Transcript PACE.-Legislation-Implementation-and

PACE
Legislation, Implementation
and Financing
David M. Robins
Thompson & Knight, LLP
Houston, Texas
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Challenges In Ensuring That We Have The Infrastructure To Meet
The Needs Of A Growing Economy
● Reliability of both our electrical power and water
supplies
● Negatives of traditional approach – Tax incentives
and abatements – Distortion of Free Markets
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Energy Consumption in Texas
Commercial and industrial sectors account for 63%
National
and
Residential
Buildings
22%
Industrial
32%
Commercial
Buildings
18%
Transportation
28%
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Texas vs. Nationwide
Energy Consumption By Industry
Texas
19%
Remainder of U.S.
81%
Texas’ industrial sector is a huge, untapped market
for energy saving retrofits.
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Texas’ Projected Water Demands
and Existing Supplies
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Projected Texas Population
“More than 1,000 people…move to Texas every day.” Gov. Rick Perry, 12/29/2012.
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Why Not Capitalize the Energy Savings?
• “U.S. Businesses Waste $60 Billion Annually on Energy.”
• “Scaling up energy efficiency retrofits offers a $279 billion
investment opportunity with potential for energy savings
totaling more than $1 trillion over a period of 10 years.”
If there is so much pent-up demand for energy & water
efficiency retrofits for commercial and industrial buildings,
then why is this untapped sector of the economy laying
fallow?
Answer:
The ROI for energy retrofits is too long to
justify capital expenditures using existing financing tools.
Sources: Beth Hartman, E Source Research Brief, September 2012; Report conducted by The
Brookings Institute ‘Renewing the Economy’ November 2012
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PACE Offers Solutions
Barriers
Scarce internal capital budget
No down payment and costs
spread over time w/ savings
• No investment-grade credit
rating
• Repayment security through
property assessment/tax lien
position
• Lack of collateral assets that
don’t fall under first mortgage
• Backed by property, not by
owner or equipment collateral
No access to, aversion to financing
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PACE Solutions
Uncertain holding period
PACE obligation transfers to the
new owner upon sale
Owner / tenant split incentives
Operating Expense pass-thru to
tenants
Skepticism savings/ROI will be
realized
ESCO/contractor guarantees or
third party insures performance
WHY PACE?
● Need for long term financing of energy and water
saving projects for businesses and other nongovernmental entities
● PACE Act Passed June 2013
● Next Step is local government adoption
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Initiating a Texas PACE Program
● The PACE Act requires four actions that a local
government must follow in establishing a PACE
program:
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A.
Publish a Report and Make it Available for Public
Inspections
B.
Adopt a Resolution of Intent to Create a Program
C.
Hold a Public Hearing
D.
Adopt a Resolution Establishing the Program
Initiating a Texas PACE Program
● Designate a PACE Region
►
Must be located wholly within the local government’s
jurisdiction (including a municipality’s extraterritorial
jurisdiction).
● Determine Whether to Establish or Join a Regional
PACE Program
►
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Cooperating local governments may jointly implement one
program .
Initiating a Texas PACE Program
● Determine Roles and Responsibilities of the Local
Government and Third Party Administrator
►
Third party administrators can be another governmental body,
private sector entities, or a collaboration of several entities.
● Determine how the local PACE program will be
funded
►
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Fees and/or Interest.
PACE Project Underwriting and Technical
Standards
● Eligible Properties – Existing Improvements
►
Privately owned commercial real property - including not for profit
real property such as private schools, medical facilities, churches,
etc.;
►
Privately owned industrial real property - including privately owned
agricultural real property; or
►
Privately owned residential real property with five or more dwelling
units.
● Properties that are statutorily ineligible for PACE
assessments include:
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►
Undeveloped lots or lots undergoing development at the time of
the assessment; and
►
Government owned real property.
PACE Project Underwriting and Technical
Standards
● Eligible Property Owners
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►
Legal property owner;
►
Current on mortgage and tax payments;
►
Not insolvent or bankrupt;
►
Holds a title to the property to be subject to a PACE assessment
that is not in dispute; and
►
Has consent of any preexisting mortgagee to the proposed PACE
assessment through a written contract.
PACE Project Underwriting and Technical
Standards
● PACE in a Box Checklist Adds:
►
Ad valorem taxes not delinquent in the previous three years.
►
Property owner is in good financial standing:
−
No bankruptcy in the previous 5 years
−
No outstanding final judgment.
−
Not had any property sold at foreclosure in the previous 5 years
−
Good standing with the Secretary of State of Texas
−
Good standing with the Texas Comptroller of Public Accounts
● Current credit report
● Current title report and property not subject to mechanics
liens.
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PACE Project Underwriting and Technical
Standards
● Eligible Projects
►
Permanently fixed to the real property
►
Demonstrated capacity to decrease –
− Water consumption or demand; and/or
− Energy consumption or demand; and
►
Useful life that exceeds the term of the PACE financing.
● Ineligible Improvements – Improvements that are
not permanently fixed - For example, screw-in
fluorescent light bulbs removable low-flow
showerheads and faucet aerators.
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PACE Project Underwriting and Technical
Standards
● Length of Assessment term – 22
● Useful life must be longer than the assessment
term.
● Savings to Investment Ratio
►
Projected savings must be greater than the cost of the
PACE assessment over the life of the assessment (i.e., the
SIR should be greater than one).
