PACE Supporters Mobilizing to Get Solar Funding Back on Track

PHOTO CREDIT: ERIN MILNES / SOLAR HOME & BUSINESS JOURNAL
Only a few weeks before Fannie Mae and Freddie Mac took aim at the PACE solar financing mechanism in May, San Francisco launched its own version of the program, called GreenFinanceSF. Like many other sponsors, the city has temporarily suspended its program because of federal agencies' objections. Above, San Francisco City Hall.

By Michael Balchunas

Published July 15, 2010

Supporters of community programs that use special tax financing to help people install solar electric systems are mobilizing for a battle.

The Federal
Housing
Finance
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issues a
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affirming
its position.

More than 600 of them took part in a conference call Wednesday to learn what they can do to help overturn federal directives that caused many such programs to grind to a halt just as an unprecedented wave of residential and business solar photovoltaic installations was getting under way last spring. With consumers scooping up bargain rates for solar electricity in state after state, some property owners who want to own a system but are unable to pay cash up front have been shut out.

The federal action "has really gotten folks outraged," said Jeffrey Tannenbaum, founder of a group called PACEnow.org, during the conference call, which it organized with the Natural Resources Defense Council and the Vote Solar Initiative. "The next three weeks are the most critical."

Shortly after the conference call ended, California's attorney general, Edmund G. Brown Jr., announced that the state had filed a lawsuit against the mortgage financing enterprises known as Fannie Mae and Freddie Mac, which issued advisory letters May 5 that have put Property Assessed Clean Energy programs, as they are commonly called, in limbo.

"Let's be clear. They are trying to kill PACE. That is their intent," said Cisco DeVries, the creator of the PACE financing concept, during the telephone discussion directed at supporters.

PACE financing plans, adopted in varying forms in more than 20 states, allow property owners to buy and install solar PV systems or make other energy improvements with little or no money up front. A typical 5-kilowatt residential solar PV system may cost $25,000 or more out-of-pocket, although incentives can reduce the cost.

Tax-assessed financing allows owners to pay for the systems over periods as long as 20 years through special assessments added to property-tax bills. The approach is not for everyone; those able to wrap a solar PV purchase into a cash-out mortgage refinancing may obtain lower rates at present, but the fall in housing prices has left huge numbers of homeowners with much-reduced equity, or none at all. A cash purchase offers the cheapest long-term solar electricity price, but the initial outlay can be daunting or impossible. Leases or power-purchase agreements, some with zero-down options, have surged in popularity recently, perhaps boosted in part by the stall affecting PACE programs.

However, for some property owners, PACE financing is not only attractive, it may be their only option if they wish to own a solar electric system. One example of a PACE participant may be a retiree on a fixed income who is unable to pay cash for a solar array, but who can use tax-assessed financing to lock in an electricity price for 20 years or more, providing security against rising energy costs. Homeowners with limited up-front cash who already have a low mortgage rate and don't wish to refinance may also be among those interested in exploring tax-assessed financing for solar electricity.

A key rationale behind tax-assessed financing is that the saving on electricity bills creates free cash flow that can be used to cover the owner's higher taxes. Whatever way a solar PV system is acquired, the long-term predictability of a properly sited array's electricity output makes it an investment with a value that can be calculated with an unusually high degree of confidence.

One common feature of tax-assessed financing has been that the solar array and the special tax assessment stay with the property if the owner should move. Solar modules are typically warranted for 20 to 30 years of power production, and may last even longer.

PACE programs are usually sponsored and overseen by local or regional governments such as cities or counties. Special tax assessments have long been a common way to finance community improvement projects, and provide the legal framework under which many of the programs have operated.

Like some other special tax assessments, PACE projects in some jurisdictions have been given senior lien status in the event of a mortgage default on a property. This position of superiority to a mortgage, with its assurance of repayment, has helped PACE program organizers obtain funding, allowing them to provide consumers financing at interest rates competitive with or better than home equity loans or lines of credit. In today's real estate lending market, large numbers of homeowners whose property values have dropped have been unable to qualify for equity financing.

Many PACE programs have not required credit checks, but organizers have not reported high rates of tax delinquency – the largest PACE program has experienced a lower-than-average rate of overdue payments – and the mortgage enterprises have not cited data to indicate that PACE users are at higher risk of mortgage defaults.

After expressing concerns about tax-assessed energy improvements over a period of months, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., the formal names for Fannie Mae and Freddie Mac, said in their May letters to lenders that these energy liens could not be made superior to mortgage debt for mortgages that they would accept.

Because the two government-sponsored enterprises between them own about 56 percent of U.S. home mortgages, meaning many participating homeowners with mortgages could be affected, the letters brought PACE programs across the country to a standstill. Mortgage officials have suggested in their communications that they interpret the financial disbursements to participants as loans, not as traditional special tax assessments.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, issued a longer, more detailed directive July 6 on PACE financing, citing a number of objections in addition to the senior lien status. Among other things, it expressed concerns about loan-to-value ratios and about consumer lending protections.

The federal Office of the Comptroller of the Currency also weighed in July 6 with similar concerns in a bulletin to banks. "The OCC supports commercial and residential energy lending when such lending programs observe existing lien preference, ensure prudent underwriting, and comply with appropriate consumer protections," the bulletin said. "Programs that fail to comply with these expectations pose significant regulatory and safety and soundness concerns."

