EECBG PACE Legal Issues Webinar (Text Version)
Below is a text version of the December 15, 2009 PACE Legal Issues Webinar.
Announcer: Merrian Fuller:
Next Slide: Speakers
Merrian Fuller:
This is Merrian Fuller from Lawrence Berkeley Lab; I'll be moderating this session. We have a great line up of speakers today to talk to you about PACE legal issues. Brandon Belford from the Department of Energy, Sam Gill from Modrall Sperling, Lawrence Hoyt from Boulder County, Kathy Larocque from Sonoma County, Chris Lynch from Jones Hall. We're going to be having a somewhat informal discussion today, in that there will be a lot of back and forth between our different representatives who come from different states, and have experiences on the ground that they're going to be willing to and able to share with you today. So, hopefully help other cities, counties and states get started on PACE programs.
Next Slide: Webinar Outline/ What we will not cover
Merrian Fuller:
So our general outline for today, we're going to go over what we won't cover, we realize that are some legal issues that are very important and pressing right now and we do have a plan for how to address those and we'll talk about that briefly. Then we'll go over the basics of property assess clean energy, just kind of the introduction, most people on the phone have already gotten that, but just a quick review and then we're get into the meat of the program, some of the key issues, including defining what public purpose is in context, seniority issues around PACE liens, consumer lending laws, and risk to local governments, and then we'll go over pretty briefly that PACE policy framework update which is a document that the White House used a few weeks ago along with the retrofit; recovery through retrofit plan that was posted. So, we'll give you links to all sorts of resources at the end as well, and feel free to ask questions using the Q&A box at the bottom right hand of your screen, you can type in questions I'll be reviewing those and trying to verbally answer questions of our speakers as it fits into the discussion.
So, thank you very much everyone for being here today, we're going to quickly have Brandon talk about what we will not cover today. Brandon?
Brandon Belford:
Thank You Merrian, and Good Afternoon Everyone, and good morning for those on the west coast. Real quickly just obviously NEAP and Davis Beacon are pretty large topic right now and concerns of many folks out there looking at implementing various financing program. This could not cover the details around that, I know for NEPA a lot of our grantee's we've obviously been trying to work with all of you through our field offices to get guidance and a more instructions on ways to navigate that process in terms of reviewing specific plans within the SEP and block grant programs is obviously the August 21st guidance and also the additional follow up template that we send to folks on various way to expedite that process if you have any questions if you are guaranteed feel free to reach out to your project officer at the respective field offices or you can call myself afterwards on NEPA related question. As for Davis Beacon Obviously another big issue out there was recent opinion or guidance from the department of labor on how Davis Bacon will be applied for a residential home rebate program we are currently in the process of working with both the department of energy general counsel as well as the department of labor because they are ultimately the ones that make those who make those opinions and guidance on expanding that basically that exemption for residential energy retrofit programs we hope to have some update on that for you all on the next week or we will continue to work through addressing and providing more clarity on one in where Davis Beacon requirements will apply toward recovery act funding projects.
Next Slide: Property-Assessed Clean Energy
Merrian Fuller:
Thanks Brendon so really quick what is property access clean energy? These are the basics the local government creates a financing district and an approval process for the types of improvements that will be allowed. They provide the upfront capital for project and they attach the re-payment obligation to the building itself. The home owner or building owner identifies the work that they want to be done within the guidelines set by the local government they repay financing as a line item on their property tax bill and the repayment obligations transfer with ownership, it's a fairly simple process.
Next Slide: States that have Passed PACE Legislation
Merrian Fuller:
One thing that we do know about PACE is that most places let state level legislation and local level legislation is required. This is a slide from our presentation last week by Sheridan Parker at Wilson Sonsini it has the states that have passed state legislation. I like to refer you to her power points which have more details about some states that may not need legislation. There is just a few but in general you are going to need state level legislation that gives the local jurisdictions the ability to collect assessments for this purpose. We're not going to dwell on this too much today but I just wanted to mention it because it is a big legal issues.
We're going to go straight into four key issues identified. The first one which Larry Hoyt from Boulder County is going to talk about is about defining the public purpose. I'm just going to turn it over to Larry he'll give an introduction to the topic and then the rest of our speakers can and their two cents if they have something additional to say on this issue. Thanks Larry.
Next Slide: Defining "Public Purpose"
Lawrence Hoyt:
Thanks Merrian of course there's a local government attorney were always concerned with the issue related to the public purpose since for many of us our state constitution that a minimum require that we expend the tax payer funds for public purposes and not to benefit individuals private persons. And so that's a concern when one comes up with this kind of program where you are actually providing for the financing of improvements to be installed on private properties. The way that we've analyzed this and the way that ______came at this with a very strong public purpose statement in the enactment on our special assessments district statue is to determine that first off the expenditure energy is a problem for this country that there is relative sacristy in certain kinds of energy there's also those global warming climate change kinds of things that result from the expenditure or the use of access energy. We also have national security problems that relate to the expenditure of energy in this country. And the other part of that equation is that through our life time 99% of the building stock that is going to be necessary to be heated and cooled already exists. It building stock that has been built over the past 200 years or 200 plus years, and often times built in era when the installation technology or the energy production technology was not what it is today and so there is a lot of inadequate building stock in the country. So we start from that point and then we go from that point of find that for a number of years I believe at least ten years in the federal internal revenue code the energy efficiency and renewable energy improvements has been an area that is a subject for financing via private activity bonds under the internal revenue codes. So we saw that and determined that we probably could use that to do some of the financing the we are proposing to do via the tax exempt projectivity bond provision and that as well defines a public purpose there as found by the federal government.
