Florida Is Keeping Pace: House Bill 7179
As the ceremonial handkerchiefs fell and the dust settled on a busy sine die in Tallahassee, a bright piece of legislation emerged: House Bill 7179. The very last bill passed this legislative session, HB 7179 may have the rather innocuous title of an “act relating to qualifying improvements,” but it is a ground breaking piece of legislation establishing Florida’s Property Assessment Clean Energy (PACE) program.
This legislation, which was initiated and proposed by the Town of Cutler Bay and subsequently championed by Senator Michael S. Bennett and Representative Adam Hasner, is modeled on a similar program that was originally adopted by the City of Berkeley, California. The concept is so popular that it has since been adopted by 16 different states around the country in one form or another. This article explains the various provisions of HB 7179, legal issues surrounding the creation and implementation of a PACE program, and other potential challenges.
Eligible Improvements and Establishment of PACE
HB 7179 creates F.S. §163.08, which provides, in part, that local governments1 may levy non-ad valorem assessments to fund “qualifying improvements.” Qualifying improvements are defined as 1) energy conservation and efficiency improvements ( e.g., installation of energy efficient cooling systems); 2) renewable energy improvements ( e.g., installation of solar panels); and 3) wind-resistant improvements ( e.g., hurricane shutters). These improvements are required to be installed by a properly certified or registered contractor pursuant to F.S. Ch. 489. Local governments will need to consider whether to create further rules and regulations regarding those entities that may be hired to perform the work under its program.
Under HB 7179, local governments can adopt either an ordinance or resolution to create a program that will allow local governments to provide the upfront funds to cover the financing costs for the qualifying improvements. Property owners that reside within the boundaries of a local governmental entity that creates such a program will have the opportunity to voluntarily apply to the local government to receive the funding. Each different type of use (residential, commercial, industrial, etc.) on a property is eligible to participate in a PACE program.
The local government’s investment in the property will be secured by a non-ad valorem assessment along with a recorded financing agreement, which would constitute a lien on the property. This lien will have equal dignity to taxes, which means it will have super priority in the event of foreclosure of the property.
Satisfying the Special Benefits Test
Prior to HB 7179, there was no express grant of authority for local governments to assess properties to finance such qualifying improvements. However, local governments do have broad home rule powers granted by the Florida Constitution, which may implicitly permit such assessments, so long as it passes what is usually described in common law as the “special benefits test.” In order to satisfy this test, the following two requirements must exist: 1) The property assessed must derive a special benefit from the improvement or service; and 2) the assessment must be fairly and proportionally assessed among the properties receiving the special benefit.2
When examining whether a property being assessed would receive a special benefit, Florida courts examine whether the real property would increase in value as a result of the improvement or service.3 In order to ensure that the special assessments contemplated by HB 7179 are valid under Florida law, the Florida Legislature expressly provided that properties improved with energy-related improvements would receive a “special benefit” by reducing the property’s burden on energy consumption, and, in the case of wind-resistant improvements, such properties would receive a “special benefit” by reducing the property’s burden from potential wind damage. Additionally, there are implicit savings in energy costs and insurance premiums that would accompany those respective improvements. Studies have shown that reducing dependence on fossil fuels would indeed increase property value. For example, ICF Consulting Group concluded in a 1998 study that every $1 reduction in annual energy costs would increase a home’s value from $10 to $25.4
Furthermore, installing wind-resistant improvements would also increase the value of a property. For example, the installation of hurricane shutters decreases a property’s windstorm insurance,5 which in turn would increase the value of the property.6 As such, the installation of qualifying improvements pursuant to HB 7179 would provide a special benefit to the property and would also increase its value. Moreover, the “special benefit” would be fairly and proportionally assessed among property owners given that the amount of the assessment would equate to the total costs of the improvements spread over the timeframe of the financing. Accordingly, given the express language of HB 7179 and the provisions of the program, it seems that a special assessment pursuant to the provisions of this bill would meet the special benefits test and would be a valid special assessment under Florida law.
Financing the Qualifying Improvements
Governmental entities across the country that have adopted PACE-type legislation have used different means of funding the program. Accordingly, in order to afford local governments the maximum amount of flexibility in financing the upfront costs for providing the qualifying improvements, HB 7179 affords local governments the option of either issuing debt ( e.g., bonds) or using a third-party vendor ( e.g., banks).
In addition, the bill also provides significant assistance to local governments that are interested in obtaining financing for their PACE programs by allowing those local governments to enter into partnerships with one or more other local governments for the purpose of providing upfront financing for the improvements. This very important aspect of HB 7179 will help smaller local governments broaden the pool of individuals that may want to participate in the program by leveraging their attractiveness to a financing entity, which will in turn facilitate the issuance of bonds or attract more third-party vendors. It is critical that local governments get interest rates for property owners that are lower than that which property owners can get on the open market or the program will likely not be sustainable.
Furthermore, it is worth noting that the bill also allows a variety of entities to administer the program should the local government choose not to do so directly. The bill specifically provides that a local government may have its qualifying improvement program administered by a for-profit entity or a not-for-profit organization. It may even be possible for the financial institution that is lending the money to also provide administrative support.
Potential Challenges to the Establishment of a Successful PACE Program
There are several potential challenges to creating a successful PACE program. Some of the more important challenges that one should consider are discussed in detail below. However, because of the flexibility given to local governments in creating these programs, each program will have its own unique issues and challenges that will need to be examined and evaluated.
