Energy and Clean Technology



Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.


January 19‚ 2012

PACE-ing in Purgatory: Outlook for Property Assessed Clean Energy Financing

By Jordan M. Collins

The once much-heralded financing mechanism to unlock energy efficiency retrofits — Property Assessed Clean Energy Financing (PACE) assessments — remained in a holding pattern during 2011. While states continued to break down barriers to instituting PACE programs, federal support remained at best unresolved, and at worst opposed to allowing PACE loans for the ubiquitous, federally supported housing market. However, recent litigation and introduced legislation signals a continued effort by energy efficiency advocates to make PACE programs a mainstream financial instrument for the residential housing market.

PACE Primer

The Property-Assessed Clean Energy (PACE) model is a financing structure that enables state and local governments to raise money through the issuance of bonds or other sources of capital to fund energy efficiency and renewable energy projects.1  PACE programs use the same kind of land-secured financing districts that municipal governments have employed for over 100 years to pay for improvements deemed to be in the public interest. For example, municipal-level property assessments have proven to be an effective financing tool for investing in street paving, public parks, water and sewer systems, street lighting, and seismic strengthening.

The extension of this common municipal financing model to energy efficiency and renewable energy investments allows a property owner to install improvements such as weather sealing, insulation, energy efficient boilers and cooling systems, new windows, and solar installations without a large up-front cash payment. Further, by offering a long loan tenor — typically twenty (20) years — PACE financing spreads the cost of energy improvements over the expected life of the measures.

Policy Inception: Picking Up Speed

Conceived in 2008 with a pilot program in California, the original PACE program quickly caught the attention of other communities around the country. In just three (3) short years, twenty-seven (27) states have passed PACE-enabling legislation, and nearly twenty (20) more state legislatures and local governments are currently considering authorizing or implementing PACE programs.2

Some opponents of PACE programs have questioned their constitutionality by asserting that PACE programs may violate the Due Process Clause and/or the Contracts Clause of the U.S. Constitution on the grounds that PACE assessments are given senior lien status over an existing mortgage. However, such legal arguments have not proven persuasive. Significant case law supports the constitutionality of government actions like PACE programs which affect pre-existing, private contracts.3

PACE programs have arguably enjoyed tremendous success since the first programs were stood up in 2007. By the fall of 2010, it was estimated that roughly 2,000 homeowners had PACE assessments nationwide. The City of Berkeley’s pilot program sold out in nine minutes, and Boulder County, Colorado has sold over $10 million in municipal bonds to support 500 projects. Sonoma County, California, is nearing $40 million in approved projects, and Palm Desert, CA has approved over $7.5 million in projects to date. The modified PACE program in Babylon, NY has also shown initial signs of success.4

From a macroeconomic perspective, a 2009 University of California at Berkeley study concluded that if PACE programs became widely adopted, the programs could infuse $280 billion of bond financing into the economy, and reduce overall greenhouse gas (GHGs) emissions by up to one (1) gigaton.5

PACE Mechanics: Taking a Page Out of the Municipal Playbook

PACE programs are inherently local government programs. While specific program elements inevitably vary by jurisdiction to meet the needs of individual communities, and reflect differences in state laws, most PACE programs share several basic features:

·         State and local governments codify either in law or public policy a specific goal or objective such as promoting energy efficiency as a modality to spur economic development, or enhance environmental standards.6

·         A municipal government then establishes a type of land or real property secured financing district, also known as a “special tax” or “special assessment” district. Participation in these districts is strictly voluntary, and property owners choose whether or not to opt-in.

·         The municipality provides financing for energy efficiency projects, typically funded through bond issuances secured solely by payments made from participating property owners.

·         A contractor will assess the scope of desired improvements through energy audits for efficiency measures, or cost estimates for renewable projects’ projected energy savings. Any such assessment will evaluate anticipated energy savings against the cost of installing energy efficiency improvements or renewable energy systems.

·         Property owners benefitting from the improvement repay the government issued bond through property assessments, secured by a property lien, and paid as an addition to a property’s tax bill.

