Property Assessed Clean Energy: Is There Finally a Clear Path to Success?
Property assessed clean energy (PACE) programs allow a property owner to voluntarily finance energy efficiency or wind resistance improvements through a non-ad valorem assessment repaid through the annual tax bill. Pursuant to F.S. §163.08, improvements can include energy efficiency, renewable energy, and wind resistance improvements.1 In states other than Florida, PACE can be used for improvements to mitigate for seismic damage, flooding, and tornado resilience.2 The PACE financing structure addresses a barrier to financing these types of projects by providing funds to the property owner upfront.
Local governments support PACE because programs spur local jobs for contractors, and there is additional revenue through permit fees for PACE projects. PACE projects can increase property values,3 creating another tax revenue enhancement for local governments. PACE also provides a strategy to reduce community-wide greenhouse gas (GHG) emissions and save money on utility bills.
PACE programs evolved first in California back in 2008 with great momentum, but that slowed in 2010 due to concerns raised by the Federal Housing and Finance Agency (FHFA), Fannie Mae, and Freddie Mac regarding the seniority of the PACE lien over mortgages. Several federal legislative attempts in 2011 and 2012 to resolve these concerns failed to pass.4 Federal litigation against the FHFA, Fannie, and Freddie occurred from 2010 to 2013, along with a court-mandated federal rule-making process that was later suspended.5 Appeals to several PACE-related bond validation proceedings in Florida also slowed progress. Despite these challenges, PACE implementation is taking off in Florida. PACE programs throughout the country may differ by method of financing, eligible improvements, whether the program includes residential and whether the program includes specific criteria to minimize the risk. To date, almost $2 billion worth of PACE improvements have been completed.6
The Pace Law in Florida
In 2010, F.S. §163.08 authorized local governments to create PACE programs.7 The statute finds “a compelling state interest” for PACE programs; clarifies the public purpose and confers a special benefit from the improvements; requires use of the F.S. Ch. 197 levy and collection process; defines a “qualifying improvement”; allows local governments to partner and form a program and levy the assessments across jurisdictional lines; and clarifies that PACE assessments are considered a “senior lien.”8 It provides a general framework within which local governments (municipality, county, dependent special district, or separate legal entity created pursuant to F.S. §163.01) have flexibility to create and administer programs.
On September 18, 2009, Fannie Mae directed lenders to treat PACE assessments as any other tax assessments, but later in 2010, Fannie Mae and Freddie Mac reversed that position through “lender letters” reflecting a more adverse position to PACE with the FHFA following suit. In response, eight complaints were filed in federal courts in California, Florida, and New York.9 Claims against the FHFA, Fannie Mae, and Freddie Mac included violations of the federal Administrative Procedure Act (APA); unfair business practices; violations of the National Environmental Policy Act (NEPA); and violations of the 10th Amendment to the U.S. Constitution (reserving to the states all powers except those granted to the federal).
Plaintiffs argued that Fannie Mae and Freddie Mac had purchased and guaranteed mortgages subordinate to government assessment liens and PACE assessments were no different. The plaintiffs sought remedies holding that 1) the assessments are liens, not loans (a constant theme even recently in front of the Florida Supreme Court); 2) the assessments do not pose risk, and do not alter traditional lending practices; 3) the assessments constitute liens equal to county taxes and assessments; and 4) the assessments do not contravene Fannie or Freddie’s uniform security (mortgage) instruments in terms of lien status. Injunctive relief was also sought to prevent adverse actions against participants or local governments involved in PACE.
The defendants argued that pursuant to 12 U.S.C. §4617, in a conservatorship role over Fannie and Freddie, the FHFA acted to preserve safe and sound financial practices per the Housing and Economic Recovery Act (HERA) of 2008. They argued that the FHFA’s actions were not reviewable and they were within its authority. They also argued that the plaintiffs’ claims were not in the zone of interests protected by HERA, and that the FHFA did not issue any rule or regulation subject to notice and comment under the APA. Ultimately, the courts found for the defendants in all cases with narrow rulings regarding FHFA’s authority under HERA.10 The remedies sought by plaintiffs were never addressed.
