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10 - Expansion of Property Assessed Clean Energy (PACE) Program Presentation & DiscussionItem No. 10 TO: City Council Grayson Path, City Manager FROM: Stephanie H. Harris, City Attorney SUBJECT: PRESENTATION AND DISCUSSION OF EXPANDING PROPERTY ASSESSED CLEAN ENERGY (PACE) PROGRAM TO PROJECTS THROUGHOUT THE CITY DATE: July 12, 2021 BACKGROUND: You will recall that in February and March of this year, Council adopted a PACE program. While the jurisdiction of the program was all properties inside the city limits, the program was set up for a single pilot project involving Paris Lakes. We now have a request from Harrison Walker and Harper (HWH) to expand the program to projects throughout the city so that HWH can take advantage of the program for energy efficient upgrades to various of its properties. As a refresher, and as background for Council Member Pankaj, Chapter 399 of the Texas Local Government Code (LGC) codifies the Property Assessed Clean Energy (PACE) Act. PACE financing is an alternative to traditional financing for energy efficiency, water conservation and renewable energy projects for privately -owned commercial and industrial properties. PACE makes it possible for commercial, industrial, and certain residential property owners: ■ to obtain low-cost, long-term financing ➢ to improve energy efficiency, generate renewable energy, and achieve other vital public benefits ➢ to increase the value of their property through improvements to lighting, roofing, HVAC systems, boilers and chillers, insulation, glazed windows, hot water heating systems, renewable energy systems, and more ■ to finance these projects in away that is cash-flow positive —payback terms of up to 30 years can result in yearly savings from energy improvements greater than annual PACE payments Unlike more traditional means of financing, PACE financing is secured by an assessment on the property that is in turn secured by a senior priority lien on the property that runs with the property and cannot be extinguished by a foreclosure of a mortgage or a property tax lien. The PACE lien is enforced in the same manner in which a property tax lien is enforced, through foreclosure by the local governmental entity. PACE financing is designed to be risk- and cost-free for the local government. Phase 1— Establishing the framework for a local PACE Program Phase 1 includes four primary statutory requirements for a local county or municipality to establish the framework for a PACE program within its jurisdiction. The Texas statute code requires a report to be published for the public and posted on the municipality's website. This report outlines the primary facets of the local program, application process, financing guidelines, and other big -picture and administrative items pertinent to running a PACE program. Next, the statute requires two resolutions to be adopted by the local county or municipality, including a resolution of intent to create a PACE program, and a resolution to establish the PACE program. After the resolution of intent is adopted, the statute requires the governmental body to hold a public hearing on the proposed program and report. After the public hearing, the governmental body passes the second resolution, the resolution to establish the PACE Program. In this case, we will only be amending the existing program, but the following steps still apply. 1. Public PACE Report (Required by Section 399.009) — Report by local government describing the PACE program once structure has been decided. This report must be made available for public inspection on the local government's website and at the office of designated official. 2. Resolution of Intent to Create PACE Program (Required by Section 399.008(a)(1)) — Include finding that projects will serve a valid purpose, local government intends to make contractual assessments to repay financings, description of project and map boundaries, reference to the Public PACE Report, statement of the time and place for a public hearing. 3. Public Hearing (Required by Section 399.008(a)(2)) — Public may comment on proposed program and report. 4. Resolution to Establish Program (Required by Section 399.008(a)(3)) — This resolution should include each item in the Public PACE Report required by statute, or it may incorporate the Report by reference; this resolution should also include a description of each aspect of the program that may be amended only after another public hearing is held. Phase 2 — Set up administration of the local PACE Program The PACE Program can be administered in one of several ways: (1) via the local government itself, (2) by implementing a program jointly with another local government, or (3) by contract with a third -party administrator. Administration of the program would include the application process, application review, and possible servicing functions also. The administration process will include the requirements of Section 399.009(a)(9)-(11) and (15)- (16) of the LGC: (9) description of the application process and eligibility requirements for financing qualified projects to be repaid through contractual assessments under the program; (10) the method described below for ensuring that property owners requesting to participate in the program demonstrate the financial ability to fulfill financial obligations to be repaid through contractual assessments; and (11) explanation of the manner in which property will be assessed and assessments will be collected ... (15) a description of quality assurance and antifraud measures to be instituted for the program; and (16) the procedures for collecting the proposed contractual assessments. All of these elements are required to be addressed in some manner in the Report. Per the Report requirements of Section 399.009(b) of the LGC, there are requirements that the method for ensuring a demonstration of financial ability of the property owners under Subsection (a)(10) be based on appropriate underwriting factors, including: (1) providing for verification that the property owner requesting to participate under the program is the legal owner of the benefitted property, is current on mortgage and property tax payments, and is not insolvent or in bankruptcy proceedings; and the title of the benefited property is not in dispute; and (2) requiring an appropriate ratio of the amount of the assessment to the assessed value of the property. The state permits a local government to impose fees to offset the costs of administering a program (See Section 399.008(e).) Fees authorized by this subsection are to be assessed as: (1) a program application fee paid by the property owner requesting to participate in the program; (2) a component of the interest rate on the assessment in the written contract between the local government and the property owner; or (3) a combination of (1) and (2). Phase 3 — Financing and Project Completion The primary operative document for each program, is the "program agreement" or "Owner Contract", which is required by the Section 399.005 of the LGC. The Owner Contract creates the property assessments and senior lien and must obtain written consent of any existing mortgage lenders as a condition precedent to this agreement. Below are each of the statutory requirements to entering into the Owner Contract, third -party lender financing, and review of the proposed and completed project, all of which comprise Phase 3 of the local PACE Program. 1. Owner Contract between Pace Program and Property Owner (Required by Section 399.005) — This is the primary Program agreement; this agreement creates the property assessment and senior lien, and specifies terms of financing to be provided by an eligible lender. 2. Consent of existing mortgage lender (Required by Section 399.010) — Prior to signing Owner Contract, each existing mortgage lien holder must be given 30 days written notice, and give written consent. 3. Notice of assessment lien (Required by Section 399.013) — Filed in the real property records of county where property is located. — A local government that authorizes financing through contractual assessments under this chapter shall file written notice of each contractual assessment in the real property records of the county in which the property is located. The notice must contain: (1) the amount of the assessment; (2) the legal description of the property; (3) the name of each property owner; and (4) a reference to the statutory assessment lien provided under this chapter 4. Lender Contract between Property Owner and Capital Provider (Required by Section 399.006(d)) — Provides financing by third -party lender and servicing of the debt through assessments. — Servicing Agreement: Includes billing, collecting and remitting payments to the third -party lender. Servicer also maintains payment records, account balances, etc. (See Section 399.015, Local government may contract with another entity for collection of assessments imposed by the local government.) 5. Review of Proposed Project and Completed Project (Required by Section 399.011(a) and (b)) — Owner must obtain a review which must be conducted by an independent third party with no financial interest. — A program established under this chapter must require for each proposed qualified project a review of water or energy baseline conditions and the projected water or energy savings to establish the projected water or energy savings. — After a qualified project is completed, the local government shall obtain verification that the qualified project was properly completed and is operating as intended. STATUS OF ISSUE: The city has been approached by HWH requesting that the program be expanded beyond the initial pilot project. BUDGET: The costs of a PACE program are supposed to be borne by the owner, who is participating in the program voluntarily. The city will have to determine how best to pass on any staffing or other costs, but the program should be budget neutral. OPTIONS: 1. Direct staff to expand the PACE program beyond the initial pilot project to include any qualifying projects within the city. 2. Decline to expand the PACE program. RECOMMENDATION: Direct staff as to one of the options above.