·         The financing is amortized over a long loan tenor through a “special tax” or “assessment” on a participating property owner’s tax bill.

·         The financing is secured with by senior lien on the property and in the event of foreclosure, the energy financier is paid before other claims against the property.

·         If the property is sold before the end of the PACE repayment period, the new property owner inherits both the remaining repayment obligation, and the energy benefits accruing to the property as a result of the PACE-financed improvements.

PACE Policy Rationale: Overcoming Energy Efficiency Market Barriers

PACE programs are designed to overcome several market barriers currently impeding property owners from making investments in energy conservation measures. These barriers include:

·       Limited access to capital by property owners

·       High transaction costs associated with EERE investments

·       Lack of information leading to undervaluing efficiency investments

·       Reservations about fully recovering investments through energy savings before the property is sold or transferred.

PACE programs address these well-understood market deficiencies by providing access to low-cost capital at attractive borrowing rates supported by state and local governments. Other benefits associated with PACE programs include streamlining a borrower’s application process, lower application and transaction fees relative to other lending options, and establishing a financing mechanism that alleviates concerns about stranding benefits associated with energy efficiency and renewable energy improvements if a property owner sells or leaves the property. This is because PACE loans – as well as the associated energy savings benefits – “stay with the property.”

Because energy efficiency measures can lower a homeowner’s energy costs by up to 35%, annual energy savings will typically exceed the cost of PACE investments over the useful life of a property, transforming the perceived upfront cost barrier into improved cash flow for property owners, as well as potentially enhancing property values.

The Recovery Act: Scaling Up PACE with Federal Support, Quickly

PACE programs garnered greater national prominence after passage of the American Recovery & Reinvestment Act of 2009.7 In the Recovery Act, the Department of Energy (DOE) received unprecedented funding for its State Energy Program (SEP) receiving $3.1 billion, and for the first time, Congress appropriated $3.2 billion in funding for the Energy Efficiency Block Grant Program (EECBG).8 Both programs authorize state and local SEP and EECBG funding recipients to leverage Federal grant awards to develop innovative energy efficiency retrofit financing programs like PACE.9

In response to a surge in SEP funding, DOE received approximately $80 million of applications by grant recipients to leverage Recovery Act funding to provide the necessary upfront capital to establish PACE-type programs in their communities.10 In 2009 and 2010, DOE actively worked to promote and structure PACE programs with interested municipalities and states. Internal DOE analysis in early spring 2010 indicated that more than forty (40) cities and states were using or planning to use roughly $175 million of DOE Recovery Act funds to support PACE programs. DOE began funding PACE financing mechanisms, as well as incorporating new federally designed principles for state and local PACE programs.11

Both members of Congress and Vice President Biden publicly praised the PACE model as an important tool in addressing America’s environmental and economic challenges. In October 2009, Vice President Biden announced White House support of the PACE model, including the availability of millions of federal dollars aimed at expanding the PACE model to municipalities across the country.12

Despite federal policymakers recognizing the tremendous potential PACE presented for unlocking the energy efficiency retrofit market, other federal agencies with significant equities in financing and regulating the U.S. housing market — Government Sponsored Enterprises (GSEs) Fannie Mae & Freddie Mac and their conservator the Federal Housing Finance Administration (FHFA) — took a drastically different policy position on allowing municipalities to underwrite PACE loans backed by the U.S. government. This internal divergence within the Executive Branch resulted in a chilling effect on PACE market uptake.

Hitting the Proverbial Wall: Bank Regulators Raise Concerns

Beginning in 2010, Federal regulators of the U.S. secondary mortgage market began taking notice of PACE programs both encouraged by and beginning to receive funding by DOE through the Recovery Act, starting to express three (3) concerns with the financing mechanism. These concerns were substantial, as they led to first a freeze, and ultimately a de facto suspension of using PACE loans associated with residential properties either owned by, or securitized by federal housing regulators.