The California court did require at one point that a federal rulemaking process be initiated regarding the FHFA’s actions.11 On January 26, 2012, the FHFA published an advance notice of proposed rulemaking seeking comment12 and received 33,000 comments in response. On June 15, 2012, the FHFA issued a notice of proposed rulemaking and proposed rule concerning underwriting standards related to PACE programs.13 Due to the final disposition of the cases, the rule was ultimately withdrawn by the FHFA.
Pace Development After the Federal Challenges
After a post-litigation “cooling off period,” PACE programs began developing again. Some have focused on commercial (Connecticut and Texas) and others have scaled residential PACE successfully (California and Florida). These PACE programs are administered either at the state (Connecticut) or local level (most other programs). The primary differences are the financing strategy, lien status, and whether residential is included.
Several innovations have also occurred in the PACE market. The first is that running a common program for multiple local governments is more efficient at either the state or local levels.14 Second, multiple financing alternatives can be offered (or the “open market” approach), which primarily is only a factor in commercial programs. Finally, multiple PACE programs are now being offered within a single jurisdiction (the “multi-provider” approach). Programs manage the “risk of the unknown” through disclosing that Fannie and Freddie have raised concerns or that it is possible upon resale or refinancing of a property that a property owner may have to pay off remaining PACE lien balances first. Additionally, all costs, financing rates, payment schedules, etc., are routinely disclosed to property owners.
Florida Pace Bond Validation Challenges
Prior to 2014, three successful bond validations were unchallenged: St. Lucie County secured in 2010; Florida PACE Funding Agency secured in 2011; and the Green Corridor secured in 2012. In 2014, five bond validations for PACE were appealed to the Florida Supreme Court.15 Two appeals included an attack on the PACE statute itself, F.S. §163.08: Fla. Bankers Ass’n (FBA) v. State of Fla., No. SC14-1603 (Fla. Aug. 15, 2014);and Gowen v. State of Fla., No. SC14-2269 (Fla. Nov. 19, 2014). Other appeals related to procedural issues for cases involving the Leon County Energy Improvement District (LCEID),16 a dependent special district of Leon County; the Clean Energy Coastal Corridor (CECC);17 the Florida Development Finance Corporation (FDFC);18 and the Florida Green Finance Authority (FGFA).19 the end of 2015, all of the bond validation appeals were favorably resolved, upholding the underlying PACE programs.20
Bond validations, pursuant to F.S. Ch. 75, are undertaken to use bond proceeds to finance the actual “qualifying improvements” in a PACE program. The scope of bond validations includes three issues: 1) Does the public body have authority to issue the bonds; 2) is the purpose of the bonds legal; and 3) compliance with the requirements of law.21 F.S. Ch. 75 provides that “property owners, taxpayers, citizens and others having or claiming any right, title or interest in property to be affected by issuance of bonds” may become parties to a bond proceeding.22 F.S. §75.07 provides that “[a]ny property owner, taxpayer, citizen or person interested may become a party to the action by moving against or pleading to the complaint at or before the time set for hearing.”
All of the appeals in some form relied upon Meyers v. City of St. Cloud, 78 So. 2d 402 (Fla. 1955), to confer standing. The PACE cases were distinguishable from Meyers because at the time Meyers was decided 61 years ago, intervention after a final judgment was permissible. Subsequent to Meyers, F.S. §75.07 was revised and still states today that “[a]ny property owner, taxpayer, citizen or person interested may become a party to the action by moving against or pleading to the complaint at or before the time set for hearing.”23 In the PACE bond validation cases, the Florida Supreme Court found that full party status is granted only to those who appear and plead in the circuit court proceedings (“by moving against or pleading to the complaint”).24 This was a critical element in the FBA and Gowen cases in which the validity of the statute and non-ad valorem assessment was raised.
Robert Reynolds, a citizen of Leon County, filed a notice of appeal in two of the proceedings (LCEID and FDFC) and three citizens in Broward County, Vicki Thomas, Christopher Trapani, and Sidney Karabel, filed an appeal in the CECC proceeding. The FBA also filed a notice of appeal in one of the proceedings (FDFC) raising virtually identical issues to those raised in the previous FHFA federal litigation. Finally, James Gowen appealed the bond validation judgment of the FGFA. Appellants in three of the five cases were represented by common counsel raising narrow procedural issues, such as judicial foreclosure. Appellants, FBA and Gowen, were represented by separate counsel attacking the statute. The following provides a case overview for the five proceedings:
• Reynolds v. Leon County Energy Improvement District, No. SC14-710 (Fla. Apr. 11, 2014)— Notice of appeal was filed the final day to appeal the bond validation. The basis was whether the LCEID had authority to issue bonds and whether judicial foreclosure was an appropriate remedy. An emergency motion to disqualify was filed on the grounds that there was a conflict of interest with one of the counsel, and the court relinquished jurisdiction to the circuit court for a period of 45 days to conduct an evidentiary hearing. LCEID’s motion to disqualify was granted, and the Supreme Court affirmed. Oral argument was held on February 4, 2015, and the court affirmed the validation, remanding only to require removal of judicial foreclosure.