As mentioned briefly above, the first challenge in establishing a PACE program is to ensure that there is a large enough pool of individuals that may apply for the improvements. Ensuring that there is a large pool of individuals interested in receiving the funding will assist local governments in obtaining low interest rates on the upfront financing. Having low interest rates is important because this would reduce the overall cost to the residents and would persuade individuals from using other methods of financing the improvements, such as savings accounts or home equity loans.
The second challenge that may be faced in a PACE program is that existing structures may not have the necessary electrical infrastructure or be able to structurally support the installation of renewable energy devices. Florida has a lot of homes that were constructed in the 1950s and 60s, and the electrical infrastructure ( e.g., circuit breakers) of these homes not may be able to support renewable energy devices, such as solar panels. In addition, the roofs of older homes may not be able to handle the additional weight of renewable energy devices. Furthermore, older homes need careful consideration as to whether the renewable energy devices will compromise the wind storm integrity of the structure. Therefore, prior to participating in a PACE program, it is important that the property owner have the structure inspected to ensure that it is feasible to operate and install the renewable energy devices.
The third challenge that may be faced in a PACE program is that banks and other lending institutions that have mortgages on the property may object to a property owner’s participation. The bill provides that property owners do not need the consent of the mortgage holder if the lien does not exceed 20 percent of the just value of the property, as determined by the county property appraiser. In addition, the bill further provides that any acceleration provisions in a mortgage contract that would be triggered as a result of the PACE program are not enforceable.7 However, despite the fact that the bill asserts that the consent of the mortgage holder may not be necessary, and that certain provisions of a mortgage may not be enforceable, the property owner may still breach his or her contractual obligation with the mortgagee. As such, the property owner — and each PACE program — will need to evaluate such potential legal risks and do whatever possible to mitigate them.
Lastly, another potential challenge is for local governments or institutions providing the upfront financing to understand and make allowances based upon the specific economic demographic of the property owners within the geographic area covered by the program. The legislature built into HB 7179 several financial safeguards which include, but are not limited to 1) providing that the PACE lien will be of equal dignity to taxes, 2) requiring that all property taxes and any other assessments levied on the property tax bill are paid and have not been delinquent for the past three years, and 3) ensuring that the property owner is current on all mortgage debt on the property. However, even though the improvements will be financed, this additional payment could still be financially burdensome for some individuals. Therefore, it is advisable for local governments, as well as financial institutions lending the upfront costs, to evaluate and analyze the economic demographics of the proposed PACE district prior to its establishment.
Conclusion
PACE is an exciting program with great potential to assist Florida’s property owners in reducing their dependence on foreign oil and their vulnerability to wind storm damage. Those reductions in consumption and risk also result in direct, immediate cost savings to those property owners that participate in PACE in the form of lower electric bills and insurance premiums.
Furthermore, the enactment of a PACE program also provides an additional benefit that is not of legal interest, but should be of great economic interest: PACE could potentially provide a strong stimulus for the construction industry in the state. Florida lost another 2,400 construction jobs in March and April of this year, and the state has lost over 45,000 in the past year.8 The demand for construction and engineering professionals generated by a PACE program could potentially put many of those individuals back to work.
PACE is one of the most substantial pieces of practical, “green” legislation to come out of Tallahassee in recent years. Hopefully it is an indication that Florida’s legislature intends to keep “pace” with more cutting-edge green business initiatives going forward.
1 H. B. 7179 provides that a local government means municipalities, counties, or dependent special districts.
2 Sarasota County v. Sarasota Church of Christ, Inc., 667 So. 2d 180, 184-186 (Fla.1995).
3 Id. (quoting Klemm v. Davenport, 129 So. 904 (Fla. 1930)).
4 Rick Nevin and Gregory Watson, Evidence of Rational Market Valuations for Home Efficiency,
The Appraisal J. 401 (Oct. 1998), available at http://www.icfi.com/Markets/Community_Development/doc_files/apj1098.pdf.
5 In order to reduce a property’s windstorm insurance, the property owner would also need to have a windstorm mitigation report conducted.
6 Citizen’s Property Insurance, Premium Credits for Wind Mitigation Construction Features, https://www.citizensfla.com/policyholder/about_policydiscounts.cfm?show=text&link=/shared/mitigation/mitDiscountTable.html.
7 Presumably, one could argue that such provisions would violate
Fla. Const. art. I, §10 (impairment of the obligation of contracts). However, the Florida Legislature’s express finding that the bill fulfills a compelling state interest and the importance of the governmental interests advanced by this bill will likely be enough to satisfy such a challenge.
8 Florida Loses 2,400 Construction Jobs,
South Florida Business J. , May 21, 2010, available at http://southflorida.bizjournals.com/southflorida/stories/2010/05/17/daily59.html.
Chad S. Friedman is a senior associate with the firm Weiss Serota Helfman Pastoriza Cole & Boniske, P.L. He focuses his practice on representing local governments and developers in land use and zoning issues. Mr. Friedman received a B.S.B.A., with honors, from the University of Florida and his law degree, cum laude , from Stetson University College of Law.
MacAdam J. Glinn is the senior manager of the Aviation Major Projects Group for the Parsons Corporation, and is also a LEED AP. He received his B.A. from Kenyon College, and his law degree from Florida International University College of Law, where he currently serves as president of the Board of Directors of the College of Law Alumni Association .
A shorter version of this article appeared in the June/July issue of Altenergymag.com and the June issue of the Florida Real Estate Journal and is reprinted with permission.
This column is submitted on behalf of the City, County and Local Government Law Section,Vivien Jane Monaco, chair, and Jewel W. Cole, editor.