First, regulators expressed a concern that because PACE assessments created senior liens with priority over existing mortgages backed by the GSEs, creating additional risks for lenders, servicers, Fannie/Freddie, and other mortgage holders (i.e., investors in mortgage backed securities) by exposing them to defaults on PACE assessments without giving them control over the loan underwriting process.13 In other words, when GSEs underwrote or purchased a mortgage, they did not anticipate a new lien could supersede their senior creditor position after originating the loan in the event of default. From a regulatory standpoint, the terms of the GSEs Uniform Security Instruments prohibit loans that have senior lien status to a mortgage, which PACE assessments would arguably hold.

Second, federal regulators expressed concerns that PACE programs, which varied considerably in the design from one locality to another, generally lacked sufficient underwriting criteria and consumer disclosure provisions.14 They also expressed a concern about the lack of centralized monitoring and enforcement of PACE program features.

Finally, regulators were concerned that investments made through PACE loans might not result in the projected energy savings, putting borrowers in a potentially adverse financial position behind a PACE lien. They raised questions about the lack of data on home energy performance, practices for reducing home energy use, and potential impacts on home values for homes that were upgraded through PACE programs. More broadly, the regulators were concerned that PACE programs could create scenarios that would enable predatory lending practices, as had been the case in the past with various home improvement programs.

The Death Knell for Recovery Act PACE Programs

Throughout the summer of 2010, the Administration attempted to address bank regulators’ concerns and secure their support for a carefully designed pilot program to enable the PACE concept to be fairly tested in the residential market. Elements of the proposed pilot program included a limited number of participants and required the adoption of a set of “best practices” to mitigate the perceived risk exposure PACE loans presented to federal bank regulators such as limiting the size of the PACE lien to a percentage of a property’s value. Administration officials also floated the concept of fully guaranteeing all PACE assessments by using Recovery Act funds to establish a loan loss reserve, serving as a federal backstop for defaulted PACE loans. Such a fund sought to alleviate regulator concerns about the senior status of PACE assessments in relation to underlying home mortgage loans they originated or secured. However, Administration efforts did not prove persuasive, and a series of policy statements made by Fannie Mae, Freddie Mac, FHFA, and other bank regulators signaled their positions were hardening.

On May 5, 2010, Fannie Mae and Freddie Mac sent a letter to bank lenders inquiring as to whether or not states or municipalities in which conducted business had existing or prospective PACE or PACE-like programs. The purpose of this communication was two-fold: (1) to warn lenders that “programs with first liens (i.e., PACE) run contrary to the Fannie Mae-Freddie Mac Uniform Security Instrument”, and (2) that the GSEs would “provide additional guidance should the programs move beyond the experimental stage.” 15 This letter served as GSE’s official warning.

On July 6, 2010, the FHFA issued a statement that PACE programs “present significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities and are not essential for successful programs to spur energy conservation.”16 In the statement, the FHFA directed Fannie and Freddie to adopt policies that effectively precluded homeowners from participating in PACE programs as designed.17 The same day, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration — independent agencies that regulate various sectors of the banking system — issued similar statements.18

On August 31, 2010, Fannie Mae issued guidance to lenders stating that, “Fannie Mae will not purchase mortgage loans secured by properties with an outstanding PACE obligations unless the terms of the PACE program do not permit priority over first mortgage liens.” 19 The statement also instructed borrowers contemplating refinancing their mortgage with sufficient equity in their homes to pay off any PACE assessments.20 Freddie Mac issued a similar statement.

By the fall of 2010, almost all PACE programs focused on the residential sector had been effectively frozen. DOE recognized that the aforementioned policy positions taken by the federal bank regulators undermined any efforts to leverage Recovery Act funds to capitalize state and local PACE Programs. DOE remarked,

 “…Recovery Act grantees are not expressly prohibited from using funds to support viable PACE financing programs, however the practical reality is that residential PACE financing programs with a senior lien priority face substantial implementation challenges in the current regulatory environment. In light of the clear opposition from the regulators for PACE financing programs with a senior lien priority, prudent management of the Recovery Act compels DOE and Recovery Act grantees to consider alternatives to programs in which the PACE assessment is given a senior lien priority.” 21

Some of those alternatives included modified PACE assessments subordinate to first mortgages (similar to a structure piloted in Maine) or other creating other financing mechanisms such as revolving loan funds or loan loss reserves for state energy efficiency financing programs.22 However, frustrated with the federal bank regulators position, states began to take matters into their own hands, challenging FHFA in federal court in September 2010.

