David M. Robins Thompson & Knight, LLP Houston, Texas PACE Legislation, Implementation and Financing…

David M. RobinsThompson & Knight, LLP

Houston, Texas

PACE

Legislation, Implementationand Financing

1

Challenges In Ensuring That We Have The Infrastructure To Meet The Needs Of A Growing Economy

● Reliability of both our electrical power and water supplies

● Negatives of traditional approach – Tax incentives and abatements – Distortion of Free Markets

2

3

Energy Consumption in TexasCommercial and industrial sectors account for 63%

Industrial32%

Residential Buildings

22%

Transportation28%

Commercial Buildings

18%

National and

Texas vs. Nationwide Energy Consumption By Industry

Texas19%

Remainder of U.S.81%

Texas’ industrial sector is a huge, untapped market for energy saving retrofits.

4

Texas’ Projected Water Demandsand Existing Supplies

5

Projected Texas Population

“More than 1,000 people…move to Texas every day.” Gov. Rick Perry, 12/29/2012.

6

Why Not Capitalize the Energy Savings?

• “U.S. Businesses Waste $60 Billion Annually on Energy.”

• “Scaling up energy efficiency retrofits offers a $279 billion investment opportunity with potential for energy savings totaling more than $1 trillion over a period of 10 years.”

If there is so much pent-up demand for energy & water efficiency retrofits for commercial and industrial buildings, then why is this untapped sector of the economy laying fallow?

Answer: The ROI for energy retrofits is too long to justify capital expenditures using existing financing tools.

Sources: Beth Hartman, E Source Research Brief, September 2012; Report conducted by The Brookings Institute ‘Renewing the Economy’ November 2012

7

PACE Offers Solutions Barriers

Scarce internal capital budget

No access to, aversion to financing• No investment-grade credit

rating• Lack of collateral assets that

don’t fall under first mortgage

Uncertain holding period

Owner / tenant split incentives

Skepticism savings/ROI will be realized

No down payment and costs spread over time w/ savings

• Repayment security through property assessment/tax lien position

• Backed by property, not by owner or equipment collateral

PACE obligation transfers to the new owner upon sale

Operating Expense pass-thru to tenants

ESCO/contractor guarantees or third party insures performance

PACE Solutions

8

WHY PACE?

● Need for long term financing of energy and water saving projects for businesses and other non-governmental entities

● PACE Act Passed June 2013

● Next Step is local government adoption

9

Initiating a Texas PACE Program

● The PACE Act requires four actions that a local government must follow in establishing a PACE program:A. Publish a Report and Make it Available for Public

Inspections

B. Adopt a Resolution of Intent to Create a Program

C. Hold a Public Hearing

D. Adopt a Resolution Establishing the Program

10

● Designate a PACE Region► Must be located wholly within the local government’s

jurisdiction (including a municipality’s extraterritorial jurisdiction).

● Determine Whether to Establish or Join a Regional PACE Program► Cooperating local governments may jointly implement one

program .

11



● Determine Roles and Responsibilities of the Local Government and Third Party Administrator► Third party administrators can be another governmental body,

private sector entities, or a collaboration of several entities.

● Determine how the local PACE program will be funded► Fees and/or Interest.

12

PACE Project Underwriting and Technical Standards

● Eligible Properties – Existing Improvements► Privately owned commercial real property - including not for profit

real property such as private schools, medical facilities, churches, etc.;

► Privately owned industrial real property - including privately owned agricultural real property; or

► Privately owned residential real property with five or more dwelling units.

● Properties that are statutorily ineligible for PACE assessments include:► Undeveloped lots or lots undergoing development at the time of

the assessment; and

► Government owned real property.13

● Eligible Property Owners► Legal property owner;

► Current on mortgage and tax payments;

► Not insolvent or bankrupt;

► Holds a title to the property to be subject to a PACE assessment that is not in dispute; and

► Has consent of any preexisting mortgagee to the proposed PACE assessment through a written contract.

14


● PACE in a Box Checklist Adds:► Ad valorem taxes not delinquent in the previous three years.

► Property owner is in good financial standing:− No bankruptcy in the previous 5 years

− No outstanding final judgment.

− Not had any property sold at foreclosure in the previous 5 years

− Good standing with the Secretary of State of Texas

− Good standing with the Texas Comptroller of Public Accounts

● Current credit report

● Current title report and property not subject to mechanics liens.

15


● Eligible Projects► Permanently fixed to the real property

► Demonstrated capacity to decrease –

− Water consumption or demand; and/or

− Energy consumption or demand; and

► Useful life that exceeds the term of the PACE financing.

● Ineligible Improvements – Improvements that are not permanently fixed - For example, screw-in fluorescent light bulbs removable low-flow showerheads and faucet aerators.

16


● Length of Assessment term – 22

● Useful life must be longer than the assessment term.

● Savings to Investment Ratio► Projected savings must be greater than the cost of the PACE

assessment over the life of the assessment (i.e., the SIR should be greater than one).