Finally we took that language from the federal internal revenue code added to our special assessment district statute and made that one of the recognized public purposes for which we could issue bonds financing as well as provide for payment of or financing of those improvements to private property. So that kind of the global look at the public purpose, As I said our statue is fairly robust in its finding in that regard and it's not that unusual for government to be involved in the financing of private improvements it's done frequently with respects to economic development initiative there lots of mechanisms used on the theory that if you do a public private partnership that you will provide for greater private employment, private development, but also public tax proceeds in the future. So often times there are sales tax rebates or property tax rebates that are paid back to the developers in connection with doing a private development as well as the use of condenation for economic development and urban renewal purposes that was affirmed in the in Kilo Case in the Supreme Court a few years ago. So there are a lot; the definition public purpose is fairly broad and can readily determine in connection with the kind of problems we see in connection with energy usage in this company.
Merrian Fuller:
Thank You, and this is question for Larry or for anyone on; the third question of what are the limits on the included improvements, how far can you go, related to energy savings or renewable energy generation? A few examples here where you know to upgrade the electrical board to accommodate solar or to trim tree's or etc., like how have you in your local program kind of defined the limits on what counts as a public purpose?
Lawrence Hoyt:
We have included in Boulder County, we included a specific list of improvements that will finance and those thing that you've included there are included as long as, for instance, if you're going to put in Solar PV then the accommodating measures necessary to do that and to have; to connect that and have the metering for it, the PV and in connection with the connection to the grid, those things have to be in place, so we include all these accessories if you will to the solar PV as part of the financing.
Merrian Fuller:
And Kathy, How do you approach this in Sonoma?
Kathy Larocque:
Basically the same way, we would certainly include the upgraded electric board, when someone came to us with their $2000 tree trimming, we said no, we don't think so, and I think you have to trim your own trees. So, a lot of; its case by case sometimes, you have to look at something that is odd that people have asked to include, we also have a long list of included improvements but then for example someone asks for attic insulation that's fine, but it turns out that their house was built in the last century and they have this really funky electric wiring that is basically live wiring going to their attic and they can't insulate it until they replace all of their wiring. Is that an energy upgrade? Sometimes you come up with these case by case items.
Merrian Fuller:
Ok, any other further comments for Chris or Sam?
Chris Lynch:
Yes, this is Chris, I guess I would also point out that your definition of public purpose maybe broader than the type of things that you can ultimately concluded you can finance because typically we'll want the useful life of what's being finance to have the same term as the life of the financing. So, you know when you start talking tree trimming or sod or things like that you may start running into question about whether that's appropriate to be financed.
Lawrence Hoyt:
We did run into that with connections with their program in Boulder County, we had to do a determination that the average useful life of the improvements we were financing would in fact survive beyond the financing; the financing we've done thus far has been 15 year financing.
Merrian Fuller:
That's Important, and Sam any final thoughts from New Mexico.
Sam Gill:
Well I think Chris's point is a good one, you know definitely the public purpose can be quite broad and you know conscrewed in a number of ways, and I think generally its always safe to look back at the enabling legislation and determine exactly the types of renewable energy improvements and energy efficiency improvements to the extent of our; in New Mexico we you know our enabling legislation actually is limited to only to sort of will take solar, solar terminal, GEO Thermal, and wind energy systems so we do not have energy efficiency measures at this point and time.
Merrian Fuller:
Ok, interesting.
Lawrence Hoyt:
In Colorado, we have the statue defines both energy efficiency improvements as well as renewable energy improvements and then each of those includes a list under the rubric of included but not limited to.
Merrian Fuller:
Great, Well lets go on to our next topic issues to Chris Lynch is going to talk about this; the seniority of PACE liens and some of the issues that have been brought up around that. So I'm going to turn it over to Chris to kind of give us an introduction to this topic.
Next Slide: Seniority of PACE Liens
Chris Lynch:
Sure, Thanks Merrian; the first question was "Are PACE liens entitled to senior liens statues afforded other tax liens? And the place we want to start when you're looking at this issue is what does the state law say the state PACE enabling legislation. In California, and I should say I'm a California bond attorney so my discussion will be inevitably be limited to some extent to California and federal law although most of; I think most of the issues will apply outside California as well.
The California enabling legislation do a very good clear job of declaring the public purpose of using the PACE assessment to finance privately owned improvements, and these are assessment liens for they have senior statues according to the legislation, which means in California that the liens are on a _____ _____ and special taxes and their seniored all private liens including pre-existing private liens. The power of states and political subdivisions to levy taxes and assessments, to achieve public purpose have been upheld in both state and federal court for well over 100 years, and similarly the ability to let levy taxes and assessments that are secured by a senior lien even over pre-existing private liens has been upheld in both state and federal courts. The case law seems to focus on the fact that if you have a good strong valued public purpose, that that is appropriate for the taxes and the assessments to have a senior lien because that is necessary for the common good and to accomplish the functions of government, and I'll talk about that more in a second.
To conclude than that a PACE assessment or tax lien is not entitled to be senior, you have to conclude that PACE programs don't have a public purpose that goes back to the points we were just talking about earlier. In California the courts have said that public purpose maybe broadly defined by legislative bodies and the courts will defer the legislative bodies in their declaration of public purpose. Ok so assuming we senior lean what steps are needed to be taken to establish a case lean and again that should be a function of state law in California we have three basic steps. First you have to form a district or program and that requires the declaration of intent of the legislative body, a public hearing, and then a final resolution after that public hearing declaring the formation of the district through the program. Thereafter to the extent a particular property will be subject to the case lean you have to have the consent of the property in California whether as a result of a vote or as a result of the execution of a contract. And then finally since you have formed your program or your district and you have the consent of the property in order to participate and be subject to the tax or assessment lien you need to record some kind of document in the real property records to provide constructive notice to lenders and future property owners. In California those that notice that assessments and those that document that attempts to be _________over the head with the fact________tax assessment by requiring you know 14 point language in bold letters and require; it looks like it requires itself to be attached to the, that notice as well. So those are the steps needed to be taken to establish a lien.