On Life Support: California v. FHFA

Then California Attorney General Jerry Brown filed a lawsuit against FHFA in the 9th Circuit, alleging the agency did not: (1) complete the statutorily required environmental review in violation of the National Environmental Policy Act (NEPA), and (2) the federal bank regulator’s 2010 statements amounted to a “substantive rulemaking”, thereby violating the requirements of Administrative Procedure Act (APA) which governs the Federal rulemaking process.23 In its August 26, 2011 opinion, the Court agreed with the State of California, and held that FHFA’s actions indeed violated both NEPA and the APA. However, the Court declined to weigh in on the policy conclusion reached by FHFA, minimizing the impact of the decision.24

National Environmental Policy Act

Under NEPA, a major federal action that may significantly affect the human environment cannot be issued without an environmental assessment or environmental impact statement.25 California argued successfully that FHFA’s attempts to “pause” PACE financing amounted to a “major federal action” for the purposes of reviewing the agencies’ action under the National Environmental Policy Act (NEPA) because FHFA “altered the environmental status quo”.26 The Court held that FHFA’s failure to comply with NEPA constituted an arbitrary and capricious agency action, was an abuse of discretion, and was contrary to procedures required by law.27

Administrative Procedure Act

Under the APA, agencies undertaking a “major federal action” must follow a public notice and comment process unless an exception or exemption is applicable.28 In its opinion, the Court held that FHFA’s 2010 policy statements amounted to a “substantive rulemaking” because its actions directing Fannie Mae and Freddie Mac to prospectively refrain from purchasing any mortgage loan secured by property with an outstanding PACE obligation did not merely constitute an agency interpretation.29 Based on the facts presented, the Court held that FHFA’s policy statement could be characterized as “final agency action” with a legally binding effect (regardless of how FHFA characterized the statement), and that the policy was therefore subject to judicial review.30

In light of the 9th Circuit’s ruling, and from a purely procedural standpoint, the FHFA – pursuant to the APA – must now issue a notice of proposed rulemaking (NOPR) addressing its position on PACE loans, then undertake the formal notice and comment period before the agency issues a Final Rule on the subject.31 Observers have speculated FHFA should begin this process around January 20, 2012 (the FHFA has asked for a brief delay because it is moving its offices), with an opportunity for the public to submit comments for at least sixty (60) days after FHFA publishes the NOPR in the Federal Register.32 FHFA will then have thirty (30) days to publish its proposed rule on PACE programs, which will subsequently trigger another round of public comment before the Final Rule is published.

From a policy perspective, requiring FHFA to follow the APA and conduct a NEPA review of its now court-directed rulemaking may simply result in a moral victory. The federal conservator may ultimately come to the same conclusion reached in its 2010 policy statements after following the formal APA rulemaking process, and may still prohibit GSEs and bank lenders from allowing PACE loans in their portfolios. The 9th Circuit’s opinion reinforces that future PACE policies lie solely within the purview of the FHFA, remarking “…the claims [made by California] do not oblige the Court to evaluate whether the FHFA arrived at the correct conclusion, as a matter of policy.” 33

However, alternative pathways forward for PACE financing programs may lie in the Administration’s creative use of existing authorities, or through Congressional legislation.

Use of Existing Authority: Federal Housing Authority (FHA)

Although FHFA has issued policy statements effectively barring Fannie Mae and Freddie Mac from insuring mortgages for homes with a PACE assessment, the Federal Housing Authority (FHA) is not subject to FHFA conservatorship or regulatory oversight, and could serve as another pathway for supporting the adoption of state and local PACE programs.

