Local Option - Municipal Energy Districts

Note:  In 2010, the Federal Housing Finance Agency (FHFA), which has authority over mortgage underwriters Fannie Mae and Freddie Mac, directed these enterprises against purchasing mortgages of homes with a PACE lien due to its senior status above a mortgage. Most residential PACE activity subsided following this directive; however, some residential PACE programs are now operating with loan loss reserve funds, appropriate disclosures, or other protections meant to address FHFA's concerns. Commercial PACE programs were not directly affected by FHFA’s actions, as Fannie Mae and Freddie Mac do not underwrite commercial mortgages. Visit PACENation for more information about PACE financing and a comprehensive list of all PACE programs across the country.

Property-Assessed Clean Energy (PACE) financing effectively allows property owners to borrow money to pay for energy improvements. The amount borrowed is typically repaid via a special assessment on the property over a period of years. California has authorized local governments to establish such programs, as described below. (Not all local governments in California offer PACE financing; contact your local government to find out if it has established a PACE financing program.)

In July 2008, California amended its state law to enable cities and counties to offer PACE financing programs to property owners. Financing may be used for improvements to developed property only if the property owner agrees to a contractual assessment (that is, agrees to repay the loan) on his/her property tax bill for up to 20 years. To be eligible, a property owner must have a clean property title and must be current on property taxes and mortgages. The law requires that local governments first establish draft plans that will be subject to a public hearing. Subsequently, city/county officials will develop a report, which will be voted on by the local legislative body. The report must include:

• A map delineating the area where contractual assessments are proposed;
• A draft contract agreement between property owners and the local government;
• Eligible facilities;
• Eligible distributed renewable-energy systems;
• Eligible energy-efficiency improvements;
• A designated local official who authorized to enter into contractual assessments on behalf of the local government;
• A maximum aggregate dollar amount of contractual assessments;
• A method for prioritizing applications/requests in the event that applications exceed the authorization amount;
• A plan for raising a capital amount required to pay for work performed pursuant to contractual assessments; and
• Costs incidental to financing, administration, and collection of the contractual assessment program among the consenting property owners and the city

Participating local governments may authorize the property owner to contract for the improvements or purchase equipment directly. Although local governments determine which energy projects are eligible for financing, the California Energy Commission (CEC) recommends photovoltaics (PV), geothermal heat pumps, fuel cells, high-efficiency HVAC systems, insulation, and high-efficiency windows.

The interest rate of bonds may be determined by an index, but it will be fixed at the time the bonds are issued. The assessments levied, interest and any penalties constitute a lien against the improved property until loans are paid.

Senate Bill 77 of 2010 requires the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) to develop and administer a PACE Reserve program to help reduce overall program costs. The bill appropriated $50 million to the authority through January 1, 2015. The bill also authorizes the authority to issue revenue bonds to help support PACE programs. Click here to read more about the CAEATFA's efforts to support PACE.  

California voters provided even more support for PACE programs by approving Ballot Proposition 39 in November 2012. The new law closes a tax loophole, which is expected to provide $1 billion in additional revenue every year. According to the law, half of the new funding collected in the first five years must be used for renewable energy and energy efficiency projects at schools and public facilities, workforce development, and providing assistance to local governments in establishing and implementing PACE programs.