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Published Dec. 24, 2010
Tax-assessed financing for home energy improvement projects may be down, but it’s not out.
Commonly called PACE, for property-assessed clean energy, these programs were gaining steam in early 2010 when federal regulators put up a serious roadblock to their use by homeowners.
Key supporters of PACE programs, which in California are also called AB 811 programs after the state law that enabled them, are planning to gather in Palm Desert, Calif., in March for a conference called “PACE Solutions: Bringing AB 811 Home.”
The homecoming is a reference to Palm Desert’s having been one of the two places where tax-assessed energy financing originated, the other being Berkeley, Calif. The two cities couldn’t be more antipodal: Berkeley is a liberal city that is host to thousands of college students, while Palm Desert is a conservative retirees’ haven where golf is pursued with religious fervor.
Cisco DeVries, who at the time was an aide to Berkeley’s mayor, several years ago encountered the problem of paying a large sum up front for a solar electric system when he had an array installed at his home. He subsequently came up with the idea of using special tax districts as a way for homeowners to finance such projects, much like paying special assessments for such things as sewer improvements, street lighting or sidewalks.
Instead of paying as much as $20,000 or more in cash for a solar photovoltaic system, property owners could have them installed for little or nothing up front and pay for them through tax bills. As with other property improvements, a solar PV system – with a typical lifetime measured in decades – would stay with the property if it was sold. Credit checks were often waived because the improvement went on the property and stayed there. Because they reliably produce a quantifiable asset — electricity — for many years, solar electric systems have a continuing value that is relatively easy to determine.
While Berkeley was in the process of setting up its tax assessment program for energy improvements, which was first formally discussed there in 2007 and did not require state involvement, Gov. Arnold Schwarzenegger signed legislation, AB 811, in the summer of 2008 that allowed communities such as Palm Desert to establish similar programs.
The first such loans in the United States became available in Palm Desert in August 2008, just before Berkeley’s program received final approval.
In Palm Desert, where summers can be scorching and air conditioning is virtually one of life’s essentials, the use of this financing method became very popular. Under the tiered electricity rates offered in Palm Desert, electricity prices can rise dramatically with extensive use. The combination of rich sunshine and high electricity bills made solar PV an attractive, cost-saving option for some.
PACE programs, in which cities and counties rather than banks became conduits for financing expensive home improvements, began to spread across the country, and by the spring of 2010 nearly half the states had some type of program in place or were considering one.
In May, the mortgage finance organizations known as Fannie Mae and Freddie Mac, which had previously advised lenders to treat PACE financing like other taxes and assessments, changed course. Most PACE programs, as with other special tax assessments, place a priority lien on residential property to ensure that the tax-related obligation is repaid first if a homeowner defaults on a mortgage. The mortgage agencies said that approach with PACE financing was not acceptable for mortgages they would purchase.
The government-sponsored mortgage enterprises, which are overseen by the Federal Housing Finance Agency, handled about three-fourths of the funding in the U.S. mortgage market in 2009, according to Barron’s magazine.
The mortgage enterprises and the housing finance agency consider PACE financing to be a loan, not a typical tax obligation. They have described this method of financing energy improvements such as solar photovoltaic systems as risky and “lacking in sound underwriting guidelines and consumer protections.” PACE supporters have responded that property owners who have used tax-assessed financing for energy improvements actually have had lower default rates than other taxpayers.
The mortgage regulators were joined by the Office of the Comptroller of the Currency in deeming tax-assessed energy financing with priority liens to be unacceptable. Their opposition effectively put a halt to most such programs across the country.
Still, PACE lives, according to EcoMotion, a firm that advises governments, utilities and companies on energy and environmental programs. EcoMotion and its president, Ted Flanigan, had assisted Palm Desert in establishing that city’s groundbreaking tax financing program.
The company is coordinating a March conference in Palm Desert to discuss the status of tax-assessed financing.
“The purpose of ‘PACE Solutions: Bringing AB 811 Back Home’ is to convene key stakeholders and advocates of property assessment financing, to consider and collectively support solutions to make PACE the bold, viable, and ‘revolutionary’ energy efficiency and renewable energy financing tool it was envisioned to be,” the firm’s invitation says.
“We’ll be discussing and debating the challenges at hand, especially in the residential sector, with the goal of supporting a myriad of solutions – from legislative actions to lawsuits and ‘work-around’ opportunities,” it adds.
Tax-assessed financing is still available for many commercial projects, and also may be obtainable for residential customers with mortgages that do not involve Fannie Mae or Freddie Mac. Many older mortgages were written and sold before the agencies began to dominate the mortgage market. Some homeowners have owner financing or private mortgages not handled through the big mortgage finance enterprises. A significant number of U.S. homeowners have no mortgage at all and thus would not be subject to the strictures if they sought to finance an energy project through tax bills.
Palm Desert reopened its Energy Independence Program in August after reviewing the positions of the mortgage regulators. The city is requiring that applicants to its program sign a special disclosure statement. The disclosure says that property owners who wish to participate in the Energy Independence Program should consult with their first deed holder and research any implications the energy program’s lien may have on their mortgage loan.
“If your lender wishes to sell or has sold your mortgage or deed of trust to Fannie Mae or Freddie Mac, your lender has been instructed by Fannie Mae and Freddie Mac to withhold consent to energy assessment financing under a program such as the Energy Independence Program,” is just one of the disclosure’s warnings.
“In FHFA’s view, lenders participating in Fannie Mae and Freddie Mac programs should treat energy improvement assessments (such as a contractual assessment levied under the Energy Independence Program) differently than assessments levied in connection with traditional assessment districts. The City of Palm Desert disagrees with this viewpoint and is working to modify this position,” the disclosure says.
With most PACE or AB 811 programs in limbo, the federal government has initiated a new loan program called PowerSaver. With this program, financing for energy projects is to be channeled through banks.
Organizers of the PACE conference say they hope participants “will leave with direction on how to plug in and fully resuscitate PACE to its full potential and its AB 811 roots.”
More information about the planned gathering is available from the firm EcoMotion at its website, http://www.ecomotion.us/.