● PACE Assessment Cost to Assessed Building Value Ratio► PACE assessment cannot exceed twenty percent (20%) of the

assessed value of the property (Pace in a Box).

17


● Eligible Expenses Included in PACE Assessments► Statutorily authorized expenses:

− Permit fees− Inspection fees− Lender’s fees− Program application and administrative fees− Project development and engineering fees− Third party review fees, including verification fees− Any other fees or costs that may be incurred by the property

owner incident to the installation, modification, or improvement on a specific or pro rata basis not to exceed 20% of the overall project cost

− Less any applicable government or utility provider rebates or instant manufacturer discounts, or other upfront cost reductions.

18


● Energy/Water Savings Calculations► Baseline measurement of a property’s existing water and

energy consumption;

► Measure the projected water and energy savings; and

► Verify that the work is operating as intended.

19


PACE Third Party Lending

● Two sources for financing PACE assessments secured by a property assessment lien

● Third-party lenders and public financing (bonds).

20

● Third Party Financing ► PACE Act requires the local government to:

− Develop a model Owner Contract (399.009(a)(2);

− Develop a model Lender Contract (399.009(a)(3; and

− Adopt a plan for ensuring sufficient capital for third-party financing (399.009.(a)(6)).

21


● PACE in a Box third-party financing consists of: ► Model agreement between the local government and

property owner regarding the qualified project and imposition of the assessment (the Owner Contract);

► Model Notice of Assessment Lien that will be filed in the real property records (either as a separate document or incorporated in the Owner Contract);

► Model participation agreement between the local government and third-party lender (Lender Contract); and

► Model certificate from the local government to the third-party lender certifying that the financing is for a qualified project and the assessment is authorized under the PACE Act (either as a separate document or contained in the Lender Contract.

22


● Note and Credit Agreement - Interest rate, financing terms, and repayment terms► Interest may be a fixed rate or a variable rate.► Term may not exceed the useful life of the Qualified

Improvements. ► No balloon payments. ► Payments may be monthly, quarterly, semiannual or annual. ► Delinquent installments incur interest and late penalties in the

same manner as delinquent property taxes (Section 399.014(d)) ► Pre payment of PACE assessment financing may not be

prohibited.● Construction Advances

► Resemble the construction loan documents used by commercial lenders.

23


● Participation Agreement (Lender Contract)

● Without recourse of the PACE loan by the local government to the third-party lender. ► The participation agreement:

− No modification without the consent of the third-party lender;

− Payments received in trust by the local government (or its representative) and segregated from the general revenues;

− Timelines for local government (or its representative) to remit payments to the third-party lender;

− Timelines for enforcement by foreclosure ;

24


● The PACE Lien► Notice of Assessment Lien (section 399.013) filed in the

real property:

− Exists from the date on which the notice is recorded until fully paid;

− Same priority status as a lien for any other ad valorem tax;

− Runs with the land (the unpaid portion transfers to a new owner upon sale);

− Is not eliminated by foreclosure of a property tax lien; and

− Does not accelerate.

25


● Existing Mortgage Lender Consent ► Existing holder of a mortgage lien must receive at least 30

days advance and must consent before the PACE loan is made.

26


● Ensuring Sufficient Capital From Third Party Lenders ► In the PACE in a Box model eligible third-party lenders include:

− Any federally insured depository institution such as a bank, savings bank, savings and loan association, federal or state credit union;

− Any insurance company authorized to conduct business in one or more states;

− Any publicly traded entity; − Any private entity that:

■ Is an "Accredited Investor" as defined by the Rule 501 of Regulation D of the Securities Act of 1933.

■ Can provide independent certification as to availability of funds.

■ The Local Government may consider requiring an entity in this category to demonstrate the ability to fund an established minimum number of PACE loans or an aggregate total transaction dollar minimum, such as: such as the lesser of funding a minimum of five projects or a minimum of $ 5 million over a three year period.

27


Servicing and Enforcement● Servicing by the County Tax Assessor Collector

► Texas has a Truth in Taxation statute that requires that tax bills are only for taxes.

► Tax bills are sent only once a year.

● Servicing by a Third Party Administrator or subcontracted to a private servicer

● Servicing by the Third Party Lender► Lenders and property owners would have more flexibility to

negotiate which could reduce the interest rates charged for annual PACE payments;

► Servicing their own loans is what lenders do, can be more efficient or cost effective;

► For commercial property pass through to tenants, assessment bills should be clearly marked as an obligation to the local government as a result of a PACE assessment on the property

28

● Enforcement► The enforcement and foreclosure of a PACE assessment

lien must be done in the name of the local government. Foreclosure is by judicial process just as foreclosure of a property tax lien.

29

Servicing and Enforcement

Resources:

● www.KeepingPACEinTexas.org

● www.PACENow.org

● www.TexasPACEupdate.com

30

David M. Robins Thompson & Knight, LLP Houston, Texas PACE Legislation, Implementation and Financing…

Documents