Housed within the Department of Housing & Urban Development (HUD), FHA provides federal insurance for private mortgages associated with single family and multifamily homes, including manufactured homes and hospitals. FHA is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934, and currently insures 25% of the U.S. residential housing market.34

Under current FHA policy, the agency’s insurance instruments reimburse mortgage holders for the full costs of property taxes associated with a home in the event of a mortgage default. Therefore, FHA could agree to provide a 100% federal guarantee of PACE assessments levied on new or refinanced mortgages insured by the FHA. FHA lenders could in turn also agree to allow the PACE assessments to be senior to their loan. Because the PACE assessments could be fully guaranteed by FHA, those financial obligations would theoretically impose no additional risk to the lender or a subsequent mortgage holder.

The advantage of leveraging FHA’s position in the residential housing market is three-fold: (1) FHA insures a significant (and growing) portion of the housing market allowing PACE programs to be meaningfully scaled, (2) HUD would not need additional legislative authority or appropriations from Congress, and (3) HUD would not be required to seek FHFA, Fannie, Freddie, or other Federal bank regulators’(e.g., FDIC, OCC) approval because FHA-insured mortgages are not sold or securitized through Fannie/Freddie, nor are they subject to FHFA regulations. (The secondary market for FHA-insured mortgages exists through Ginnie Mae, which is part of HUD and not in any way associated with FHFA, Fannie or Freddie.)

Efforts to leverage FHA for PACE programs are currently under consideration by agency officials, but remain purely deliberative as of the date of this article. The Administration has not taken a formal policy position, or signaled it will take definitive steps to allowing PACE programs in conjunction with FHA-insured mortgages.

The Last Resort: Legislation in an Election Year

The most elegant and effective solution to overcome FHFA’s entrenched policy stance towards PACE programs is for Congress to show  clear support for PACE programs. Advocates for PACE financing have sought Congressional approval to introduce legislation, which has received bipartisan support on from both House and Senate members.

In the 112th Congress, Rep. Nan Hayworth (R-NY) introduced H.R. 2599, the “PACE Assessment Protection Act of 2011” to prevent Fannie Mae, Freddie Mac and other federal residential and commercial mortgage lending regulators from adopting policies contravening established state and local property assessed clean energy laws.35 The bill received fifty-one (51) cosponsors, including thirty (30) Democrats, and twenty-one (21) Republicans. H.R. 2599 is identical to both H.R. 5766 and S.3462 introduced by Representatives Mike Thompson (D-CA), and Senator Barbara Boxer (D-CA), respectively in the 111th Congress.36

The legislation, if enacted, would prevent FHFA and mortgage underwriters from discriminating against communities implementing or participating in a PACE program, including a prohibition on lending within the community or requiring more restrictive underwriting criteria for properties within the community.37

Further, the legislation would also mandate the adoption of underwriting standards aligned with DOE’s PACE guidelines released in May 2010.38 These underwriting standards would explicit incorporate the aforementioned White House Policy Framework for PACE programs to provide that, “in the event that a tax or assessment under a PACE program is delinquent, only the unpaid delinquent amount along with applicable penalties, interests, and costs will be subject to foreclosure and not the entire amount.”39

While strong bipartisan support has been an unusual occurrence in the 112th Congress, so too has a clear legislative vehicle for meaningful energy legislation unrelated to tax policy. Despite the well-documented gridlock in Washington, H.R. 2599 remains one of the more promising pieces of energy legislation that could be enacted in an election year.

A likely legislative scenario would be to incorporate H.R. 2599 into the most bipartisan energy bill introduced in the 112th Congress, “The Energy Savings and Industrial Competitiveness Act of 2011”.40 Introduced by Senators Shaheen (D-NH) and with support from Sen. Portman (R-OH), Landrieu (D-LA) and Coons (D-DE), the bill has gone through several iterations, several hearings before the Senate Energy & Natural Resources Committee, and is a strong candidate for advancing through the legislative process in 2012.


In a recent National Journal article, PACE programs were cited by the Brookings Institution as one of eleven (11) policy measures that could prove effective in jumpstarting economic growth in the United States.41 The President’s Council on Jobs & Competitiveness 2011 Year End Report also called for the U.S. government and the private sector to “continue to promote energy efficiency measures… and provide innovative financing options for homeowners undertaking retrofits.” 42  PACE programs could fulfill that policy recommendation.