• Vicki Thomas et al. v. State of Fla., No. SC14-1282 (Fla. Jul. 2, 2014)— The basis of the claim was the use of judicial foreclosure. Oral argument was held February 5, 2015, and the court affirmed validation but remanded to remove judicial foreclosure.
• FBA — Notice of appeal was filed on August 15, 2014. Amicus briefs were filed by seven interested parties, including the Green Corridor, Florida Green Finance Authority, Sierra Club, Associated Builders and Contractors of Florida, Southern Alliance for Clean Energy, PACENow, Florida Association of Counties, and Florida Municipal Electric Association. The basis was that the validation unconstitutionally provided lien priority rights to special assessments over mortgages and was an impairment of contract. Oral argument was held on May 7, 2015, and the court dismissed the case for lack of standing under Meyers.
• Robert Reynolds v. State of Fla., No. SC14-1618 (Fla. Aug. 18, 2014) — The basis of the claims was scope of authority of FDFC to assess and judicial foreclosure.Oral argument was held on May 7, 2015, and the court affirmed the final judgment, but with remand to remove judicial foreclosure.
• Gowen — The initial brief was an exact copy of the brief filed by the FBA, but filed as an individual citizen versus the banker’s association. FGFA filed a motion to dismiss, which was granted without any substantive opinion rendered.
In conclusion, all of the PACE programs were upheld, although some required elimination of the use of judicial foreclosure. No programs were required to undertake the validation process again, and a new standard was set under Meyers that party status is conferred in bond validation proceedings only for those who appear and plead in the proceedings. late October 2015, after 18 months of delay and now with the bond validation appeals resolved, PACE finally has the “greenlight” for strong growth within Florida.
Florida Program Status
Notwithstanding the federal issues and litigation, several local governments in Florida launched PACE programs (approximately 58 municipalities and counties). To clarify, there is no Florida PACE administrator because there is no state program.25 All of the PACE programs within Florida are formed “by local governments to operate for local governments” and operate pursuant to F.S. §163.01 interlocal agreements, with the exception of St. Lucie and Leon counties, which operate within their own counties. Additionally, all PACE programs in Florida are operated by a third-party administrator (either for-profit or not-for-profit). Several common themes exist:
• None of the PACE programs charge fees to join or terminate;
• Multi-jurisdictional programs “indemnify” the participating local governments pursuant to F.S. §163.01(7)(b), which states that “separate legal entities” have the common power to “incur debts, liabilities, or obligations which do not constitute the debts, liabilities, or obligations of any of the parties to the agreement”;26
• Multi-jurisdictional programs allow new “partners” to enter into the program through a fairly standard process: pass a resolution and execute an interlocal agreement; and
• All access one common “platform” including a web-based application process, information hotline, and contractor registration.
In the multi-jurisdictional programs, there are two main structures, and operation is through either 1) membership and participation in representational board per F.S. §163.01, through a fairly standard interlocal agreement; or 2) new members “subscribe” to the PACE program. Regardless of the structure, all involve a partnership of local governments on some level to levy and collect the assessments. The Florida programs include:
• The Green Corridor District PACE Program — This program in Miami-Dade County is administered by Ygrene and currently consists of voting and nonvoting members, with total membership including over 20 local governments. The Green Corridor includes both residential and nonresidential properties. Since its inception, the program has financed approximately $42 million in qualifying improvements. The majority of these improvements have been on residential property with an average residential project size of $22,975.
• RenewPACE — Formerly “Florida Green Energy Works,” now “RenewPACE,” is a statewide multijurisdictional structure. EcoCity Partners, L3C, the third-party administrator of the program, was acquired by Renew Financial in October 2015. To date, the program has focused on commercial, but it is currently launching residential, providing all financing to its 28 local government jurisdictions across eight separate counties.
