This page’s content comes from PACENation’s Program Implementation Guide: “How to Start a PACE Program.” For even more information, click the see the full Implementation Guide.
“It’s not rocket science, just hard work.” David Rogers. Frost, Brown, Todd Attorneys LLC
It all starts with the analysis of the existing body of state law – lawyers would want to know whether local governments, in a given state, have the ability to undertake public improvements that benefit private property owners and collect the charges through an assessment mechanism. This ability is termed an existing authority. The majority of states have an existing authority to create parks, improve street lighting, build new sewage plants, etc. Then, the issue becomes expanding this existing authority to include energy efficiency, renewable energy and, in some cases, water conservation projects that have a valid public purpose. A PACE bill essentially becomes an amendment to the existing code, expanding the local government’s authority, by:
- amending the type of improvements that can be financed for a public benefit (adding energy efficiency, renewable energy, water conservation to the well-known options like parks, street lighting, water filtration plants, etc.)
- allowing private properties to be voluntarily assessed (typically property taxes and assessments are mandatory, so there is a need to create a voluntary opt-in mechanism for private property owners)
It is generally preferred to build a PACE law upon the existing code that has an interpreted set of rules guarding the lien priority of a property tax assessment. However, in some states, PACE laws ended up creating a new section of a statutory code. In these stand-alone cases, it is important to explicitly define the lien priority as senior and describe the annual/bi-annual collection mechanism.
While the legislative process differs across states, there are common elements emerging across the country:
A PACE Champion: A champion can be an organization, a private company or a group of individuals (e.g. Arkansas Advanced Energy Association, Utah Clean Energy Coalition, Keeping PACE in Texas, Renew Financial). A champion typically amasses political support at the state legislature and engages in lobbying, if necessary. Additionally, a champion helps determine a PACE model for the state: whether there is support and infrastructure to put a state-wide model in place or whether there is interest for locally driven city or county-led programs. All successful legislative efforts had a very clear champion.
Coalition Building: it is never too early to start thinking about state legislation and begin building the support group consisting of energy service contractors, lawyers, bankers, members of the legislature, local government staff, and other state-specific entities. For instance, in Texas a coalition in support of PACE was comprised of the Sierra Club, Dixie Chemical Company, Inc., Texas Association of Businesses, and many other businesses and environmental community advocates. This diversity ensured that the PACE bill in Texas passed both the House and the Senate unanimously and was signed by Republican Governor Rick Perry.
Effective statutes have:
- Clearly defined lien priority – PACE assessment or charge should be senior to mortgages and, ideally, have the same lien status as other taxes and assessments. Additionally, PACE assessments should be collected in the same manner as property taxes and cannot be accelerated or extinguished until fully repaid.
- Broadly defined project financing options to allow many sources of capital (grants, municipal bonds, public or private capital).
- Broadly defined types of improvements – energy efficiency, renewable energy, and water conservation – without limiting to any particular technology in order to allow local governments to expand the selection in line with new technological discoveries and market trends.
- Open and flexible administrative structures to allow for multiple cities and counties to join in together to form energy improvement districts to achieve standardization and scale.
PACENation developed a legislative protocol that offers a more detailed description of the multiple parameters that can be part of a PACE legislation.Legislative Protocol
PACE is still a relatively new concept and it is not unexpected for the mortgage lender community (e.g. Associations of Bankers and Realtors and Mortgage Bankers Associations) to voice an initial opposition to PACE. The banks want to know how PACE is going to affect their mortgages. Once the mortgage lender community is educated about the PACE mechanism, they tend to realize that PACE funded improvements, in fact, add value to their property and help de-risk the portfolio. In Connecticut, Utah, Texas, and Virginia, the mortgage bankers’ associations were brought on board early-on and ended up acquiescing to or out-right supporting the PACE bills with an explicit lender consent provision. Across the country, lender consent requirement is considered a best practice for commercial PACE. In fact, over a 200 different institutions have consented to PACE across the nation.
Learn How Utah Navigated Its Legislative Process
Meeting regularly with the Utah Bankers Association, Zions Bank Public Finance, and individual lenders to understand and address their previous concerns. We kept bankers and lenders involved throughout the process to make sure their interests were representedKevin Emerson, Utah Clean Energy Coalition
Learn from Virginia's experience
The only known opposition in the beginning was the Virginia Bankers Association. We were able to overcome their opposition by working with them to write legislation. The VBA took a neutral position on the legislation which was the best we were going to getBill Greenleaf, Virginia Community Capital, Inc.
