Q & A re PACE in New Jersey

PACE stands for “Property Assessed Clean Energy.” While it was originally aimed at energy conservation and renewables, it has now been extended in several states to cover hurricane-resistant construction and other resiliency measures.

PACE is enabled in New Jersey by statute (PL2011, c.187), but municipalities must request approval from the Director of the Division of Local Government Services (DLGS) before they can pass an ordinance establishing a PACE program.

The existing statute does not differentiate between commercial and residential properties, leaving the door open to permitting pilot projects in either category. Although the statute only refers explicitly to municipal and county improvement authority bonds, as repeatedly noted by the Senate Budget and Appropriations Committee, “Currently, use of private financing is not explicitly prohibited.”

However, no municipality has yet attempted to get approval to establish a local PACE program.

Amending legislation passed in 2015 was conditionally vetoed by Governor Christie in November, in a way that the sponsors of the bill considered unacceptable. It is anticipated that new legislation will be introduced in 2016 in an effort to address the Governor’s concerns.

  1. Residential PACE
  2. Lender Consent
  3. Subordination
  4. Municipal and Consumer Protections

Residential PACE became controversial in 2010 when the Federal Housing Finance Agency (FHFA) issued a statement concerning the financial risks of the first-lien PACE financing, directing Fannie Mae and Freddie Mac to avoid buying residential mortgages with PACE liens. Since then, some states have continued to promote Residential PACE, sometimes adding prepayment options, loan-loss reserves, and contractual subordination clauses in an effort to overcome these objections. (For more information, see http://www.ncsl.org/research/energy/pace-financing.aspx.)

In August 2015 the Obama Administration stated its intention to adopt a policy of “subordination plus lien persistence” to facilitate Residential PACE, but definitive guidance has not yet been issued.

“Lender Consent” is widely accepted as a solution to the problem of lien priority in the commercial arena, where mortgages are typically held by individual lenders rather than being bundled and syndicated (or sold to Fanny and Freddie). Commercial mortgage lenders are typically willing to provide consent where PACE projects improve (a) the asset value of their collateral, and (b) the cashflow of the borrower.

But some stakeholders object to putting a requirement for lender consent into the law — arguing that no other assessments require it, and that the public interest trumps lenders’ interests. In addition, it is considered unworkable to obtain lender consent in the case of residential, where mortgage pools are broadly syndicated and servicers cannot authorize approvals.

Bankers and mortgage lenders have also asked why PACE financing should take precedence over the priority of the first mortgage lien. It is of course such precedence that makes PACE investments attractive in the first place. Otherwise PACE-type projects could be financed with second mortgages and home equity loans. In practice, however, such instruments are of little interest to investors or to property owners.

Finally, there is a need to protect individual property owners from exceeding borrowing limits or being saddled with unreasonable financing costs; and a need to protect municipalities from liability in the event that a property owner fails to make timely payments. (In the latter case, the municipality is likely to impose a tax lien, but should not be required to continue making payments to the PACE investor.)

The Coalition’s recommendations will reflect the ongoing discussions amongst Coalition members regarding the most controversial issues in NJ’s PACE legislation.

In it’s December 15 webinar, NJPACE proposed the following as principles for 2016 legislation:

  • „Add lender consent for commercial PACE
  • „Keep residential PACE subject to FHA/FHFA guidance in early 2016
  • „Keep competitive, open market (multiple administrators in a jurisdiction)
  • „Keep private sector financing, County Improvement Authority revenue bonds
  • „Coordinate with NJ Clean Energy Program
  • „Keep storm/flooding resiliency, energy efficiency and renewable energy
  • „Add focus on affordable housing, low/moderate income neighborhoods
  • „Ensure economies of scale to make NJ attractive to private capital
  • „Implement PACE as soon as possible to stay competitive with other states

But these have not yet been accepted or adopted by the Coalition.

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