• The Florida PACE Funding Agency — This program currently includes 25 local governments, including both residential and commercial PACE projects, and has partnered with a single capital provider to provide financing.
• LCEID — The LCEID decided initially to pursue commercial and multi-family PACE (units of quadplexes and greater) by utilizing a request for proposals (RFP) and selecting Ygrene as its third-party administrator. After executing an administrator agreement on September 13, 2013, the LCEID set about establishing its commercial and multi-family PACE program. The successful bond validation appeal cleared the way for the LCEID to continue developing its program.
• SELF — The Solar and Energy Loan Fund (SELF) has now been operational for five years and has expanded service into 44 jurisdictions in Florida. SELF is a nonprofit community lending organization that provides unsecured personal loans (not PACE assessments) for residential building retrofits anywhere in Florida, including energy efficiency, renewable energy, wind-hazard mitigation, and water conservation projects. To date, SELF completed more than 1,000 energy audits and closed more than 500 home improvement loans totaling $4.2 million. SELF also has been approved as a field partner with KIVA.org and is now raising loan capital worldwide through innovative peer-to-peer lending (i.e., crowdfunding). In addition, SELF helped create and secure financing for St. Lucie County’s new PACE program and has closed five commercial PACE projects to date.
Tax Collector and Property Appraiser Agreements
Agreements with the county property appraisers and tax collectors are also being executed for levy and collection of the assessments for reimbursement of administrative costs per F.S. Ch. 197. This statutory section addresses several other aspects of the uniform method of collection, including the timeline by which assessment rolls must be submitted.
Pre-existing agreements with these offices for routine non-ad valorem assessments are typically the starting point. Depending on the program and local government, these agreements may be separate agreements between the PACE provider and the property appraiser and tax collector (meaning two agreements) or a triparty agreement between the PACE provider and the constitutional offices. There is no “model” agreement because some of the property appraisers and tax collectors are seeking certain attributes in the agreements, but most have the same common provisions of indemnification and responsibility for reimbursement of fees.
The most common concern on the part of local governments raised in the PACE process is protection of participants. Concerns have also been raised regarding communications between PACE contractors and participants and disclosures about program elements. Another concern routinely raised is that regarding the level of understanding the program participant has about the lien process and ramifications for nonpayment. To address concerns over protections for the program participants, several approaches exist to create protective standards not included within the PACE statute. These include ordinances or administrative code provisions to address consumer protections;27 standardized language included in the interlocal agreements;28 language included in the levy and collection agreements;29 and requests on the part of the local government to review “consumer protection policies” of the PACE providers.Several PACE providers in other states have publicly adopted key concepts of consumer protection into their program offerings.30 While there is no silver bullet to address every concern, the PACE providers are typically open to addressing concerns raised to build successful programs.
On August 24, 2015, the White House announced its intentions to “unlock” residential PACE programs. More specifically, the announcement stated that new “guidance” would be issued soon for properties with PACE assessments to be dealt with when there is an existing mortgage through HUD’s Federal Housing Administration (FHA). A preliminary statement was issued outlining the conditions under which borrowers purchasing or refinancing properties with existing PACE assessments will be eligible to use FHA-insured financing. The crux of the guidance is that “FHA is developing [s]ingle [f]amily PACE guidance to overcome impediments in the purchase and sale of properties to which PACE loans are attached due to these concerns.” As of this time, the new forthcoming guidance has not been issued yet. It is expected not only to address the purchase and sale of property subject to a PACE assessment, but it is also expected to address key consumer protection issues.
Harvard Business Review recognized PACE as one of its top “breakthrough ideas” in 2010. With legal challenges laid to rest, guidance forthcoming, and now a positive course of performance developing, it seems as though we have a much clearer path to success for PACE in Florida. Only through a commitment to full transparency and a track record of beneficial cost-savings projects will governments, PACE providers, and participants be able to build successful partnerships through PACE programs.
1 Fla. Stat. §163.08(2)(b) (2015).
2 See Cal. Sts. & High. Code §5899 (West 2011) and 2015 Ala. Acts 494.
3 Laurie S. Goodman & Jun Zhu, PACE Loans: Does Sale Value Reflect Improvements Value Study, 21 J. of Structured Finance (Winter 2016).