Do pre-existing lenders have constitutional due process rights? I think it's a real interesting issue. But if you view pace taxes and assessments as being just another tax or assessment being levied to accomplish public purpose then California and federal courts and I would imagine other state courts as well have upheld later in time senior tax and assessment leans in the face of both procedural and subjective due process rights and challenges. In other wards when lenders complained about the fact that their now suborning to a tax or assessment lien levied be a governmental agency the courts have upheld the right of the governmental agency to do that. And the underling theory seems to be that that assessment or the taxes either are necessary to accomplish the public purposes for which their being leveyed or that they actually increase the value of the assessed property and that's true primarily in the assessment context. And the argument ought to be really easy to make in the PACE context where unlike other taxes and assessments where you're talking about undergrounding utilities or you know doing roads and curbs and gutters we're actually going to have a positive cash flow impact on properties as a result of the creation of the PACE assessment lien. So if you have; if you know you have a senior lien status you've created that senior lien and you know you're not creating a problem with existing lenders from a constitutional stand point, is lender consent or lender notice never the less required? And I think that's one of the more challenging issues to these programs so far how local agencies should deal with that issue. Whether notice or consent is required is really a function of state law and existing contracts. Unless lender consent or notice is required by state law and it not in California, then you have to ask what the existing mortgage property provides. And does creation of the senior PACE lien create the opportunity for the lender to exercise remedies. And from the local agency prospective obviously we don't want to put our citizens in the position of participating in our great new program to reduce greenhouse gas _______ but cause them to default in the mortgages. So in California the answer again is no; that no notice is or consent is required. And that is consistent with the treatment of other special taxes and assessments in California law. So we're again treating PACE liens and assessments just the way we treat other taxes and assessments under California law. That isn't required by contract for no residential loans many if not most non-residential mortgages have _________provision where it says that the loan can be accelerated if a senior lien is placed on the property. So creation of voluntary contractual lien may trigger loan acceleration unless lender consent is obtained. So on the programs I'm working on and I'll talk about this a little bit more in a second we are requiring consent of lenders. For residential loans there are no_________ provisions however if you look at the stander Fannie Mae and Freddie Mac trust the lender may have certain rights of the senior lien is created either one, the right to prepay the PACE assessment and add to the mortgage balance or two, the right to the borrower to prepay the PACE assessment. And I think the language that's most relevant in that document is; it says the borrower shall Promptly discharge any lien which has priority over this security instrument unless the borrower and there is a number of opportunities of options, one might be that the borrower might challenge the creation of the lien, the secondly and most relevant in this circumstance, the borrower agrees in writing to the payment of the obligation secured by the lean in mannered subsided lender.
So, how does existing programs address this issue? Kathy Larocque can talk about how Sonoma is handling this issue. But on the program that I'm working on we're doing the following: First: for non-residential loans we're requiring lender consent. And we think that may be appropriate because in the commercial context you may be more likely to be able to contact a live lender representative who understands the situation and will be open to the discussion of the costs and benefits of the PACE financing. For residential loans we're requiring property owners to give notice to lenders. Practices indicated in some of the local jurisdictions I'm working in that lenders are likely to respond to a notice with or request for acknowledgement that they won't exercise remedies either with silence or a request subordinate the PACE lien. And in California subordinate PACE liens isn't an option the statues provide their seniors and a matter of law. So we're proposing that property owners use a form letter that complies with the language in the Fannie Mae, Freddie mac mortgage document that inhabit describe the financed improvements and the anticipated cash flow benefits. Declare the property owners agreement to pay the PACE assessments when due, ask for the lender written acknowledgement within thirty days that will not exercise remedies as a result of the creation PACE assessment. And declare that the lender will be deemed of consented of the PACE lien after thirty days is the lender doesn't protest in writing. And that approach is consistent with the language of the mortgage document which require the borrower to agree in writing to pay both a new senior lien and the subordinate lien, but doesn't require the lender to express its acceptance in writing, and under California law opt out agreements of this type have been upheld as well. So, we think that approach will both works under state law and the language of the mortgage documents itself, and Kathy you may want to add what you're doing in Sonoma, if you're doing anything different.
Kathy Larocque:
Will basically we on commercial properties we also require a lender consented that also help us in assuring that the project makes since and assuring that the project make since, someone's looked at it, looked at the value of the property and run the numbers and decided that yes, this is a sensible project to do. On residential, I like your approach Chris, we haven't implemented that we've basically given people notice that they need to look at their mortgage documents, we can't look at everyone's mortgage documents to see what it says, and to send people in to try to get an actual consent document was just ridicules, they hit their banks and the front line people at the banks had no idea how the program works, what to do, a lot of the lenders are actually just servers and Fannie Mae owns the mortgage and so they felt that they couldn't consent. Fannie Mae now have some language on its website suggesting that these program and that these expenditures be treated as special assessments by their servers, and that's very helpful.
Merrian Fuller:
Chris, do you think that we could get a copy of that residential notice?
Chris Lynch:
Sure!
Merrian Fuller:
Ok, Great. So just so everyone knows I will post that once I get that from Chris on the financial product website of the DOE which I'll provide a link to at the end of the session; any other comments from; about the how existing programs have addressed this issue? Larry, do you have anything to add here?