In some states, public utilities may oppose PACE and it is imperative to engage with utilities early-on and address their potential concerns about alternative energy production. The key to gaining support or acquiescence from the public utilities is to communicate that PACE financing is not in competition with their business. In Louisiana, as a result of negotiations with public utilities, PACE-funded renewable-energy improvements are not eligible under the PACE statute, as the Louisiana Public Service Commission, a state regulator, deemed PACE-funded solar to be in competition with public utilities. Arguably, this position handicaps Louisiana’s application of PACE. On the other hand, in CA, the Public Utilities Commission has been a vocal supporter of PACE. In fact, the president of the Commission, wrote that PACE is “an innovative local government tool that eliminates the upfront cost associated with energy efficiency, renewables and water conservation retrofits.”
Moreover, in CT, public utilities are working closely with the Green Bank and state of CT on clean energy initiatives, funded through a charge on customer bills. C-PACE, operated by the Green Bank, is one of the initiatives supported by the public utilities. Overall, while each state is different, most public utilities have to balance rising consumer demand with government mandated control for carbon output. PACE financing can be a zero-cost option to meet the utilities’ needs.
Each state has different interest groups that may oppose PACE legislation; these interests may range from well-developed groups, such as the Kentucky Coal Association or the California Association of Realtors, to amorphous groups opposing PACE for purely ideological reasons.
Coal industry has an important presence in the state of KY, which is the third largest coal producer in the US. PACE advocates engaged with the coal interests in the state early in the legislative process. It was important to avoid the perception that the PACE effort was a critique of the coal industry’s raison d’etre, but rather present it as a parallel effort. To that effect, the name PACE (Property Assessed Clean Energy) was changed to EPAD (Energy Project Assessment District) to avoid unnecessary semantic debates. To date, several communities in the state of KY have created energy districts and funded projects.
PACE is inherently a local mechanism as it hinges on a municipality adopting the necessary local ordinances and resolutions to enable a PACE transaction. These local laws ultimately stem from a state-enabled PACE law and are intended to interpret the criteria established in the state law.
In terms of timing that it may take to put a local law in place, PACE programs have reported a wide range, anywhere between two weeks to six months, depending on the municipal structure, political culture and, at times, administrative scheduling. Having an existing relationship with a jurisdiction or having a potential PACE project may speed up the process. Typically, a PACE champion would reach out to an economic development director or a city manager. Subsequently, an issue to adopt PACE is added to the City Council (or the Common Council’s) agenda. In some instances, the issue may be first delegated at the sub-committee level and only then be sent to the full City Council hearing. This process may vary from a municipality to municipality.
The following best practices for local laws were identified by the PACE market leaders:
A local law should make it clear what sources of financing can participate in a program (private, public, foundation, etc.) and what administrative models can be explored (e.g. outsourced administrative functions, government administrator, a combination).
It is a best practice to set up programs that are easily replicable across the state. A larger market will attract investors, make it more cost-effective for customers, and obviate the need for local governments to re-create administrative and legal framework from municipality to municipality. A local ordinance is a set of rules, therefore it is important to have a standard set of rules across the state in order to avoid unnecessary barriers to entry. Joint Powers Authorities in CA, Port Authorities in MN and OH and Green Bank in CT are some examples of programs that successfully created scalable markets. There are exceptions to this rule, large metropolitan areas like Los Angeles and San Francisco have pioneered their own programs.
Local ordinances and resolutions should not be too prescriptive in order to allow program administrators to change program rules when necessary, without having to amend a local law. While it is necessary to interpret the state PACE statute, it is important to avoid restrictive criteria (e.g. setting the loan-to-value ratio at 10 %), especially if an ordinance is covering a geographically varied landscape with diverse property types. Additionally, it is a best practice to allow for a third party administrator option as well as a government-administered program. Keeping the ordinance open allows the local government flexibility to adjust to changing market conditions.
Unless a state law requires for the creation of a special district, it is a best practice to take advantage of an existing taxing district (these can also be termed energy districts, assessment districts, or improvement districts depending on a state). Programs, leaning on the existing geographic boundaries and set of rules, tend to be more cost-effective. Creating a new district means establishing a new set of rules, an administrative structure, recruiting a board, and developing an oversight function – all these actions require resources and legal expertise. It is recommended to engage local government departments during ordinance drafting in order to create processes that are accepted by a local finance department, planning department, law department, public works departments, and by local property assessors and collectors. Above all, PACE is a public-private partnership!
Things to consider while writing a local law:
- PACE and third party ownership structures. PACE can unlock the small to medium scale (~200kW) commercial solar market by combining the security and collection mechanic of PACE with traditional Power Purchase Agreements (PPAs). Thus far, several states have put PACE PPAs into practice and empower small business and non-profits to go solar without making a prohibitive upfront investment. Please refer to our PACETalk with CT’s Green Bank and Demeter Power’s website to learn more about PACE PPA and PACE Lease.