4 E.g., PACE Assessment Protection Act of 2011, H.R. 2599, 112th Cong. (2011).
5 Mortgage Assets Affected by PACE Programs, 77 Fed. Reg. 3958 (proposed Jan. 26, 2012) (to be codified at 12 C.F.R. pt. 1254).
6 PACENation, http://www.pacenation.us/.
7 Fla. Stat. §163.08(5) (2015).
8 Fla. Stat. §197.3631 provides general provisions for the use of special assessments. Special assessments are defined in Fla. Stat. §197.3632 as “assessments which are not based upon millage and which can become a lien against a homestead permitted in [§]4, [art.] X of the [s]tate [c]onstitution.” Certain special assessment liens are given a priority equal to that of liens for general taxes and superior to all other liens. See, e.g., Fla. Stat. §153.05(10) (sanitary sewer assessments) and Fla. Stat. §170.09 (alternative method of making local municipal improvements).
9 Plaintiffs included the Sierra Club; Sonoma County, California; Placer County, California; the City of Palm Desert, California; the Natural Resource Defense Council, Inc.; the Town of Babylon, New York; and Leon County, Florida (Leon County filed its complaint on October 8, 2010).
10 On October 24, 2012, the Second Circuit Court of Appeals upheld the dismissal of the cases from the Southern and Eastern districts of New York. The Florida case was appealed and argued before the 11th Circuit Court of Appeals on October 30, 2012, and on November 9, 2012, the 11th Circuit upheld the dismissal from the Northern District of Florida. On August 9, 2012, the Northern District Court of California granted the plaintiffs’ motion for summary judgment with respect to their notice and comment claim under the APA finding the FHFA’s actions amounted to substantive rulemaking. A final judgment was entered in the case on October 16, 2012, dismissing all other claims. On March 19, 2013, the Ninth Circuit Court of Appeals vacated the district court’s previous order and dismissed it for lack of jurisdiction. The Ninth Circuit panel held that the FHFA’s decision to cease purchasing mortgages on PACE-encumbered properties was a lawful exercise of its statutory authority as conservator of Freddie and Fannie. The panel held that the courts do not have jurisdiction to review actions that the FHFA takes as a conservator and dismissed the case.
11 Administrative Procedure Act of 1946, 5 U.S.C. §551, et seq. (2012).
12 Mortgage assets affected by PACE programs. See note 5.
13 Enterprise Underwriting Standards, 77 Fed. Reg. 36086 (proposed Jun. 15, 2012) (to be codified at 12 C.F.R. §1254).
14 Connecticut has launched a single statewide platform focused on commercial PACE (C-PACE), run by the Clean Energy Finance and Investment Authority (CEFIA) and Connecticut Energy Efficiency Fund. C-PACE offers financing to commercial, industrial, or multifamily property owners. The statewide authority provides a platform for local governments to join and receive delivery of a common PACE program.
15 Robert Reynolds v. Leon Cnty. Energy Improvement Dist., No. SC14-710 (Fla. filed Apr. 11, 2014); Vicki Thomas et al. v. State of Fla., No. SC14-1282 (Fla. Jul. 2, 2014); Fla. Bankers Ass’n v. State of Fla., No. SC14-1603 (Fla. Aug. 15, 2014); Robert Reynolds v. State of Fla., No. SC14-1618 (Fla. Aug. 18, 2014); Gowen v. State of Fla., No. SC14-2269 (Fla. Nov. 14, 2014).
16 Leon Cnty. Energy Improvement Dist. v. State of Fla., No. 2013-CA-003396 (Fla. 2d Cir. Mar. 13, 2014); Robert Reynolds v. Leon Cnty. Energy Improvement Dist., No. 2014-APS-000230 (Fla. 1st DCA Apr. 10, 2014); Robert Reynolds v. Leon Cnty. Energy Improvement Dist., 176 So. 3d 254 (Fla. 2015).
17 Clean Energy Coastal Corridor v. State of Fla., No. 2013-CA-003457 (Fla. 2d Cir. May 27, 2014); Vicki Thomas et al. v. State of Fla., No. 2014-APS-000416 (Fla. 1st DCA Jul. 1, 2014); Thomas v. Clean Energy Coastal Corridor, 176 So. 3d 249 (Fla. 2015).