Mr. DeVries, who had helped San Francisco Mayor Gavin Newsom launch that city's tax-assessed energy program a few weeks before Fannie Mae and Freddie Mac took aim at the financing mechanism in their May 5 letters, said in the telephone conference that the federal officials' concerns are unfounded.

"Over the last few months these regulators have raised a number of concerns. Every one of those issues was raised, and in every one of those cases the issue was resolved," he said.

San Francisco, like many other sponsors, has suspended its tax-assessed financing program, called GreenFinanceSF.

"The City and County of San Francisco deeply regrets this development and has joined with other local governments to urge Fannie Mae, Freddie Mac and FHFA to reconsider their position and allow local governments to bring the benefits of energy conservation and job creation to communities across the country," the program's website advises residents interested in participating.

Although Mr. DeVries developed the concept of PACE financing while working as an aide to the mayor of Berkeley, Calif., the first city to actually begin authorizing tax-assessed financing for energy projects was Palm Desert, Calif., in August 2008.

MAP CREDIT: SOLAR HOME & BUSINESS JOURNAL

Berkeley formally began its special energy assessments about a month after Palm Desert's Energy Independence Program got under way. The plan was slow to gain adherents in Berkeley, but in Palm Desert, a golf-resort community packed with retirees, it took off. Palm Desert, with about half the population of Berkeley, had almost 10 times as many participants in the first year of operation.

Palm Desert, too, has suspended its residential program because of the mortgage issue.

"In an effort to protect our participants, the Palm Desert Energy Independence Program is temporarily suspending the processing of all residential applications and will not be accepting new residential applications or signing new contracts pending direction from the City Council. Businesses are still eligible to apply," the city's website advises prospective applicants. "We remain hopeful and will continue our endeavors toward a positive resolution that will allow the EIP to again offer financing to all segments of the community."

PACE supporters have been joined by members of Congress in urging Fannie Mae, Freddie Mac and the Federal Housing Finance Agency to loosen the strictures that have choked off PACE financing. Most of the political support in Washington has come from Democrats so far. Mr. Tannenbaum told PACE program organizers and other supporters in the telephone conference that the real issue is, "The federal government has infringed on states' rights" by denying them the opportunity to use local tax assessments for energy projects. He urged supporters to pay heed to Republicans' concerns, because "we need Republican leadership" to help overcome the federal blockage.

Although on a national basis Democrats have been more closely associated with the promotion of solar energy, in California, the leading solar state, this form of electricity generation has been at least as popular among Republican property owners and officials, if not more so. Palm Desert and Berkeley are poles apart in a political sense. San Diego, a city with a significant population of military families and retirees that is led by a Republican mayor, Jerry Sanders, has more rooftop solar PV installations than either Los Angeles or San Francisco. Solar electricity also has been popular throughout the politically conservative farmlands of Central California, while some politically liberal coastal cities have lagged in adopting it.

Republican Gov. Arnold Schwarzenegger has been the most prominent single supporter of solar adoption in California, crisscrossing the state himself or sending other administration officials out to commemorate major solar installations and announcements of new factories and other projects. Lancaster Mayor R. Rex Parris, a staunchly conservative Republican, has been positioning his Mojave Desert city of about 150,000 people to become a solar powerhouse and a world model for cleaner energy production, while solar development has largely been stymied thus far 75 miles away in sprawling Los Angeles, which relies on out-of-state coal power plants for the largest proportion of its electrical generation.

Not all PACE programs have shut down.

The Sonoma County, Calif., Board of Supervisors voted Tuesday to keep open its Sonoma County Energy Independence Program, the single most successful such effort in the nation, with more than 1,000 projects undertaken.

"It is really shortsighted of one federal agency to not understand the benefits of PACE programs, especially the SCEIP," board Chairwoman Valerie Brown said in a news release. "Our program reflects investment in clean energy, local job creation and fiscal prudence. We know hampering consumers' use of these voluntary assessments is a bad call. Our board's action will ensure people are fully informed of the options, risks and opportunities that exist when they work with SCEIP."

While PACE organizers on the conference call were urging supporters to pursue both political and public-opinion support, staff members for Mr. Brown, the California attorney general, were filing a lawsuit electronically with the U.S. District Court for Northern California.

"Fannie Mae and Freddie Mac received enormous federal bailouts" as a result of the housing crisis, Mr. Brown said, "but now they're throwing up impermeable barriers to bank lending that creates jobs, stimulates the economy and boosts clean energy."

A news release issued by Mr. Brown's staff noted that San Diego has suspended its planned PACE program, leaving trained installers jobless.

San Diego's mayor, Mr. Sanders, said in the release issued by the attorney general, "I believe that the PACE program is critical to stimulating our local and statewide economy. I'm glad to see this lawsuit filed so that this novel program can continue."

Mr. Brown also wrote to President Obama on Wednesday, requesting his intercession.

He said in the letter that Fannie Mae, Freddie Mac and the FHFA "have been deaf to the repeated entreaties of dozens of cities and states" as well as the U.S. Department of Energy, and "in one fell swoop these entities have issued a death knell to PACE, thrown people out of work, and frozen tens of millions in private capital that can help speed our economic recovery."

"Earlier today I reluctantly filed a lawsuit against these federal entities, but it would be much better to solve this problem without litigation," the letter said, adding, "We need to solve this problem."