Lawrence Hoyt:
Well, Boulder County is not yet done any financing for commercial properties so thus far we've been solely residential, we've have not required lender consent for the residential program and you know thus far we've not run into any specific resistance have some generalized bank resistance to the program. We did actually seek to have local banks who were also involved in the mortgage business, become loan originators for us in connection with the program and we didn't get a single one who thought to become a loan originators and they told us they didn't like the program, they felt we was competing with them and but subsequently when we actually sold bonds they bought bond.
Merrian Fuller:
Interesting, Great and Sam any additions on this, How you're dealing with this issues in New Mexico?
Sam Gill:
You know we're taking a very similar approach just that the assessment lien is essentially created under you know state law and you know there numerous other mechanisms under New Mexico law which provide for special assessment district so, with that, that's essentially our position at this point. That being said there is a lot of interest from lenders and sort of their right in this and when you look at the contractual agreement, you know there defiantly seeing that something should be done whether its requesting consent or at least providing notice and that something that we've been looking into. We actually the first district in New Mexico and so we're sort of working through this issue as we move along as well so, I've actually, I find this very helpful.
Merrian Fuller:
Great, I think I'll pass it back to Chris, you're going to; I think finish up the case of default questions.
Chris Lynch:
Sure right, the other item I was going to talk about was what happens in the case of default? One important feature of California law that does not exist in every state is that in the event of attacks or assessment on delinquency and if it goes to foreclosure which it will within 5 years under California law, only delinquent amount is subject to foreclosure, so you don't have an acceleration of the entire obligation. That feature is important because it makes it more affordable for the private subordinate lenders to cure the delinquency in order to avoid from being wiped out, and it also as a result makes it easier to defend the senior lien under the senior PACE lien, against the concern of private lenders, and I think that it's good to think through the practical importance of having a senior lien particularly if we find ourselves defending it against lenders, and from my point of view the practical importance is demonstrated by our comparison to the results of property delinquency if the PACE liens were subordinate instead of senior. So, when a property owner defaults on their mortgage loan as oppose to their taxes and assessments the mortgage loans are accelerated, the entire outstanding balance become due. So, if the mortgage loans were secured by a lien that was seniored to taxes and assessments, a local government could only insure the payment of delinquent taxes in other words, defend its liens by paying the entire outstanding balance of the mortgage loan. Now, obviously that would be impractical if not impossible for most local agencies. So, if taxes and assessments were subordinate to private loans, it's fair to say that the local governments would be unable to protect their interest, unable to protect the interest of the bond owners, and would probably be unable to achieve most of the important worked local government does through financing, so I think it's important to keep that in mind when talking about why it makes sense to have our liens be senior, and that's it from me Merrian.
Merrian Fuller:
Great, any other comments on this; Larry did you want to talk about; I think it's a bit different in Colorado in the case of Default, is that right?
Lawrence Hoyt:
It is, in Colorado the special assessment district statues have always provided with respect to all forms of special assessments districts, that the in case of default; the remaining outstanding amount of the assessment is accelerated so that at the next tax lien sale, the entirety of the assessment is sold at tax lien sale.
Merrian Fuller:
Ok, and then Kathy or Sam, do you have anything to add?
Sam Gill:
Merrian, I just like to add that you know the acceleration that tends to have a role in the rates that are achieved in the bond financing, and that's something to consider. I don't know if Larry or Chris have kind of dealt with that specifically but, we've been asked that question, and looking to potential financing sources is you know kind of a big issue, as far as the securities, so.
Lawrence Hoyt:
I would just note that our financial advisors have told us in that regard that without the acceleration, we would not be able to achieve the bond rating we would or have achieved thus far, and we're getting double A- including a 6 month reserve fund but double A- rating on our bonds.
Chris Lynch:
In California, you know we've been doing _______ financings obviously for about 100 years, and we have never had acceleration, that may have an interest rate impact, we do have typically a 1 year reserve fund, but these properties are built out typically in California, as a matter of law, were only able to do PACE assessment on built out properties, and you know to the extent that we're trying to make PACE assessments look as much as possible like any other tax or assessment or other land secured financing in California. I think it's going to work to have non-acceleration.
Kathy Larocque:
And, we also have other means of guaranteeing the debt in California, we have different systems. There is a way to finance and guarantee that taxes get paid to local districts and our county has agreed to do that so were hoping that that kind of offset any imbalance there.
Merrian Fuller:
Great, and then just one question before we move on, there's a question here from Donna "Was there; Chris did you mention that Fannie Mae's website, there's some indication about what Fannie Mae; like how they are viewing these special assessments?
Chris Lynch:
Kathy mentioned the letter.
Merrian Fuller:
Kathy?
Kathy Larocque:
Yes. But Chris knows about it to so, he can answer, so yes; we will send that link to you later.
Merrian Fuller:
Ok, and could you just say a little bit about that? What it was.
Kathy Larocque:
It was a letter issued to their servicing banks advising them to for now treat these PACE assessments as special assessments.
Merrian Fuller:
Ok, Great, and I will make sure that I get that link up on the PACE website on the financial products site and I'll also try to get it; well I think that will probably be enough for folks to find it, if you have any issues with finding that information, there's a email address at the end of this presentation for Bret Kadison and you can email him to make sure that you get it.
Lawrence Hoyt:
Merrian it probably would be fair in the interest of full information to include a couple of the letters that the Federal Housing Finance Agency which is the regulatory agency with authority over Fannie Mae, Freddie Mac and the Federal Home Loan Banks, they've written some letters about these programs and I think it probably would be good to include that; those letters as well.
Merrian Fuller:
Great, Ok I will also post those.
Kathy Larocque:
We should tell you that there's an ongoing conversation with FHFA and were still working that through. That's to be continued.
Merrian Fuller:
Ok, Great. Let's go on to Issue 3.
Next Slide: Consumer Lending Laws
Merrian Fuller:
Consumer Lending Laws, so Kathy is going to be addressing this issue. Kathy.
