PACE LIENS AND SOLAR LEASES. PACE and Solar Liens. PACE-What is it 8/4/2015. Two Methods for Homeowners to Achieve Dual Goals

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1 PACE LIENS AND SOLAR LEASES August 4, 2015 Sanjay Wagle, Senior Counsel Copyright 2015CALIFORNIAASSOCIATION OF REALTORS (C.A.R.). Permission is granted to C.A.R. members only to reproduce and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Any other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved. 1 PACE and Solar Liens Two Methods for Homeowners to Achieve Dual Goals 1. Utility Cost Savings 2. Concern for the Environment 2 PACE-What is it Property Assessed Clean Energy (PACE) But it is now not just for clean energy Both Commercial And Residential (only looking at Residential) Way to Finance Energy and Water Efficiency and Energy conservation improvements to the home Cost of improvement becomes a lien paid for by an assessment on the owner s property 3 1

2 PACE-What is It Lien is similar to property tax lien Has super priority like a property tax lien Becomes senior to other private liens including the first mortgage That is a problem!!! 4 PACE-Adminstration Government program Local public agency creates a Joint power authority which administers the program itself or may contract with a private entity to administer 5 PACE-Adminstration Used to be a larger variety of programs but increasingly government s are contracting with three big statewide entities HERO, California First and Ygrene There are others as well. Some governments contract with more than one 6 2

3 PACE Funding Public and/or private or a combination Funds can be borrowed from County Bond issues sold to private investors Low default rates make bonds appealing to investors 7 PACE-How does it work GENERALLY Homeowner advised or required to get energy audit-not common for it to be required Homeowner contacts approved/qualified licensed contractor Gets estimate for approved improvement Applies to program Agreement with the entity administering program Work performed Contractor paid Homeowner pays for the improvement 5-20 year assessment for the cost plus interest plus fees 8 PACE-How does it work Homeowner can borrow generally from to 10%-15% of the value of the property depending on improvement/program requirements Combined assessment for PACE plus property tax cannot be more than 5% of the market value of the property at the time the improvement is done 3

4 Eligibility Requirements vary Generally no credit check Homeowner must be current on property taxes Some programs require no late payment on property taxes for a period of time-for example only one late pay in three years No judgment or tax liens Not in BK No delinquencies on existing mortgages Mortgage plus amount of assessment generally cannot be more than 90% of the value of the home Terms Interest rates from reasonable to high depend on term of period of repayment and program Can range generally from about in the range of % plus origination fees ranging from zero to close to 7% Payment through assessment and paid on property tax bill Reasons Why PACE Appealing Refinancing or Home Equity Lines are a hassle Some people may be eligible for PACE whose credit may make them difficult to qualify for financing Banks make it hard these programs make it easy to obtain funds Payments (even with relatively high interest rate and costs) often offset by energy savings 4

5 Pace Lien Disclosure Must be disclosed by seller Required by RPA-CA- PARA. 8.B.(5) Required by SPQ Clearly Material Fact Recorded document should be on prelim. Poll Question 1 Have you ever had a transaction with a PACE lien on the property? Yes OR No PACE Problems/FHFA FHFA regulator Fannie and Freddie Will not allow conforming loans for refi or for a borrower on properties with a PACE lien CA sued FHFA and lost on this issue CA started a program to help lenders in case of losses FHFA did not change policy Bottom line FHFA does not like the superpriority 5

6 PACE Problems/FHFA/Financing Does PACE lien violate loan terms Conforming loan yes-fannie/freddie Security Agreement forbids such loans without consent Fannie/Freddie will not act where PACE lien placed before July 6, 2010 New PACE liens do violate loan terms, but thus far not heard of any actions Conventional lenders generally following suit PACE-Problems FHFA/Financing Obvious consequences Homeowner limited in refinance options Limits buyer pool Potential impact on sales price since limited buyer pool PACE Programs Response Some programs such as are now suggesting they will subordinate to a new first lien mortgage However, weather such agreements will pass muster with FHFA unknown 6

