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Recent Developments Affecting Property Assessed Clean Energy (PACE) Loans

Recent Developments Affecting Property Assessed Clean Energy (PACE) Loans

Nj Governor’s Conditional Veto Restricts Nj PACE, Florida’s Top Court Expands State’s PACE Market, Congress Extends the government Investment Tax Credit and States Reduce Effectiveness of Internet-Metering –

In the current climate conscious world, alternative energy-and programs to aid their use-are more and more important. Property Assessed Clean Energy (“PACE”) loans, starting in 2008, have grown to be a significant tool for local governments, homeowners, and commercial property proprietors to make use of to set up energy-efficient upgrades, for example solar power panels or energy-efficient home windows, on private property….

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Recent Developments Affecting Property
Assessed Clean Energy (PACE) Loans

Authored by Patrick Dolan and Kira Brereton
March 2016

Recent Developments Affecting Property Assessed
Clean Energy (PACE) Loans
New Jersey Governor’s Conditional Veto Restricts New Jersey PACE, Florida’s Supreme Court
Expands State’s PACE Market, Congress Extends the Federal Investment Tax Credit and States
Reduce Effectiveness of Net-Metering
In today’s climate conscious world, renewable energy sources—and programs to support their use—are increasingly
important. Property Assessed Clean Energy (“PACE”) loans, beginning in 2008, have become a major tool for local
governments, homeowners, and commercial property owners to use to install energy efficient upgrades, such as
solar panels or energy efficient windows, on private property.
Previous Dechert OnPoints discussed the potential for securitization of PACE loans as well as regulatory
developments regarding PACE potential.
This Dechert OnPoint discusses some recent developments regarding
New Jersey PACE
To date, thirty-two states have approved legislation implementing some form of PACE program. The legislature in
New Jersey, a potential major market for solar panel installers and other green industries, passed a bill which could
have significantly expanded the Garden State’s PACE program but Governor Chris Christie issued a conditional veto
of that bill on November 9, 2015.
The Governor’s conditional veto stipulates that (i) no municipality that is disqualified from the local budget
examination exemption issued to municipalities in connection with special assistance funding from the state would be
eligible for a PACE bond program, (ii) PACE assessments should not be made against properties with less than five
dwelling units and (iii) existing lienholder consent must be obtained in connection with PACE assessments.
Additionally, instead of rolling out the program across the state, the program would be limited to the first ten
municipalities to apply and be approved by the New Jersey Division of Local Government Services.

Advocates of the bill passed by the legislature are concerned that these conditions will stall the development of
industries associated with PACE loan spending in New Jersey, and thus, limit such economic activity within the state.
Proponents of the NJ PACE bill argue limiting the program to commercial properties in only ten municipalities will
prevent the economies of scale needed for wide-spread development of a NJ PACE program. Advocates have also
indicated that the multi-family condition proposed by the conditional veto is problematic because single-family
homeowners are a major source of borrowers within PACE loan systems but Governor Christie’s conditional veto
bars single family homeowners from New Jersey’s program.

May 2012 Dechert OnPoint “Securitization of Renewable Energy Loans;” and July 2012 Dechert OnPoint “Recent U.S.
Regulatory Developments Regarding Renewable Energy Loans.”
Governor Christie’s Conditional Veto.
Notes on the Conditional Veto of the PACE Bill, NJPACE, (Nov. 2015).
Dechert LLP
February 2016 Page 3
The conditional veto, however, appeals to mortgage companies and others who object to the super priority status of
PACE assessments; Fannie Mae and Freddie Mac, for example have indicated that they will not purchase mortgage
loans on homes with PACE financing if such loans have pari passu status with tax liens.
The mortgage companies
claim that such prioritization: (i) changes the risk profile of properties which are subject to PACE assessment liens
relative to the credit underwriting completed in the initial closing of a mortgage loan and (ii) lessens PACE lenders
incentives to maximize profits in foreclosure as compared to mortgage lenders because of the size of PACE loans
(which are usually up to US$20,000) and because of the inability of PACE lenders to accelerate PACE loans for the
full amount in the event of a default. Under the conditional veto scheme, PACE assessments will remain subordinate
to mortgages and other lien holders unless consent is granted to change the prioritization among the liens by the
applicable mortgage lenders.

Additionally, advocates of the PACE bill have expressed concern that the Governor’s first stipulation will prohibit
some large population centers, such as Newark, Camden, and Atlantic City from accessing the program because the
conditional veto bars special funding recipients—which includes these cities—from participating in the program.

These areas, however, have more potential commercial sector borrowers, given their population sizes. The ten
municipality limit will also reduce the number of potential borrowers, further lessening the program’s potential
Florida PACE
In contrast to Governor Christie’s actions, the Florida Supreme Court recently rejected two challenges to PACE
programs in Florida in a combined case.
The court rejected a claim by the Florida Bankers Association, which
objected to the super priority status of PACE loans, by holding that the group did not have standing.
The decision
sidestepped the issue of whether PACE loans may subordinate mortgage loans; even so, the solar industry seems
optimistic about the potential of Florida’s PACE market.
The Florida Supreme Court also reviewed the bond validation process used to provide PACE loans, specifically
whether the process complied with Florida statutes. On this point, the court validated the special assessment revenue
bonds used by the Florida Development Finance Corporation (FDFC) for Florida’s PACE program.
However, the
court also held that the FDFC must remove all references within the financing agreements to judicial foreclosure as a
remedy and remove all references to the FDFC’s own or delegated authority to levy the special PACE assessments