Kathy Larocque:
So, is a PACE assessment a "Loan"? Well, I've tried to train my folks not to use the "L" word because for us it operates more like an assessment but it's a little like the story of the 3 blind men feeling the elephant and the moral is that you shouldn't be blindsided by just looking at your part of it. How is it like a loan? There's a strong public purpose to this improvement, but at the end of it, at the end of the day it improves private property and its privately owned, so from that perspective it kind of is like a loan, but from our perspective it operates like an assessment that it gets the priority of the tax lien, since we issue a bond to finance the improvements, it's a lot less flexible than a loan and I think that some consumers are a little bit surprised by that so you have to make sure that you explain to them that we allow pre-payment but you have to pre-pay in full because we have to call the bond every time somebody prepays something, so we just have less flexibility than a bank has. So, if some people prefer to go to their bank, and if they have equity in their house that's great let them do that. But looking at what would a federal judge think of this? If a consumer came to federal court and said "Well, I thought my interest rate was 7% but then there was these other charges in it, and nobody told me about them". What would a federal judge do? Is it subject to consumer credit protection acts and we came to the conclusion that it was, and that it's subject to truth and lending act, and the question is "Is it credit offered to a consumer? And a consumer is a natural person using that money for personal family or household purposes, and "Is it credit? Credit is a right granted by a creditor to a debtor; to incur a debt or defer payments, and who's a creditor? That's somebody who regularly extends consumer credit more than 25 times per year, payable by agreement in more than 4 installments with a finance charge in post, and that sounded like us. So we worked with our bond counselor to design a truth and lending act form, which is a little tricky because most of; you also need a calculator and most of the calculators are geared to monthly mortgage payments, so you need to work with someone to come up with a way to say what is the APR, and the other aspect of this is that you need to have a 3 day right of recession after the consummation of the transaction, which we thought is the execution of the contract so, there's a 3 day right of recession, and this applies to just consumer loan, and doesn't apply to the commercial loans.
So, other potentially applicable loans could be fair credit reporting act and we worked very hard to only look at the value of the property, we don't ask people what they make, we don't ask people for credit reports, we stick to just valuing the property, so we think that we have avoided other obligations under other consumer protection laws.
Merrian Fuller:
Who is originating the loan on what underwriting criteria steps that's what you're using is just the value of the home for that one?
Kathy Larocque:
Well, what do you mean by who originates the loan? Do you mean...
Merrian Fuller:
Well, I mean it's coming from the County.
Kathy Larocque:
Its coming to the County, you're absolutely right.
Merrian Fuller:
Ok...
Kathy Larocque:
The underwriting criteria that we use, again we look to the property, we look; what is the value of the property, we look are people current on their property taxes, are they current on their mortgages, are there any involuntary liens, if there were that would just disqualify them, they're not in bankruptcy, and they have titles to the property, and then we look at the value of the property, and then what they ask for as an improvement, and then we put a 10% ratio requirement, that we don't finance above 10% of the value of the property. On commercial transactions, we require lender agreements, and again that has a couple of aspects, it satisfies their mortgage requirements and it also helps us in terms of how to value commercial property. It's harder to get an actually value for commercial property, and I think lenders will need to consents that kind of indicates that the transaction makes since.
Merrian Fuller:
Great, Thanks Kathy does anyone have any other way they've done it differently or additions to this?
Lawrence Hoyt:
In Boulder County we; the description from Kathy related to the residential program is essentially the same as what we've done in Boulder County.
Merrian Fuller:
Great.
Lawrence Hoyt:
We have not done commercial yet.
Merrian Fuller:
Ok, Great any other additions on this topic? Ok, one more questions came in "Are they required to be US citizens to take these loans?
Kathy Larocque:
We haven't done that because we look at the property.
Merrian Fuller:
Property Ownership, yep, that makes sense. Ok, Then I think I'll move on to Issue Number 4. Sam's going to be talking about this. This is about reducing the risk to local governments, obviously a lot of local governments are having some pretty serious budget issues with the economy and are very concerned about risk to the general fund and any other liabilities that might be established, so Sam I'll let you kick that off.
Sam Gill:
Sure thank you.
Next Slide: Issue 4
First Question is Do PACE programs put the local government's general fund at risk? This is generally the first question informing these districts that local governments you know their attorneys want to know and you know generally it depends on the enabling legislation again. In New Mexico the way it works is essentially your creating, the county is creating or the municipalities are creating a separate district which is separate and apart from the municipality and so in that respect the county and the municipality's general fund is never really at risk. You know there is certain scenarios which they may extend moneys from their general fund, which appears to have been done Boulder and Berkeley with the use of general funds to provide reserve accounts for these programs, but when its actually the city or the county that is actually issuing the debt, you know that becomes a different question, which is often times governed by constitutional limitations and statutory limitations on what those entities can issue general obligation bonds or and my understanding in kind of reading about some of these other programs is that there sometimes in most states there is you know requires voter approval for the issuance of general obligation debt, and in some states, I believe in California and maybe also in Colorado, and correct me if I'm incorrect on this, but there may be voter approval of even issuing special obligation revenue bonds. Generally, with respect to New Mexico again it's a separate district which the county or municipality would appoint separate governing body, a district board which will then administer the program, and actually their the entity that is issuing the debt and in generally as far as protecting from liability, there's language in bond documents, whether it be the authorizing ordinances or the you know ________ official statements and the bond offering documents which basically will disclose that specials assessments you know districts and the improvements are financed solely from you know the special assessments that are levied against each property, and so in that sense again the general fund is not at risk. I think that's kind of the general, if Chris or Larry wants to chime in there, that's great.