7 PACE-Problems/Advertising Advertising (as all advertising) stresses benefits of PACE Some REALTORS feel not enough information given about risks Some areas believe programs are being hyped on the good aspects but not on the potential pitfalls PACE- Issues With Costs Interest rates can be relatively high 4.75% - 9% Origination charges bundled into the total can be close to 7% on some programs plus administrative fees No TILA/RESPA type disclosures required in advertising Due to ease of financing and potential savings possible many homeowners do not fully take into account full cost of financing PACE- Advertising Problems Insufficient Information about the possible difficulties with selling/financing/refinancing a property with a PACE lien Programs tout the number of properties sold with the lien, but numbers could reflect properties sold prior to FHFA prohibition! Information often downplays or does not explicitly discuss the risk 7

8 PACE-Advertising Problems Some materials tout the benefit of adding the improvements to the value of the home Without discussing the pitfalls and possible negative affect on the value due to financing issues PACE-One AOR s Response to Pace Issues IVAR-Inland Valley Association of REALTORS Home of HERO lot of PACE activity Lots of complications with sales due to financing issues BOD opposes HERO program unless and until: 1. It meets accepted consumer protection standards for disclosure and transparency of consumer lending, 2. Receives appropriate regulatory scrutiny, 3. Refrains from making any claims about loan transferability until lending issues with FHA and FHFA have been settled 4. Refrains from making general claims about increases in property values until appraisal issues are resolved. PACE Selling Property With a Pace Lien Seller Options selling property Pay off lien early Amount of lien Amount of equity available Some PACE programs have now indicated they may subordinate (HERO) However-no official change in FHFA position or most conventional lenders 8

9 PACE Who does it work for? Those who can pay off the lien when they need to sell either due to equity or lien is not that substantial if they want to refinance or sell Those who intend on remaining in their homes for the time of the assessment and don t anticipate refinancing If the PACE entity offers refinancing options through affiliates If the PACE entity will subordinate lien which is clearly acceptable to FHFA If the homeowner wants improvement and does not qualify for conventional financing Alternatives to PACE Home Equity Loan HUD Insured Energy Efficient Mortgages Local initiatives e.g., empower for SLO, SB and Ventura Counties, provides low cost/low interest loans for energy improvements PACE C.A.R. Response Concerns about impact on sales C.A.R. Task Force and Working Group on this topic Working with PACE entities Possible legislative action 9

10 Solar Leases Leases for Solar Panels Contrast with those panels which are bought outright by homeowner Many options leases attractive because little or no upfront cost Decision to buy or lease complicated many factors Solar Leases Disclosure Seller obligation to disclose RPA-CA Para 8B.(5) SPQ/Material Fact Prelim will show generally UCC-1 filing done Even if seller does not disclose, lender will need subordination from leaseholder so usually will be discovered before close Poll Question 2 Have you ever had a transaction with a solar lease on the property? Yes OR No 10

11 Solar Leases Transfer Issues Lease needs to be transferred to new buyer Various issues Buyer may not want lease Buyer may not qualify for lease (credit) Even if buyer wants lease amount of lease payment included in debt/income ratio could affect the amount borrower can borrow Solar Leases Transfer Issues Fannie guidelines, solar leases not considered in appraisal Owned solar panel are per normal appraisal guidelines Owners may have to make concessions to make buyer take lease or payoff the lease For buyer with problematic credit-some companies will accept deposits owner may have to assist Some companies have dedicated teams to assist Announcements Legal Live Webinar Recorded version of today s webinar should be available by tomorrow. Next monthly webinar: September 8, :30 p.m. 2:30 p.m. Topic: C.A.R. Sample Letters Twitter C.A.R. Member Legal is on twitter. Follow us for an easy way to get legal information and updates relevant to your 11

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