● PACE Assessment Cost to Assessed Building
Value Ratio
►
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PACE assessment cannot exceed twenty percent (20%) of
the assessed value of the property (Pace in a Box).
PACE Project Underwriting and Technical
Standards
● Eligible Expenses Included in PACE Assessments
►
Statutorily authorized expenses:
− Permit fees
− Inspection fees
− Lender’s fees
− Program application and administrative fees
− Project development and engineering fees
− Third party review fees, including verification fees
− Any other fees or costs that may be incurred by the property
owner incident to the installation, modification, or
improvement on a specific or pro rata basis not to exceed 20%
of the overall project cost
− Less any applicable government or utility provider rebates or
instant manufacturer discounts, or other upfront cost
reductions.
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PACE Project Underwriting and Technical
Standards
● Energy/Water Savings Calculations
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►
Baseline measurement of a property’s existing water and
energy consumption;
►
Measure the projected water and energy savings; and
►
Verify that the work is operating as intended.
PACE Third Party Lending
● Two sources for financing PACE assessments
secured by a property assessment lien
● Third-party lenders and public financing (bonds).
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PACE Third Party Lending
● Third Party Financing
►
PACE Act requires the local government to:
− Develop a model Owner Contract (399.009(a)(2);
− Develop a model Lender Contract (399.009(a)(3; and
− Adopt a plan for ensuring sufficient capital for third-party
financing (399.009.(a)(6)).
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PACE Third Party Lending
● PACE in a Box third-party financing consists of:
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►
Model agreement between the local government and
property owner regarding the qualified project and
imposition of the assessment (the Owner Contract);
►
Model Notice of Assessment Lien that will be filed in the
real property records (either as a separate document or
incorporated in the Owner Contract);
►
Model participation agreement between the local
government and third-party lender (Lender Contract); and
►
Model certificate from the local government to the thirdparty lender certifying that the financing is for a qualified
project and the assessment is authorized under the PACE
Act (either as a separate document or contained in the
Lender Contract.
PACE Third Party Lending
● Note and Credit Agreement - Interest rate, financing
terms, and repayment terms
►
Interest may be a fixed rate or a variable rate.
►
Term may not exceed the useful life of the Qualified
Improvements.
►
No balloon payments.
►
Payments may be monthly, quarterly, semiannual or annual.
►
Delinquent installments incur interest and late penalties in the
same manner as delinquent property taxes (Section 399.014(d))
►
Pre payment of PACE assessment financing may not be
prohibited.
● Construction Advances
►
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Resemble the construction loan documents used by commercial
lenders.
PACE Third Party Lending
● Participation Agreement (Lender Contract)
● Without recourse of the PACE loan by the local
government to the third-party lender.
►
The participation agreement:
− No modification without the consent of the third-party lender;
− Payments received in trust by the local government (or its
representative) and segregated from the general revenues;
− Timelines for local government (or its representative) to remit
payments to the third-party lender;
− Timelines for enforcement by foreclosure ;
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PACE Third Party Lending
● The PACE Lien
►
Notice of Assessment Lien (section 399.013) filed in the
real property:
− Exists from the date on which the notice is recorded until fully
paid;
− Same priority status as a lien for any other ad valorem tax;
− Runs with the land (the unpaid portion transfers to a new
owner upon sale);
− Is not eliminated by foreclosure of a property tax lien; and
− Does not accelerate.
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PACE Third Party Lending
● Existing Mortgage Lender Consent
►
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Existing holder of a mortgage lien must receive at least 30
days advance and must consent before the PACE loan is
made.
PACE Third Party Lending
● Ensuring Sufficient Capital From Third Party Lenders
►
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In the PACE in a Box model eligible third-party lenders include:
−
Any federally insured depository institution such as a bank, savings
bank, savings and loan association, federal or state credit union;
−
Any insurance company authorized to conduct business in one or
more states;
−
Any publicly traded entity;
−
Any private entity that:
■
Is an "Accredited Investor" as defined by the Rule 501 of Regulation D of the
Securities Act of 1933.
■
Can provide independent certification as to availability of funds.
■
The Local Government may consider requiring an entity in this category to
demonstrate the ability to fund an established minimum number of PACE
loans or an aggregate total transaction dollar minimum, such as: such as the
lesser of funding a minimum of five projects or a minimum of $ 5 million over
a three year period.
Servicing and Enforcement
● Servicing by the County Tax Assessor Collector
►
Texas has a Truth in Taxation statute that requires that tax bills
are only for taxes.
►
Tax bills are sent only once a year.
● Servicing by a Third Party Administrator or
subcontracted to a private servicer
● Servicing by the Third Party Lender
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►
Lenders and property owners would have more flexibility to
negotiate which could reduce the interest rates charged for
annual PACE payments;
►
Servicing their own loans is what lenders do, can be more
efficient or cost effective;
►
For commercial property pass through to tenants, assessment
bills should be clearly marked as an obligation to the local
government as a result of a PACE assessment on the property
Servicing and Enforcement
● Enforcement
►
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The enforcement and foreclosure of a PACE assessment
lien must be done in the name of the local government.
Foreclosure is by judicial process just as foreclosure of a
property tax lien.
Resources:
● www.KeepingPACEinTexas.org
● www.PACENow.org
● www.TexasPACEupdate.com
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