Chris Lynch:
Yes, in California we issue bonds payable only from assessments and it's not an obligation of the general fund of the issuing body so, although there are ways that a local agency could choose to do that, in general they do not, and so there is no risk to the general fund in California.
Kathy Larocque:
That's a big concern to our local agency was how much was it going to cost us to get the up and running and how were we going to pay it back cause ultimately that does get paid back from the spread between what were paying for the bonds and what program participants paying but that's not coming in until the taxes start coming in from that and there is a great upfront cost in terms of getting a program up and running, hopefully that will decrease for people as more and more programs are there to copy from.
Lawrence Hoyt:
In Colorado we have a couple of differences, first, at least with restricted counties, I'm not sure about the municipal form of the assessment special district, but with respect to county, our special assessment district is a district only for purposes of financing and it's not a separate political subdivision of the state, and the bonds are issued in the names of the district but it's a interesting combination of things because those are recognized the special revenue bonds, special obligation revenue bonds of the county which mean that under our constitutional amendment related to building on taxes and debt we have to subject all of that to a vote of the people we did in 2008 and got authority from the voters to go to 40 million total for our program.
Merrian Fuller:
Great, and then what about local agencies recommending contractors and validating installation cost? There is this question, I know when I was working with the folks of the city of Berkeley, they're very concerned about saying "choose one of these contractors" cause you know they were concerned about liability issues, whereas I've seen other programs for example Babylon's program in New York where they have NYSERDA the statewide organization that does a lot of the energy efficiency work, has a list of building performance institutes certified contractors, so they've had a certain level of training and so they want to just get people that have had that training. I'm curious how each of you have dealt with that question from the perspective of liability.
Sam Gill:
Generally you know, we've taken a similar position in that, you know you don't really want you know the county or municipality out there saying "Use these contractors, and don't use others" so you know, there's a number of things that can be done and one is again just to piggybacking on if there's state certification requirements, if renewable energy contractors are essentially asked to get certified in state, you know that's something you can piggyback on as far as creating a list. Another thing which were considering is sort of having a mandatory workshop or training sessions for contractors who want to participate in the program and do work under the program and that's kind of another way to kind of create a list you know a county then could come out and say well these contractors have participated in a training program or a workshop that walks through sort of the program and they have a good idea of what's coming that way, and the other thing is that local permitting requirements and industry standards if there any of those out there than you can always look to those as well. As far as validating you know quality assurance, installation cost, site inspection; again your getting back to sort of the administration burden and the cost of doing that, whether it's for a county or a special district that's been created you know there's a lot of cost in that, and so one thing that we've looked at doing is again looking at state certification requirements, we have a; the government agency; the energy and mineral and natural resources department and they require solar systems certification and application process which people that are putting solar up need to do in order to receive the state tax credit. Additionally, there are depending on the utility, utilities in the area where the district is and sometimes they have net metering programs and _______ programs and they have application procedures as well, most of which includes site inspections and so you know it's a good way for the governmental entity to essentially say, you know go get your solar systems certification from you know the state agency and get you know a project approval from you know the local utility and by doing that you sort of avoid having to pay for that.
Kathy Larocque:
We agree with Sam, we tried to rely on mechanism that are already in place for solar in California to get your rebate you have to use CSI certified installers, so that kind of takes care of that. Otherwise we would require licensed contractors on all jobs, we require all applicants to pull a building permit from their local jurisdiction and then the building inspector then goes out and inspects to make sure that the project is actually done and done correctly. As far as validation and installation cost, we have a basic list of what is the price range for the this and what is the price range for that and when people come in with their applications we kind of check to make sure that it's in the ball park and it's something that looks odd, we might recommend that they get a second bid.
Lawrence Hoyt:
In Boulder County we do very similar to that which Kathy described for Sonoma County. We try to stay as much out of the contractual relationship between the contractor and the property owner as possible so we have our side of the deal which is the financing piece which is where we have a contract with the land owner but we try to stay out of the part where the contractor is, contracting for installation of improvements with the property owner. We do require licensed contractors to perform it, we don't have a specified list of contractors and we only require inspections of the improvements where the city or county government otherwise requires building permit inspections for the improvements. So for instance, installation of installation in an attic space does not require a building permit inspection and therefore we don't require a post installation inspection, we pay the contractor directly but only based on a written statement filed by the property owner that the improvements have been installed satisfaction of the property owner.
Merrian Fuller:
Great and we have question here about requiring energy audits. Do the programs that you guys are involved with require energy audits and if so are the audits independent from the contractors performing the improvements?
Kathy Larocque:
We haven't required them yet but we're going in that direction, and whether or not their independent that going to be a discussion that's going to happen, one of the issues right now is that there aren't that many auditors in the county and we would slow the program down a lot by requiring a audit but as green energy items become more popular, there are training programs that are in the county right now and there will be more auditors available soon.
Lawrence Hoyt:
We haven't done it in Boulder County for the residential program, we are currently writing the rules for the commercial program and probably will require for commercial but once again as Kathy has noticed we have a deficit of qualified energy auditors out there and it would defiantly hold the program back, we do require every property owner to attend a workshop at which a lot of things are explained to them and the availability of the energy audits is explained and encouraged but that's as far as we go.
Merrian Fuller:
There's another question here about fraud prevention mechanisms, I know you have mentioned a few things such as kind of checking whether or not the invoice price makes sense and also by having inspectors on certain projects go if the building code requires it, are there other fraud prevention mechanisms you guys have instituted?
Kathy Larocque:
We require building permits for everything.
Merrian Fuller:
For everything?
Kathy Larocque:
Yes, whether or not if its normally permitted or not, and I should mention that if it's not usually; if it doesn't usually require a permit and if we only require a permit because of the program that impacts your truth and lending act requirement because you have to add that extra cost in as a cost but that made since to us as a mechanism to making sure that there was a improvement that it was actually done, that was a way to go out and check it.