While PACE programs remained in some version of legal purgatory in 2011, the recent 9th Circuit decision, the impending FHFA rulemaking, and the sustained bipartisan support for PACE programs are positive developments pointing towards a busy 2012 for stakeholders seeking to catalyze the residential energy efficiency retrofit market.

* * *

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For a general overview of PACE financing mechanisms, see

For the status of enacted and proposed, State level PACE legislation, see

“The Constitutionality of Property Assessed Clean Energy (PACE) Programs”, available at  (May 28, 2010)

For a general discussion of the original PACE programs, see

“Guide to Energy Efficiency & Renewable Energy Financing Districts for Local Governments”, available at

6  Legislation is required because local communities generally must establish “assessment districts” in which to offer PACE programs, similar to those established to fund other public improvement project such as sewers and sidewalks.

7  American Recovery & Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (February 17, 2009).

8  Id., at 123 Stat. 138.

9  See 42 U.S.C. §6322(d)(4); U.S.C. §17154(4). (Authorizing SEP and EECBG grant recipients to use federal funding for energy efficiency financing programs).

10 Executive Office of the President, “Policy Framework for PACE Financing Programs”, available at  (May 18, 2009).

11 Department of Energy, “Guidelines for Pilot PACE Financing Programs, available at  (May 7, 2010).

12 Executive Office of the President, “Recovery through Retrofit”, available at  (October 2009).

13 Federal Housing Finance Agency “FHFA Statement on Certain Energy Retrofit Loan Programs,” available at (July 6, 2010 ) (First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors).

14 Note 13, supra. (“Underwriting for PACE programs results in collateral-based lending rather than lending on ability-to-pay, the absence of Truth in Lending Act and other consumer protections…”)

15 Fannie Mae, “Letter LL-2010-06,” (May 5, 2010) ; Freddie Mac,” Industry Letter,” (May 5, 2010 ), available at


17 Id.

18 Office of the Comptroller of the Currency, “Supervisory Guidance,”( July 6, 2010), available at

19 Fannie Mae, “Options for Borrowers with a PACE Loans”, Announcement SEL-2010-12, (August 31, 2010) available at; Freddie Mac, “Bulletin 2010-20” (August31, 2010), available at

20 Id.

21 Department of Energy, “Status Update – Pilot PACE Financing Programs” (July 2010), available at

22 Id.

23 California v. Federal Housing Financing Agency, No. C-10-03084 (N.D. Cal. 2010). California’s petition is available at

24 Id. The 9th Circuit’s opinion is available at

25 42 U.S.C. §4322(2)(c) (Pursuant to NEPA, all federal agencies to prepare environmental impact analysis (an EA or an EIS) for any major action that may significantly affect the quality of the human environment)

26 Id.

27 Note 24, supra.

28 5 U.S.C. §§ 551(4), 551(5), 553 (The APA’s rulemaking requirements include publication of the proposed rule in the Federal Register and an opportunity for public comment.)

29 Note 24, supra.

30 Id.

31 See generally 12 U.S.C. § 4513. (The Director (of FHFA) shall issue any regulations, guidelines, or orders necessary to carry out the duties of the Director (enumerated at) under this chapter or the authorizing statutes, and to ensure that the purposes of this chapter and the authorizing statutes are accomplished.)

32 See PACENow website:

33 Note 24, supra.

34 For more information, visit the Federal Housing Authorities’ website:

35 “PACE Protection Act of 2011”, H.R. 2599, 112th Cong. (2011).

36 See H.R. 5766 and S. 2462, 111th Cong. (2010).

37 H.R. 2599, 112th Cong. §2(b) (2011).

38 Note 11, supra.

39 Note 35, §2(a).

40 “Energy Savings and Industrial Competitiveness Act of 2011”, S. 398, 112th Cong. (2011).


42 President’s Council on Jobs & Competitive, “Road Map to Renewal” (2012), available at