PACE Financing: Recent Controversy and Litigation

PACE Financing: Recent Controversy and Litigation

There is a continuing controversy over Property Assessed Clean Energy (PACE) financing, which provides loans for improving energy efficiency in buildings. After describing PACE programs and discussing why their future is threatened, J. Cullen Howe reviews recent litigation that could affect the status of PACE financing. He writes:

II. What Is PACE Financing?

       In the last several years, a number of states and municipalities have enacted legislation that authorizes the creation of finance programs, typically through the sale of municipal bonds, that allow residential building owners to make energy efficiency improvements and/or install renewable energy systems. These programs are referred to as Property Assessed Clean Energy, or PACE.

       PACE programs attempt to solve the up-front cost problem by allowing residential building owners to borrow this money at a low interest rate. The property owners then repay their loans over 15-20 years via an annual assessment on their property tax bill. PACE also solves another problem-recovering the investment before a property is sold. Property owners are unlikely to invest in renewable energy systems and/or energy efficiency improvements if they plan to sell the property before the investment is recouped. PACE liens "run with the land," meaning that if the loan is not fully paid off before the property is sold, the remaining payment obligation passes to the purchaser.

       In recent years, 27 states and several municipalities have enacted PACE laws. States typically have limitations on what can and cannot be included in property taxes. Thus, most states that have passed PACE legislation have enacted laws that, in effect, allow municipal PACE loan programs to increase property taxes for participating homeowners. These laws are referred to as enabling legislation. For example, in 2009, New York enacted a law that authorizes municipalities, by drawing on federal American Recovery and Reinvestment Act (ARRA) funds set aside for this purpose, to create finance programs for building owners for the installation of renewable energy systems and energy efficiency improvements. Under the law, loans are only made for energy efficient improvements that are deemedappropriate by an energy audit and for renewable energy systems that are determinedto be feasible through a feasibility study. Like other PACE laws, the loan made underthe PACE programs will become a lien on the property benefitted by the loan.

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IV. PACE-Related Litigation

     Following Fannie Mae's and Freddie Mac's refusal to purchase mortgages secured by PACE liens, several lawsuits were filed. A summary of each follows.

     A. Town of Babylon v. Federal Housing Finance Agency [enhanced version available to lexis.com subscribers]. One lawsuit was filed by the Town of Babylon in the Eastern District of New York against FHFA, Fannie Mae, Freddie Mac, and several other related parties. Babylon established one of the first PACE programs in the country in 2008 with its Long Island Green Homes Program. In its complaint, Babylon asserted that the typical cost of a PACE improvement was less than $9,000, and that reduced energy costs typically exceeded the homeowners' monthly repayment obligations, which averaged less than $92. Babylon further asserted that there had never been a single default on a PACE financed repayment obligation. The lawsuit alleged that FHFA, in issuing its July 2010 statement, violated the Administrative Procedure Act (APA) by not publishing the statement as a rule and doing so via a notice and comment period, and the National Environmental Policy Act (NEPA) by failing to issue an environmental impact statement. FHFA subsequently moved to dismiss the lawsuit on standing grounds. In particular, FHFA argued that in issuing the July 2010 statement it was acting in its role as conservator of Fannie Mae and Freddie Mac and as such the court was devoid of jurisdiction under 12 U.S.C. § 4617(f). This statutory section was included as part of The Housing and Economic Recovery Act of 2008, which adopted provisions intended to address the severe downturn in the housing market. The section authorizes appointment of the FHFA as conservator or receiver of a regulated entity under certain circumstances and limits judicial review of such actions. In particular, the section includes an explicit limitation on a court's ability to review actions of FHFA in its capacity as a conservator by stating that a court may not "take any action to restrain or affect the exercise of powers or functions of [FHFA] as a conservator or a receiver." FHFA also argued that its July 2010 statement was not a final agency action and thus was not subject to judicial review.

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J. Cullen Howe is the author of Green Financing: Governmental and Private Programs Concerning Financing of Green Buildings, Ch. 2M, in Real Estate Financing (Lexis treatise). Lexis.com subscribers can access CHAPTER 2M Green Financing: Governmental and Private Programs Concerning Financing of Green Buildings. Non-subscribers can purchase Real Estate Financing at the LexisNexis Bookstore

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