At a recent City Council meeting, the City Council heard a presentation on the Property Assessed Clean Energy (PACE) program.  The City Council directed the City Attorney’s Office to review the program and provide an overview to City Council as there seemed to be some interest in providing the program to the citizens and businesses of Riviera Beach.  Since then, the City Attorney’s office along with Randy Sherman, Finance Director, have met with representatives of two different programs to gain an understanding as to how the program works.  A memorandum outlining the program was sent to the Mayor and City Council on March 7, 2016.

Background and Overview of PACE programs generally

PACE programs allow property owners to finance energy improvements through a voluntary non-ad valorem assessment attached to a property and repayment through the property owner’s annual tax bill.  Improvements can include energy efficiency, renewable energy and wind resistance projects pursuant to Florida statute (Section 163.08, F.S.).  This financing structure assists property owners by providing funds to the property owner upfront to complete projects that they might otherwise not be able to afford.  The features that distinguish the various PACE programs are the method of financing, the improvements that can be financed, and the inclusion of specific criteria to minimize the risk to property owners and existing mortgage holders. 

PACE programs began in 2008 in California and in 2010, Florida created Section 163.08, Florida Statutes, which basically made it legal for cities to create PACE programs and/or enter into interlocal agreements with other governmental entities to do the same.

Florida’s PACE law also generally:

• Clarifies the process and public purpose aspects of PACE programs;
• Makes a finding that property owners receive a “special benefit” reducing the property’s energy consumption;
• Finds a “a compelling state interest” in implementing PACE programs; 
• Allows local governments to partner with one another to form a program; 
• Clarifies that PACE assessments take priority over all other obligations on a property, including mortgages, meaning they are considered a “senior lien” because they subordinate mortgage obligations;
• Provides explicit authority for separate legal entities (formed through Section 163.01, F.S. interlocal agreements) to levy and collect assessments for PACE programs as a “local government” streamlining the formation and implementation of multi-jurisdictional PACE programs.

Structure of PACE programs

PACE is completely voluntary, allowing property owners to apply for financing for energy efficiency, renewable energy and wind mitigation projects on their properties. Applicants go through an approval process to ensure that the property meets the statutory requirements for PACE, the assessment will not cause the property owner to become underwater, and that the existing mortgage lender to the property consents to the assessment. After approval, the property owner receives financing and then may take steps to complete the qualifying improvements to the property. The role of the local government then comes into play.  The local government must levy the non-ad valorem assessment on the improved property so the assessment can be repaid annually through the property tax bill, as stated above.  The benefit is that, while the property owner will see an increase in the tax bill because of the non-ad valorem assessment, the property owner’s utility bills simultaneously decrease once the improvements are made.  Ideally, the financed retrofit cost will be offset by the reduction in utility costs.

The program’s unique characteristics are:

• Uses private capital, not taxes or government subsidies.
• Increases property values.
• Is voluntary and not mandated by the government.
• Promotes energy efficiency without driving up the energy costs.
• Is not tied to personal finances but based on the equity in the property.
• Is transferable to subsequent property owners upon sale.
• Reduces air pollution

Legality of PACE programs- Residential arena

             PACE programs have faced legal challenges from the Federal Housing and Finance Agency (FHFA), Fannie Mae, and Freddie Mac.  The federal agencies were mainly concerned with the seniority of PACE liens in relation to the mortgage.  There were several attempts throughout 2011 and 2012 to resolve the concerns with proposed federal legislation, but these legislative proposals failed to pass. Federal litigation against FHFA, Fannie Mae, and Freddie Mac continued through 2013, and ended with FHFA issuing a Notice of Proposed Rulemaking and Proposed Rule concerning underwriting standards for Fannie Mae and Freddie Mac as related to PACE programs.  The Rule was ultimately withdrawn by FHFA and they suspended the rule making process. 

            Therefore, in relation to participants in a PACE program, it’s important to disclose that there is a risk of FHFA making rules that could affect their properties.  The PACE program has its participants acknowledge in a disclosure form that Fannie Mae and Freddie Mac have raised concerns and it is possible that upon resale or refinancing of a property with an outstanding PACE lien, that a property owner may have to pay off that remaining balance before being able to secure financing. 

Specific PACE program- Florida PACE Funding Agency

            The Florida PACE Funding Agency (the “Agency”) was created in June 2011 through an interlocal agreement between Flagler County and the City of Kissimmee (the “Charter Agreement”).   The charter of the Agency will only allow the Agency to provide services within the boundaries of a local government that enters into an interlocal subscription agreement. 

            One of the most important and distinctive advantages of the program offered by the Agency is limited liability for the local governments subscribing to the program.  Both the Charter Agreement and subscription agreement make it clear that any subscribing local government is not responsible for actions or liabilities incurred by the Agency or any other local government. Insulation of liability is also provided pursuant to general law, and any subscribing local government, such as City of Riviera Beach, and the Agency possess sovereign immunity. All parties are notified in writing that the actions, debts, obligations, and responsibilities of the Agency are those of the Agency and no other local government.

            The Agency is comprised of a three member Board of Directors, financial advisors, and third party administrator and financial services provider, Leidos Engineering LLC.  Leidos is an important ingredient to the Agency because it overseas the design, development, implementation, and management of the program. 

Subscription Agreement

            In the event that the City wants to subscribe to the Agency program, it must execute an interlocal agreement.  In that agreement, the Agency is authorized by general law to levy the assessments directly and enter into the financing agreements with participating property owners.  The very limited role for the subscribing local government is to adopt a resolution authorizing the execution of a standardized subscription agreement.  All the other ministerial actions and documentation (i.e. interface between interested property owners and qualified vendors, determining compliance with all legal requirements for a financing agreement, recording, assessments) will be handled by the Agency through Leidos, the third party administrator.  The City of Riviera Beach does not pay for anything or have any costs to be a part of the program.

            The Agency has internal safeguards that protect property owners from entering into an agreement that might do more harm (interest rate for residential properties is currently set at 7.3%) than good.  Before entering into an agreement with the Agency, a property owner must meet certain criteria to qualify for financing.  The Agency will determine that all property taxes and other assessments levied on the same bill as property taxes are paid and have not been delinquent for the preceding 3 years or the property owner’s period of ownership, whichever is less; that there are no involuntary liens, including, but not limited to, construction liens on the property; that no notices of default or other evidence of property-based debt delinquency have been recorded during the preceding 3 years or the property owner’s period of ownership, whichever is less; and that the property owner is current on all mortgage debt on the property.  The benefit of these strict requirements is that the Agency will only enter into financing agreements with property owners who are most likely to successfully fulfill their financial obligations under the agreement.

Florida Cities

            Currently, the Agency operates in three counties—Flagler, Osceola, and Broward County.  The City of Riviera Beach would be its first city in Palm Beach County.  Another agency that provides this service is Florida Green Finance Authority (“Authority”), and it operates in several Palm Beach county cities: Town of Lantana, Town of Mangonia Park, West Palm Beach, Village of North Palm Beach, Delray Beach, Boynton Beach, Tequesta, and City of Lake Worth.  However, as of yet, the Authority has not financed any residential projects but the City Attorney’s Office is continuing to vet the Authority’s program for your future consideration.

Conclusion

            PACE is a statutorily created program that can help the residential and business communities in Florida.  It is offered at no cost to the City.  At this time, staff recommends entering into an interlocal agreement with the Florida Pace Funding Agency.