Sam Gill:
Yes, Merrian another thing to consider in respect to that is you know adding inspection costs essentially granting the right to go out and inspect projects, you know in the program documents that way in the event you know there's some concern about fraud, it's that remedy to go out and actually do that.
Merrian Fuller:
Great, and I just want to go back one more time to the risk to local governments general revenues and I would like for each of you just to say explicitly whether or not and exactly how its setup the loan loss reserve fund or the protect fund for your programs just so that's explicitly out there.
Kathy do you want to start talking about Sonoma's?
Kathy Larocque:
Our loan loss reserve fund; We're still working on our loan loss reserve fund and how to get it established without making the program to expensive, what we have; our county has guaranteed under our alternative tax collection method that the assessments will get paid and the benefits that the county from that is that if there's a default, then the county collects the penalties and the interest, so we have a guarantee that the assessments will be paid.
Lawrence Hoyt:
In Boulder County we have in connections with our 2009A and B issues, we were required to do a full years coverage in a loan loss reserve fund and we did that out of the general fund, we provided in the documentation for the repayment for the general funds with the interest that would be attributable to what were going to make off of the financing and the program and we actually limited the amount we would get back to the general fund to equate to the rate that we get on other investments on general fund money. So, That's what we did the first time, the third series 2009C and 2009D, we were only required to do 50% of a single years loan loss reserve fund, so but it was done under the same terms.
Chris Lynch:
In the city of Berkeley, and in a couple of the county programs I'm working on, there taking the approach that Kathy Larocque mentioned that Sonoma took basically agreeing to pay delinquent taxes with the expectation of collecting the taxes when paid plus penalties and interest in the future. On San Francisco program and a statewide California program I'm working on the expectation is the property owners will be responsible for funding their own reserve fund along the lines that Larry is talking about which just say about a year's payments or approximately 10% of the financed amount or that amount could be satisfied with stimulus funds if there available to the local agency. But there is the expectation that property or some external third party source of funds will be responsible for funding the reserve fund.
Merrian Fuller:
Great and Just so that everyone knows, on the call creating a loan loss reserve with stimulus funds is a appropriate use of funds and that's been clearly designated by the Department of Energy, that is something that probably a lot of the programs that I've been talking to who were stimulus funded knew PACE programs are considering using stimulus funds for that purpose.
Chris Lynch:
But those uses may trigger possible ____________.
Merrian Fuller:
Yes, and that's why the Davis Beacon issues needs to be resolved.
Kathy Larocque:
But we've been waiting for the guidance.
Chris Lynch:
But we're not talking about that on this call.
Merrian Fuller:
Guidance will be available next week, or very soon, we are literally going through the appropriate channels right now, but it is recognized that it is a very important issue. So, let's see I think I'll ask a few more questions that have just come up here; one is question about what parts of PACE assessments are deductible? What have you guys deemed as deductible for either the deductible or interest portions?
Chris Lynch:
You're asking us for tax advice?
Kathy Larocque:
Yea I was just telling people we don't give tax advice.
Merrian Fuller:
On the California state franchise website there's an answer for Melrose tax which are kind of similar and what the California franchise for tells people is that the interest portion is deductible. And so...
Kathy Larocque:
So we don't give tax advice?
Merrian Fuller:
Go ahead.
Brandon Belford:
That's also consistent with some preliminary discussions that the doe has with people within the treasury department as well.
Merrian Fuller:
That's Brandon Belford speaking there. So yea it looks like the interest portion is deductible. Other questions here one is; Have any of the programs that exist right now considered using things third party raiders such as hers raiders to kind of insure quality assurance?
Sam Gil:
I think that goes back to the same problem noted which just the dearth of availability of such auditors was around. We actually Bolder County has an energy climate smart building code now and we require new construction that meet certain minimums to meet her rating standard and we're finding that is the significant issue.
Merrian Fuller:
One problem with _____ is that apparently _____ audits are quite pricy it's like six or seven hundred dollars in California. And if you're looking at a small project say doing installation in your attic that's a big chunk of that so we actually now have a grant application into our California energy commission to fund some audits or partially fund some audits.
Sam Gil:
One of the things over the Bolder county will have is we're requiring not only access to inspect the improvement should we have some reason to do so after construction and you know the loan is paid off but as well as we are requiring that we have access to the utility bills of both pre and post improvement so that we can create statistical modeling of what the impact is from these kinds of improvements.
Merrian Fuller:
Great! One Question about income tax credit, so for example; for the solar income tax credit and the also for like a rebate it just as an example in the state of California you can get a rebate for solar and also an income tax credit for solar. Who receive those funds and then what is the amount financed but the PACE bond is net of the rebate or the credit? How is that dealt with?
Kathy Larocque:
What we do is we require net of the rebate that you get instantly basically from the California energy commission. But the tax credits are a lot harder because you don't know if someone going to get them and sometime their paid out over years. So we have just ignored those and the tax payer gets to keep those.
Sam Gil:
Bolder County came to the exact same place we required to the net of the renewable energy credit so for instance our utilities are required to pay back and other rebates that are mandated of the state law but with respect to the tax credits there just; we could not get into that business.
Merrian Fuller:
Ok.
Chris Lynch:
I might add though if people have concerns about over burdening properties and if the property owner has an expectation or getting the benefit of the tax credit they always elect a finance ______we are just talking about the maximum in the program might be willing to finance.
Sam Gil:
That's a good point.
Merrian Fuller:
Good point. Yep. And then one last question; from Larissa could local agencies provide______for negotiation and setting of maxim prices, minimum warranties, packages of products and services etc. So that; this is really a question about is the local government much more involved in negotiating kind of lower prices for example for efficiency retrofit of solar retrofit? The question is could they I don't think anyone does that currently.