18 Fla. Dev. Fin. Corp. v. State of Fla., No. 2014-CA-000548 (Fla. 2d Cir. Jun. 16, 2014); Fla. Dev. Fin. Corp. v. State of Fla., No. 2014-APS-000526 (Fla. 1st DCA Aug. 15, 2014); Fla. Bankers Ass’n v. Fla. Dev. Fin. Corp., 176 So. 3d 1258 (Fla. 2015).
19 Fla. Green Fin. Auth. v. State of Fla. et al., No. 2014-CA-002004 (Fla. 2d Cir. Nov. 15, 2014); Gowen v. Fla. Green Fin. Auth., No. 2014-APS-000743 (Fla. 1st DCA Nov. 18, 2014); Gowen v. State, 163 So. 3d 509 (Fla. 2015).
20 Robert Reynolds v. Leon Cnty. Energy Improvement Dist., 176 So. 3d 254 (Fla. 2015); Thomas v. Clean Energy Coastal Corridor, 176 So. 3d 249 (Fla. 2015); Fla. Bankers Ass’n v. Fla. Dev. Fin. Corp., 176 So. 3d 1258 (Fla. 2015); Gowen v. State, 163 So. 3d 509 (Fla. 2015).
21 Miccosukee Tribe of Indians of Fla. v. S. Fla. Water Mgmt. Dist., 48 So. 3d 811, 817 (Fla. 2010).
22 Fla. Stat. §75.05 (establishing procedure for circuit court to issue order to show cause in bond validation proceedings); see also Fla. Stat. §75.07 (“Any property owner, taxpayer, citizen or person interested may become a party to the action.”).
23 Emphasis added.
24 Robert Reynolds v. Leon Cnty. Energy Improvement Dist., 176 So. 3d 254, 255 (Fla. 2015).
25 Fla. Stat. §20.01, et seq. (2015).
26 Emphasis added.
27 See Broward County, Ordinance 2015-44 (Oct. 27, 2015); Miami-Dade County, Ordinance 16-30 (Mar. 8, 2016).
28 See Alachua County’s Interlocal Agreement Opting into the Green Corridor PACE District and Florida Green Finance Authority, available at http://meetingdocs.alachuacounty.us/documents/bocc/agendas/2016-02-09/97f154de-8a41-4a8c-84d6-f2796c6fa981.pdf and http://meetingdocs.alachuacounty.us/documents/bocc/agendas/2015-12-08/bc7b7f2d-b4a5-4262-b033-ed1fb2065eee.pdf. See Alachua County’s Rights and Responsibilities of Property Owners and PACE Providers (Jan. 11, 2016), available at http://meetingdocs.alachuacounty.us/documents/bocc/agendas/2016-02-09/cfd64ba0-a293-45e8-9f69-8aadde687b9e.pdf. See Alachua County’s Truth in Lending Disclosures (Oct. 26, 2015), available at http://meetingdocs.alachuacounty.us/documents/bocc/agendas/2016-02-09/c1a41349-5c6e-4047-a7550d11cf50f808.pdf.
29 See Agreement Between the Pasco County Tax Collector and Florida Green Finance Authority (Feb. 22, 2016) (on file with the Florida Green Finance Authority).
30 See CaliforniaFIRST’s Quality Assurance and Consumer Protection Measures, http://www.pacenation.us/wp-content/uploads/2015/02/CalFirst_ConsumerProtect_FINAL.pdf.
Erin L. Deady is president of Erin L. Deady, P.A., in Lantana. The firm concentrates in energy, sustainability, climate, land use, environmental, and administrative law. She received her law degree from Nova Southeastern University in 2000, and has worked on program development for multiple PACE programs and on federal and state litigation involving PACE, including Gowen, cited in this article.
The author thanks Amity Barnard (Erin L. Deady, P.A.), Herb W. Thiele (county attorney of Leon County), Chad Friedman (partner at Weiss Serota Helfman Pastoriza Cole & Boniske), Doug Coward (executive director of the Solar and Energy Loan Fund), and Elizabeth Lenihan (assistant county attorney for the Martin County Attorney’s Office) for their updates and contributions to this article.
This column is submitted on behalf of the Environmental and Land Use Law Section, Carl Aldred, chair, and Susan Martin. editor.