Last week, two events gave notice that rumors of the death of PACE financing, one of the most promising policies available to fund energy retrofits, have been greatly exaggerated.
On January 20, a federal district court in California ordered the Federal Housing Finance Agency (FHFA) to initiate a “full-blown” rulemaking process on PACE financing. Yesterday, the notice of the proposed rulemaking was published in the Federal Register. The week before, on January 19, San Diego-based Figtree Energy Resource Company announced a deal involving a first-of-its-kind, multi-city commercial PACE bond.
First, some back story.
Rarely have energy policy wonks been so excited. In October 2007, that City of Berkeley announced its intention to create what it called a Sustainable Energy Financing District. Based on an idea credited to Cisco DeVries, then chief of staff to Mayor Tom Bates, the scheme appeared to offer a breathtakingly simple and elegant solution to a seemingly intractable problem: the steep upfront cost of clean energy and efficiency projects.
PACE (Property Assessed Clean Energy) programs, as DeVries’ brainchild are now known, proliferated; today, legislation enabling the programs has been passed in 27 states. PACE financing enables property owners to take out a loan, usually via city- or state-organized bonds, to pay for solar panels, insulation, energy-efficient HVAC systems, or other improvements. Loans are repaid, typically over 20 years, through an annual supplemental property tax assessment.
DeVries’ beautiful solution, however, soon hit a snag. In July 2010, FHFA ordered Fannie Mae and Freddie Mac not to underwrite mortgages for homes with PACE loans. FHFA was concerned that in most states with PACE programs the liens resulting from the PACE program loans have priority over mortgages – the PACE lender would be paid ahead of the bank, or Fannie or Freddie, in the case of foreclosure.
PACE leaders San Francisco and Boulder, Colorado, suspended their programs. Just a handful of cities and counties, notably Sonoma County, California, and Babylon, New York, kept their residential PACE programs alive. A bipartisan bill introduced in July 2011 (Forbes’ Todd Woody has more on the bill here), would address FHFA concerns and compel the agency to accept PACE liens but has not reached the House or Senate floors for a vote.
Speaking of the court ruling forcing FHFA to open a rulemaking on PACE, David Gabrielson, executive director, PACENow, an advocacy group, told Environmental Finance, “There’s real progress there.”
Richard Chien, PACE program manager, San Francisco Department of the Environment, was also optimistic. “This is great news. There will be an opportunity for stakeholders to weigh in on a range of issues as to why these programs actually are a valid application of state and local laws, and how program designers have actually taken proactive steps to address mortgage lender concerns. The open dialogue will be a healthy way to get these concerns addressed,” he wrote in an e-mail.
Stakeholders can submit comments through March 26.
The Figtree launch of the multi-city bond highlights an important but under-reported story of the PACE saga: programs for the commercial sector are thriving. The $725,000 bond will fund seven energy efficiency and renewable energy projects at businesses in four California cities: Fresno, Palm Springs, Clovis, and Exeter.
"The taxable municipal bond was sold to the capital markets without any state or federal funding assistance – a 100% private program," Figtree CEO Mahesh Shah said in a statement.
A policy brief (PDF) prepared by the Clinton Climate Initiative, Lawrence Berkeley National Laboratory, and Renewable Funding (Cisco DeVries is President and CEO), published in March 2011, provides a good overview of commercial PACE programs in place or planned in the United States. Why have commercial PACE programs moved ahead while residential programs remain in limbo? “The obvious reason is that Fannie and Freddie don't generally buy or insure commercial mortgages,” said Richard Chien.
Fresno, California, launched a commercial PACE program in January 2011. In September 2011, the Carbon War Room launched what it called the PACE Commercial Consortium, backed by Lockheed Martin, Energi, HannoverRe, and Barclays Capital, which in its first round of investments will fund $550 million worth of retrofits in Miami-Dade County, Florida, and $100 million more in Sacramento, California.
Getting back into the PACE game, San Francisco launched a program for commercial properties, GreenFinanceSF, in October 2011, as did Los Angeles County. Ann Arbor, Michigan, launched (PDF) its commercial PACE program on January 10.
I asked Richard Chien if San Francisco had been able to close any commercial PACE deals. “None yet,” he wrote, “but we have several very active leads and are communicating regularly with contractors, capital providers, and other program partners to increase interest and develop a project pipeline.”
“The reality is that commercial retrofit projects have long lead times, and this program is still brand new.”
