue commercial PACE financing despite greater federal scrutiny of the program’s residential side.
The Ohio General Assembly last year approved PACE, or property assessed clean energy, financing for solar-related projects set up in special assessment districts. Lawmakers passed a measure last month expanding the program to cover a wide range of alternative-energy projects in special improvement districts that no longer need to be contiguous.
Under the PACE program, local governments or special assessment districts issue revenue bonds and use the proceeds for loans to residential and commercial property owners. The loans generally are repaid over a 20-year period through a special assessment on the property tax bill. The bonds are backed by first liens on the property.
“PACE is still on our roadmap for the commercial market,” said Andy Holzhauser, executive director for Greater Cincinnati Energy Alliance, a nonprofit organization that works with property owners in a four-county area to lower energy costs through energy-efficient projects.
The Obama administration has pushed PACE as a low-cost way to finance environmentally friendly projects. At least 21 states have launched similar programs.
Residential PACE loans halted in early July after the Federal Housing Finance Agency directed mortgage giants Fannie Mae and Freddie Mac to tighten their standards before purchasing mortgages tied to the loans. The problem is the loan’s first-lien status, which gives it priority over mortgages when homeowners default.
Despite the federal resistance, some Ohio issuers said they still plan to move forward with the commercial program and possibly explore a so-called soft PACE program, in which the loans take on a secondary-lien status.
“Our clients are going to continue to explore commercial PACE programs because they think, with prudent underwriting standards, the loans won’t adversely affect existing mortgage holders,” said David Rogers, partner and chair of the project finance group at Bricker & Eckler LLP, which helped craft Ohio’s newly expanded PACE law.
Key to “prudent underwriting” is the amount of the special assessments and the way they are handled in Ohio. Unlike mortgages, Ohio special assessments cannot be accelerated or made to be paid off in whole in the event of a default.
Holzhauser said he talked with federal regulators last week and their message was that commercial PACE programs are still on track, though they are being scrutinized more closely, while residential PACE programs should be halted until more law or guidance is in place.
“We are aware that there are some concerns, but we also know that the commercial programs are starting to move,” Holzhauser said.
The alliance is eager to tap the financing tool, he added, and monitoring use of the program in other states. Maine, for example, has enacted a PACE program in which the lien is secondary to the mortgage, and Boulder, Colo., one of the first cities to issue PACE bonds, continues to pursue its commercial program.
“We’re going to keep a close eye on that and continue talking to [commercial property owners in Cincinnati] who might be willing to be a first mover once we’re certain it’s a good investment to make,” Holzhauser said.
Ohio law stipulates that special assessments are priority liens, though it is possible to amend that in some individual cases, said one bond attorney who asked to remain anonymous.
“You could draft the documents, but it would be messy,” the attorney said.
Meanwhile, Cleveland is moving forward with its commercial PACE program as a way to spur large-scale alterative-energy projects, such as wind turbines, in its suburbs. The city has partnered with the First Suburbs Consortium Development Council, which represents 16 inner-ring suburbs in the effort.