In the past few months, we have seen some decisions regarding Property Assessed Clean Energy Loans (PACE loans) that may open the doors for additional states, counties, and local municipalities to authorize, create, and fund PACE loans within their jurisdictions. PACE loans provide funding from municipalities (through bonds, private funding, and other funding models) to land owners to pay for energy improvements to the owner’s property. The loans are paid back to the municipalities through ad-valorem taxes on the owner’s local property taxes. Because the loans are treated like a tax assessment, PACE loans often have tax lien priority on the subject property. As a result of this priority, other secured lienholders, including purchase money mortgage holders, become at risk of losing their security interest in a tax sale or foreclosure. The Federal Housing Finance Agency, which oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, has issued directives to prohibit the government sponsored enterprises from holding or insuring mortgages on properties subject to a PACE loan, and this directive has resulted in many municipalities choosing not to create residential PACE loan schemes.
The last few months, however, have seen renewed interest in PACE programs throughout the country as a result of a number of changes at the federal and state level. Below, we detail the most interesting events effecting PACE loans in recent months.
FHA Issues Guidance to Support Residential PACE
In late August 2015, the Federal Housing Administration (FHA) announced anticipated guidelines to address the issue of lien priority on properties subject to a PACE loan, particularly for the purchase and sale of such properties to new owners. Under most PACE loan schemes, the PACE loan remains on the property when the property is transferred, creating lien priority problems for lenders who might otherwise offer a purchase money mortgage. The FHA hopes to issue guidance that would, among other provisions: (1) preserve payment priority for first lien mortgages through subordination agreements; and (2) make properties with PACE liens that preserve priority eligible for financing that does not exceed FHA’s maximum combined loan-to-value (CLTV) ratio.
New guidelines would allow people interested in purchasing a property with a pre-existing PACE lien the required mortgage financing. As a result, counties and municipalities that have previously held off on establishing PACE programs because of the Federal Housing Finance Agency’s prohibitions may reconsider the benefits of such PACE programs within their jurisdictions.
Florida Supreme Court Upholds Bond Validation to Fund PACE Loans
On October 1, 2015, the Florida Supreme Court issued two decisions related to a Florida county’s ability to validate bonds issued in order to fund PACE loans. In Thomas v. Clean Energy Coastal Corridor and Reynolds v. Leon County Energy Improvement District, et al., the Florida Supreme Court addressed whether a number of counties could validate a bond issued to fund qualifying PACE loans on real property. The bonds were issued by third-party entities that intended to fund loans to real property owners in exchange for non-ad valorem property assessments issued by the relevant municipality. At issue was whether the bonds could be validated when the anticipated financing agreement for the PACE loans issued by the third-party entity provide for a remedy - judicial foreclosure sale - not authorized under Florida law for the collection of tax assessments. The Court found that the bonds could be validated but remanded the cases to require that all references to judicial foreclosure remedies be removed from the PACE financing agreements.
These two decisions come after a previous Florida Supreme Court decisions, issued last February, which upheld the constitutionality of the Florida statute authorizing PACE funding in the state. Taken together, the Court’s decisions are seen as a big win by environmental advocacy groups, who hope that more Florida municipal governments will now authorize PACE programs in their jurisdictions to fund additional energy improvements.