Are PACE Commercial loans in Florida risky or worthwhile - our overview and video link

 

Are PACE Commercial and Residential Funding Programs in Florida Risky or not - with video link

by Vance Jochim, Editor - Fiscal Watchdog blog FiscalRangers.com     

Created Dec. 18, 2020 - Updated Dec. 19 to add link to Oct. 19 Town Council meeting and initial PACE presentation to them. 

 

This is our review and recommendations about the confusing and in our opinion, risky (to residential homeowners) PACE funding programs used in Florida and other states for "green" type residential remodeling OR for commercial projects (which may be less risky).  We have found that residential PACE loans are still risky to homeowners, but commercial project PACE funding programs may have much less risk to taxpayers and approving local governments and would provide less costly interest for qualifying commercial projects.  This review mostly focuses on issues related to Commercial PACE loan programs and is supplemented with a video we made to discuss them with the Lake County, FL Property Tax Collector, David Jordan in December 2020.  The video is more technical than some may wish to watch and we apologize for the poor audio.  You can also watch this EARLIER Oct. 19, 2020 Lady Lake video of the initial PACE presentation by advocates to the Lady Lake, FL Town Council.  

 

PACE stands for "Property Assessed Clean Energy Program" and refers to a Federal and State approved method of low-interest FUNDING of certain qualified, socially desired "Green" construction designs and materials to reduce long term energy usage in residences or commercial projects or provide Hurricane hardening improvements. 

 

HERE is the US Energy Dept. Page explaining PACE programs.

 

The Florida PACE Program page is HERE.   Note:  Their homepage induces applicants with all the marketing reasons to entice applicants such as ZERO down, "Not based on credit score", etc.   This page cites our opinion below about the RISKS of RESIDENTIAL PACE loans below to residential owners. 

 

In order for PACE funding to be offered to residential or commercial developers or contractors, the PACE program must be approved first by the local City or County government Council or Board approving the building permits.  The local government approval results in the ability for the contractor to add the PACE "loan" to the property taxes of the commercial project/home in their county and is based not on credit ratings, but available equity in the property being remodeled or constructed.  

 

Thus the local County Tax collector, not a commercial loan company, is collecting annual loan payments (including administrative fees) as part of the property tax bill which are forwarded to the PACE lender.  That is why we talked to David Jordan in the video. 

 

Three cited general benefits for PACE loans:

• The interest rates are LOWER since monthly/annual payments on the loan are added to the property's TAX bill and collected by the County Tax collector for payment to the PACE lender.  Thus the risk is LOWER to the lender and they charge lower interest rates. The interest cost savings to a commercial developer can be significant.  This process may be questionable for those who do not believe the government should be used for collecting loans to benefit private businesses.  PACE loans also use government collection resources to compete with private lenders like banks. 
• The PACE loans are based upon the property EQUITY and not the credit rating of the buyer/property owner.  This enables homeowners with low credit but high home equity to get loans for "green" home improvement projects.  This, however, is one reason residential PACE loans are riskier for a homeowner because if they lose their ability to keep up property tax payments that are higher due to the PACE loan liability, they may lose their home in certificate sale due to unpaid property taxes.  Unsophisticated residential homeowners may not understand these risks.
• PACE loans facilitate a property owner's motivation to incorporate PACE approved "Green" energy improvements into their project, reducing energy costs.  However, the total cost of such enhancements may be more than can be recovered if a home or property is sold.  Future buyers of properties with PACE loans may not want to pay the higher taxes or home loan lenders may not approve loans for homes with PACE liabilities. 

 

The two main types of PACE projects are residential and commercial.  

 

PACE residential loans are usually for home improvement UPGRADES in the property to be more energy efficient (solar roofs, better windows, hurricane hardening, etc.).  The PACE loans would be offered by remodeling contractors doing business in the city or County areas that approved PACE funding.  Residential PACE funded projects might be solar roof panel systems, replacement of windows, upgrades to more efficient heating or air conditioning systems.  In our opinion, these loans are very risky due to the reasons listed further below. 

 

PACE Commercial loans can be used to build (or upgrade) commercial properties that incorporate desired "Green" types of design and materials to be more energy efficient.  

 

The PACE funding programs started under the Clinton Presidential administration and have expanded from California to many states which created similar PACE enabling laws. 

 

As of December 2020, PACE funding programs in Lake County, FL for Commercial only projects were approved only in Leesburg.  Mt. Dora has also approved PACE funding but we don't yet know yet which types were approved.  Lady Lake turned down a Commercial PACE funded project in November 2020 but is reconsidering it this month (Dec. 21, 2020).  The Lake County government turned down requests to approve PACE funding programs in unincorporated Lake County about 3-years earlier.  

 

PACE advocates point to many other Florida counties and cities that have approved either PACE Commercial or Residential loan programs.  But, if you do a Google search on "Pace lawsuits" or "PACE BBB" you will find many horror stories about PACE residential programs. The bad reputation for PACE residential programs has carried over to PACE commercial programs which may not be appropriate. 

 

This video focuses on COMMERCIAL PACE projects, which may not have the risks described below for Residential PACE funded projects.  We did this to unpack confusion between the risks of PACE Residential horror stories which may not apply to PACE Commercial projects like $20-million retirement buildings with desired energy-efficient designs. The video also goes over some transparency issues that PACE financing entities should understand. 

