California’s statutory changes to its existing residential Property Assessed Clean Energy (PACE) financing program, that became effective January 1, 2017, may be a model for residential PACE programs across the nation.
The first residential PACE program started in Berkeley, California in 2007. Today there are laws in at least 34 states that allow some form of PACE financing, however, there are very few residential PACE programs up and running. Residential PACE loans got a late jumpstart when the U.S. Department of Housing and Urban Development and the Department of Veterans Affairs released new guidance on July 19, 2016, changing their 2011 positions, now widely allowing residential PACE.
Last year I suggested with that new guidance, PACE financing, where payments for energy efficiency, water conservation and renewable energy improvements to real estate are made through a building owner’s property tax bill without upfront cash from the owner could be bigger than anything in U.S. real estate since the invention of the glass window.
To date, more than $3 Billion has been lent for residential PACE projects and it is predicted that total will double within the year. A recent front page Wall Street Journal article went on to forecast that growth “would likely rank PACE loans as the fastest growing type of financing in the U.S.”
But this explosive growth has not been without externalities. There is growing concern that PACE loans are being made to homeowners who cannot afford to make the payments.
The State of California determined that government enabled PACE “is sometimes misunderstood and may affect the consumer’s ability to refinance their loan or sell their property” but that many of the regulatory safeguards that buttress traditional second mortgages do not exist in the realm of PACE. To address those and other issues, California announced it “is essential to promote standardized disclosures and protections for consumers to ensure that the PACE program can continue to be widely used to offset the adverse impacts of years of climate change.” To that end, the State enacted Assembly Bill No. 2693 and Assembly Bill No. 2618, both effective January 1, 2017.
Among the key features of the new laws, for residential properties with four or fewer units, that may be model language as more residential PACE programs are enabled across the country are:
Not permitting a property owner to participate if the owner’s participation would result in the total amount of any annual property taxes including PACE assessments exceeding 5% of the property’s market value, as determined at the time of approval of the owner’s contract.
The PACE financing must be for less than 15% of the value of the property, up to the first $700,000 of the value of the property, and must be for less than 10% of the remaining value of the property above $700,000.
Requiring a disclosure in substantially the same form as provided in the law shall be completed and delivered to a property owner before the property owner consummates a voluntary contractual assessment.
Mandates that the property owner shall receive the right to cancel document in substantially the same form as provided in the law, providing a 3 business day right to cancel.
In addition, the amendments to California’s existing law generally prohibit the making of any representations to property owners regarding the monetary or percentage effect that the PACE financed improvements will have on the value of the property unless the estimate of value is derived through the use of a specified automated valuation model or a licensed real estate appraiser.
PACE programs exist only as a creation of government, made possible by the fact that local governments collect payments incident to property tax bills, ignoring existing indebtedness secured by the real property. With those loans now the fastest growing type of financing in the U.S., many of these state and local enactments are less than ideal, including it has become clear that certain consumer protections must be built in if this segment is going to achieve its true market potential, advance green building, and yes, save the planet.