Kathy Larocque:
I think they could it get more complicated to set up your program and to run your program and; people kind of like to choose their own contractors and pick their own projects and they kind of feel like; Hey you're asking me to pay this assessment and pay it back with interest, isn't really my choice who I get to use and so there is a balance to how over bearing or how much government you want; how much government is a good thing and maybe if you can get people better prices that would be a good thing; but again it how much can you put into setting up these programs and what can you cover.
Merrian Fuller:
Great, let's move on to our last segment of this session and that's Brandon who's going to talk about the PACE quality frame work. If you haven't seen that document, the PDF link to that PDF is at the bottom of that page these are the PACE principles put out by the White House so I'm going to turn it over to Brandon to give an update on the policy frame work that's been issue. Brandon.
Brandon Belford:
Thanks Merrian and thanks to everyone else who has been doing this call so far this has been a great conversation and addressing many of the issues and ideas that were discussed throughout the administration the various agencies _________looking at PACE. Just to give you all; for those of you who are familiar with PACE policy frame work documents that was releases in mid-October when the Vice _________recovery retrofit effort. Essentially obviously there has been a number of great things done with PACE by all the people on this call today. And the vice president and president recognize PACE as a potential way or one of the tools; help combat to the market barrier for transforming our economy to a more clean green efficient economy. And so since the issue has gotten elevated to that level and inner agency forces convened to analyze the PACE program and figure out ways that the federal government can best support the deployment of these programs that obviously get to those clean energy goals but also have the proper mechanisms in place to prevent ________and protect both consumers and lenders. So in those discussions that happened throughout the summer and the fall both within all the agencies with the federal government as well as getting templates from both from the phone and other state holders in the industry. The policy frame work was put forth as basically the set for protection that are priority of the administration when programs are designed and being piloted out there even the PACE frame work. Obviously there has been a lot conversation that myself has had with _____and people who have programs existing and looking to do new programs and trying to figure out what exactly does the policy frame work mean and practical terms with people who have programs or looking to do new programs. I guess the first thing to note is that it is a frame work and not a federal statue to regulation. At this point given the instances of PACE program the administration is taking the stance that there truly is a need to see how these programs are enveloping collect more information and the when appropriate if appropriate provide more guidance and best practices along the lines development of PACE programs. That said especially for people that are using recovery funds there is a strong encouragement to adhere to all of the recommendations and protections within that document. That is_____ with the fact that again it not a real regulation it does not ______state law and so there will necessarily need to be deviations and flexibility on some of the issues. And so the way that the administration is approaching that with recovery fund recipients is just simply in designed new programs what type of conversation ways that program designs are addressing some of the broader consumer lender protection concerns that have been raised by various state holders. Again like I said earlier this is truly kind of a work in process in the fluid process and we're taking the approach that there is a lot of learning to be done here and so that why we are continuously on working with bank regulators and FHFA I know Kathy mentioned that some of the issues raise early on the call are still going through an ongoing dialogue with the bank regulators and that's something that we are involved in leading as well as just getting feedback from people like yourself on the phone today on what has worked, what hasn't worked and the best way to move forward with scaling up PACE on an notional level. That's kind of where we are at going forward there will continue to be that open dialogue with everyone I encourage you to contact myself or Bret Patterson if you have any questions on the application of the frame work and certain concerns that you have with some of the protections that are in there and we can walk through and talk through way that we would recommend addressing some of those concerns and ways to move forward. With that I guess I'll pass it back to Merrian.
Merrian Fuller:
Thank Brandon. So that helpful and you know I think the bottom line for this is that there are issues that we really need the be sensitive about in terms of protecting both existing lenders and the people the we're lending to or that we're putting assessments on they're property. So there is some really great information in that document that is helpful and there are a few areas where it may conflict with that you are trying to do and that where we need to talk and kind of work those out.
Next Slide: Resources
Merrian Fuller:
On this next page on resources Bret Patterson is the contact who is leading up the financial team that myself and a few others are on. He will be able to connect you to the most appropriate person on the team to talk with. So I really encourage you to email Bret. And also if this session has been helpful if there is other types of sessions that we can offer as webenars to bring you ______the high quality people who are really the legal experts in their areas. We would love to do that and we are really open to feedback on what other issues you're struggling with that we can bring to a more public forum and you know make it available to several hindered people to get this type of information. So if you have ideas for different sessions going forth please email Bret about that. The second resource you see there is on the financial products portal that the DOE has. There's a link on there on PACE and that is where I'll put the few items that we mentioned today the residential notice letter, the letter from Fannie Mae etc. I'll make sure those are listed under resources by the end of the week. Another resource that I helped to create is the how to guide for PACE programs this pdf. The third link you see there kind of walks you through how to set up a PACE program and talks about some of the legal issues, marketing issues, some administration issues from the prospective of the city of Berkley when they set up their program and also a few other programs that are highlight as case studies in that document then the link to the policy framework is there. If you want to check whether or not your state has legal authority to issue PACE programs all of that; all of the 16 different states that have that legislation. That legislation is online on the t desire USA database and then to get the audio of this it should be up in about a week will be on the same place where you signed for tis webcast which is that last link there. And that includes; you will also see some of our most recent webinars some of the on PACE so the one that was last Friday on administration and setting up PACE programs may be interesting to those on the call that were not on that. That is available on that webcast page and the power point should be up within the next day or two for all of those.
So I want to thank our speakers for taking time out to give other people advice based on their experience and again just encourage you all to contact Bret if you questions, comment, and ideas, for further technical assistance that the department of energy can offer. Thank you very much.