 

In summary, it is our opinion that Commercial PACE projects do not appear to have the same owner or political risks as Residential PACE loans.  Both loan types must be approved by the governing City or County government, but Commercial PACE loans may be beneficial and less risky because:

• The PACE Commercial funding programs do not appear to cause a taxpayer liability or risk, even though they are added to property tax rolls and must be collected by the County Tax Collector.  The Tax Collector DOES receive a processing fee for their collection duties, so taxpayers are not subsidizing tax collecting costs. If the commercial property DOES go into default and must be seized to pay for property taxes due, existing processes cover the government's costs which are recovered when the property is sold.  
• A recent statement from the Federal Government said tax defaults of PACE funded commercial properties for overdue taxes are extremely limited, with only one default in 1800+ Commercial Projects receiving PACE funding nationwide. 
• Commercial developers are much more sophisticated in understanding the financial risks of PACE funding, which "stays with the property" on tax rolls. 
• Risk is lower based upon the percent of non-PACE funding provided by the developer or other conventional lenders since they are paid LAST if a Commercial project does default on paying property taxes, which do include the PACE loan in the total due.  
• The risk of commercial developments may be lower due to the value of the project and the ability to generate revenues to cover PACE costs embedded in property tax bills.
• The construction quality and permitting of PACE funded commercial projects is assumed to be higher and not subject to fly by night operators implementing substandard materials and construction methods.
• The ability of Commercial property owners to keep up property tax payments is assumed to be higher than the average residential PACE loan recipient. 

 

Reducing "PACE Confusion"

It is also our observation that it is unfortunate that both commercial and residential PACE loans use the same "PACE" name because the owner and political risks (to the approving City or County) seem to be quite different.  To alleviate "PACE confusion" I suggest they be referred to separately as Commercial PACE, and Residential PACE and be shortened to C-PACE and R-PACE to reduce the confusion as defined on the above linked FloridaPace.gov page. Cities or Counties considering approval of only PACE Commercial programs should clearly differentiate what they are approving. We recommend the approving cities or counties ONLY hear presentations about one or other PACE program, and not accept a "mixed" presentation about both PACE loan types. 

 

RESIDENTIAL PACE projects, however, are controversial and not condoned by FiscalRangers.com because they are sometimes used to entice homeowners with lower interest rates for sometimes dubious quality construction projects where the cost of the "loan" is added to their home's property tax bill until paid off. Thus the cost of a $30,000 solar roof system would be added to the property tax bill and there is no way to "null" it if the project quality fails in a short time period.  Naive homeowners could be misled and not know the PACE "loan" is really a lien on their home. There are several negatives for homeowners who use PACE funding:

• If the project goes bad, or the owner stops paying their property tax due to poor quality or other factors, the home will be seized for lack of tax payments and sold by a standard default process performed by the County Tax Collector and Court Clerk. (see the video for a description).  Owners could lose significant home equity in this process just to pay overdue property taxes and PACE payments. 
• Many lenders will not provide loans to subsequent buyers of homes that have a PACE property tax liability. They will be harder to sell unless the current owner pays off the entire PACE loan before listing their home for sale.  Not many homeowners can do that. According to the Florida Pace page, "Fannie Mae and Freddie Mac’s policies prohibit them from purchasing a residential mortgage where the property is subject to a first lien PACE assessment. "  Read other caveats about a homeowner's ability to refinance or sell a home with PACE loans here:  https://floridapace.gov/about-pace/. 
• If the homeowner loses income, they cannot use bankruptcy laws to avoid PACE liabilities.  PACE tax liabilities increase the annual property tax bills and STAY with the property.   Thus a homeowner who loses a job cannot just stop payment on the PACE loan and file bankruptcy to avoid further payments.  Instead, he would lose his house due to non-payment of the combined property tax bill which is higher due to the PACE loan. 
  • To find many examples of PACE Residential loan problems, just do a Google search on "PACE lawsuits" to find them. 

    For instance from the MiamiHerald.com :

    "Currently, there are no (Florida) statewide laws requiring PACE providers to explain the costs of the improvements, check if the people who sign up can actually afford to pay back the money or understand the terms."

    “It’s getting bad. It is bad,” said Mike Fasano, the tax collector for Pasco County and a self-described watchdog for the program in the state. “There’s nobody in the state — no agency, no entity, no one — that a homeowner can go to with issues with these PACE loans.”

    https://www.miamiherald.com/news/local/environment/article240395386.html.  (Feb. 20, 2020) 

Our conclusion: based upon our research and the above-linked video interview with the Lake County, FL Tax Collector about Cities or Counties approving PACE Commercial and residential properties it is our opinion:

• PACE Commercial loans appear to provide a fairly low risk to the taxpayer and to the property owner and allow lower interest costs for funding desired local commercial construction built by financially sophisticated developers.   
• PACE Residential loans have many risks, and harmed residential owners may complain to the City or County that approved them. We do not recommend that cities or counties approve RESIDENTIAL PACE funding programs at all without improved safeguards for homeowners which do not apparently exist yet. 

The above article is the sole opinion of Vance Jochim of Fiscal Watchdog blog FiscalRangers.com

This article is copyrighted Dec. 18, 2020