- It is not too early to think about securitization. The PACE market is growing and it’s important that the local laws do not hinder future securitization. We strongly recommend that draft local law be reviewed by a law firm with special expertise in your state’s municipal laws to ensure that what is intended can be achieved.
“Fayetteville is committed to an energy future that is cleaner, more efficient, and more reliable. The A2E2-PACE energy financing program is an opportunity for Fayetteville property owners to save energy costs and make their buildings and homes more valuable. A2E2-PACE is creating green jobs that will help build Fayetteville’s future.”Lioneld Jordan, Mayor of Fayetteville, AR.
“I view the Texas PACE as a win-win for our business community and our environment. This bipartisan program will help reduce the costs of doing business and conserve limited Texas energy and water resources.”Bruce Elfant, Travis County Tax Assessor-Collector, Texas.
“The County created a PACE program for both residential and non-residential buildings because we saw the potential for changing the energy/water efficiency marketplace through provision of a powerful financing product. The County has been involved in other energy financing programs through its work with investor-owned utilities and the CA Public Utilities Commission. While financing products developed under this have launched – they have seen limited success. PACE meets a market need re energy financing: it lets owners have a choice in their upgrade, it is easy to use, and it has additional benefits that go beyond traditional financing. The County is now seeing in its residential PACE program since our launch in June of 2015, the kinds of results we hoped we’d see when we planned a launch more than 5 years ago but delayed due to FHFA concerns. Nearly 15,000 projects have been approved in LA County in less than 9 months.”Howard Choy, General Manager, Office of Sustainability, Los Angeles County.
“Our county legislation was attracted to the notion of advancing energy efficiency and renewable energy projects. PACE is a local tool that helps businesses save money.”David Church, Commissioner of Planning, Orange County, New York
“Placer County in California adopted mPOWER, a Property Assessed Clean Energy (PACE) program, to help residential and non-residential property owners lower their energy costs, improve their property value, reduce their impact on the environment, and stimulate the local economy through job creation. We believe that investment in the local economy is a critical step to creating economic resiliency. mPOWER has helped California property owners reduce reliance on foreign fuels and reduce greenhouse gas emissions. Placer County chose to administer its own program to assist its property owners in taking advantage of all available benefits PACE has to offer. mPOWER benefits include terms up to 20 years, 6% fixed interest, low fees, renewable energy credit aggregation for local use, local investment and contractor employment. Through County administration, mPOWER ensures the Placer County Board of Supervisors, property owners, and the public of the highest achievable levels of consumer protection.”Kimberly Hawley, Chief Deputy Treasurer, Placer County, CA
Beth N. Smayda, City of White Plains Common Council, on Why She Advocated for PACE?
The City of White Plains, NY is located in Westchester County, an affluent suburban community adjacent to New York City, and has a population of over 50,000 people. The City has a vibrant commercial real estate base consisting of retail, office buildings, corporations and multifamily. White Plain mayor, Thomas Roach, and the Common Council viewed PACE as a tool to help buildings become more energy efficient and, ultimately, use less energy. His administration and the Council have been very supportive of environmentally friendly initiatives, including bringing the first dedicated bike lanes to Westchester, bringing Zipcars to White Plains, and installing electric vehicle charging stations. Besides being an environmental initiative, PACE was viewed as a draw for businesses to stay or to relocate to White Plains and a way to create more jobs in the growing area of sustainable technology.
On the local level, there was strong political support coming from the Mayor’s office and trickling down to the finance department, legal department and the assessors’ department. The city’s Common Council explored the scenarios of potential delinquencies and defaults and was convinced that the city would not bear much if any risk from authorizing a PACE program. The city was coming out the recession and wanted to avoid over-burdening the city staff with administrative duties for the new program. The Energy Improvement Corporation or EnergizeNY is the sole provider of PACE financing in the State of New York and provided the City with technical assistance throughout the process and is a third-party administrator, qualifying loans for approval and undertaking the financings. As a result, the City, specifically assessors, collectors and the finance department, function as “loan servicers” by recording, collecting and remitting PACE assessment payments.
“Travis County is a forward thinking urban county with a highly active real estate market. Our carefully vetted PACE Program allows free market choices to the real estate professionals, allowing them to be more creative and structure contracts with a better return on investment that is more sensitive to the environment, a win/win.”County Commissioner, Gerald Daugherty
“We were coming out of a recession and budget cuts, so we didn’t want to unduly burden the city staff. Working with the Energy Improvement Corporation as a PACE administrator made it possible for us to ensure that local businesses and other building owners could take advantage of this form of financing to enable their undertaking energy efficiency improvements.”Beth Smayda, White Plains Common Council