Joe Light, Clean-Energy Loans Make for Messy Home Sales, THE WALL STREET JOURNAL, (Nov. 6, 2105).
Statement of the Federal Housing Finance Agency on Certain Super-Priority Loans, FEDERAL HOUSING FINANCE AGENCY, (Dec.
22, 2014).
Governor Christie’s Conditional Veto.
Notes on the Conditional Veto of the PACE Bill, NJPACE, (Nov. 2015).
Florida Bankers Associate, etc., v. Florida Development Finance Corporation, etc., et al., No. SC14-1603 (Fla. Supreme Court
Dechert LLP
February 2016 Page 4
in order for the program to comply with Florida statutes.
The court held that once these changes are made, Florida’s
PACE market will be in accordance with state law and the court’s decision.

The Florida Supreme Court’s decision may help expand the growth of PACE programs in Florida, especially in the
residential market. In 2014, residential PACE spending surpassed commercial PACE spending
and Florida may be
poised to take advantage of PACE market growth nationwide.
Federal Investment Tax Credit
Nationwide, the market for solar panels and the PACE loans that often finance them will be strengthened by
Congress’s extension, in December 2015, of the Federal Investment Tax Credit for renewable energy. This tax credit
extends the 30% federal tax credit through 2019.
Thereafter, the credit will decline through 2022 to 10%, where it
will remain.
This tax credit has been a crucial component in the growth of renewables and this extension is
predicted to lead to US$73 billion—or a 56 percent boost—in new investments according to Bloomberg New Energy
Finance over the next five years.

Commercial PACE
Commercial PACE has not taken off the same way that residential PACE has. One reason is that most statutes
providing for commercial PACE require the consent of the first-mortgage lender on the related property. It appears
that the consent processes within the mortgage lending institutions for allowing commercial PACE assessments to be
placed on one of their borrower’s properties can be lengthy. Connecticut’s Green Bank appears to have done a good
job explaining commercial PACE to mortgage lenders in Connecticut. It may only be a matter of time before other
states follow.
Net-Metering Under Threat
Net-metering is a tool and billing mechanism that credits solar energy system owners for the electricity they add to
the grid when their solar panels create more energy than their home or business uses.
Net-metering helps
consumers and businesses but some utilities dislike the policy because they believe it lowers profits.
The public
utilities commissions in both Nevada and Hawaii changed their state’s rules in December and October, respectively,

The remaining remedy for failure to pay the PACE assessment is issuance of a tax certificate against the property. (Florida
Statute 197.3632(8)(a) Uniform method for the levy, collection, and enforcement of non-ad valorem assessments.)
Katherine Tweed, Plug-and-Play Residential PACE Financing Grows in California, GREENTECH MEDIA, (Mar. 6, 2015).
Cassandra Sweet, Wind, Solar Companies Get Boost From Tax-Credit Extension, THE WALL STREET JOURNAL, (Dec. 16, 2015).
Bloomberg NEW ENERGY FINANCE, Impact of Tax Credit Extensions for Wind and Solar, BLOOMBERG NEW ENERGY
FINANCE, (Dec. 17, 2015).
See Net Metering.
Dechert LLP
February 2016 Page 5
to lower the rates earned by selling back excess energy.
Nevada also increased the basic service charges for solar-
panel users.
As a result, SolarCity, a major solar panel installer, announced that it will leave Nevada—firing 550
employees and closing a training center opened in November 2015 in the process of moving out.
The moves by
Nevada and Hawaii may be followed in other states; for example, a utility in Arizona is already seeking permission to
enact the same changes as Nevada.

Late 2015 saw many developments in the renewable energy sector including regulation that helped establish or
expand PACE programs that have helped increase availability of renewable power in many states. These programs
also often help create jobs, such as the 10,000 estimated jobs that Renovate America has created through its PACE
lending since December 2011.
Though New Jersey’s PACE program is constrained by Governor Christie’s
conditional veto and questions of PACE loan prioritization remain, Florida’s program appears to be poised for growth.
Congress’s extension of the Federal Investment Tax Credit should also help this growing field.

Nora Colmer, Pace the Nation: Why Florida is Shaping Up to be the Next Big Source of Property-Assessed Clean Energy
Bonds, STRUCTURED FINANCE NEWS, (January-February 2016)
Following Nevada PUC’s Decision to Punish Rooftop Solar Customers, SolarCity Forced to Eliminate More than 550 Jobs in
Nevada, SOLARCITY, (Jan. 6, 2016).
Arizona utility TEP wants to add solar fee, reduce net metering credit , UTILITY DIVE, (Nov. 6, 2015).
PR Newswire, Renovate America Is Named In The 2015 Global Greentech 100, PR NEWSWIRE, (Jan. 25, 2016)
Dechert LLP
February 2016 Page 6
This update was authored by:

Patrick D. Dolan
Partner, New York
+1 212 698 3555

Kira N. Brereton
Associate, New York
+1 212 698 3574

*Thank you to Zachary Dugan for his assistance with this publication.
© 2016 Dechert LLP. All rights reserved. This publication should not be considered as legal opinions on specific facts or as a
substitute for legal counsel. It is provided by Dechert LLP as a general informational service and may be considered attorney
advertising in some jurisdictions. Prior results do not guarantee a similar outcome. We can be reached at the following postal
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