Board of County Commissioners
Cover Sheet for Agenda #15
October 23, 2012
||Honorable Chairman and Members of the Board
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||Vincent S. Long, County Administrator
Herbert W.A. Thiele, County Attorney
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||Acceptance of Status Report on the PACE Program and Litigation and Authorization to Issue a Request for Proposals for Third-Party Administration of a Commercial PACE Program.
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Review and Approval:
|Vincent S. Long, County Administrator
Review and Approval::
|Herbert W. A. Thiele, County Attorney
Review and Approval:
|Alan Rosenzweig, Deputy County Administrator
|Herbert W. A. Thiele, County Attorney
Maggie Theriot, Director, Resource Stewardship
This item has no fiscal impact to the County at this time.
Option #1: Accept the status report.
Option #2: Authorize staff to draft and issue a Request for Proposals for third-party administration of a commercial PACE program.
Report and Discussion
On April 22, 2010, the Board of County Commissioners of Leon County adopted an ordinance creating the Leon County Energy Improvement District which, among other things, provides for property accessed clean energy ("PACE") and certain energy improvements and weatherization programs for both homes and businesses in Leon County. On July 21, 2010, the Board of County Commissioner adopted an amended ordinance making certain technical changes to comport our ordinance with the recently enacted state legislation.
As other local governments throughout the country initiated programs involving PACE programs, including Sonoma County, California; Berkley, California; and, Babylon, New York, Fannie Mae and Freddie Mac raised concerns regarding certain residential mortgage lenders because PACE financing takes a senior lien position in terms of property-based debt repayment obligations. This is the same as with the Leon Energy Improvement District Program. In fact, there are over 37,000 special assessment districts in the United States, and all of those assessments have the same senior lien status. However, the Federal Housing and Finance Agency, Fannie Mae and Freddie Mac assert that these assessments make it harder to make repayments of those loans, and the alleged risk cannot be supported by these entities.
Specifically, Fannie Mae and Freddie Mac sent lender "caution notices" in early May of 2010 to national lenders. The position of Fannie and Freddie was upheld and supported by the Federal Housing and Finance Agency and the Office of the Comptroller of the Currency, in early July 2010. FHFA reiterated its position and, for various reasons, FHFA directed Fannie/Freddie to take actions that they restrict mortgage lending opportunities and lower credit lines for homeowners who live in local governments that offer home energy retrofit program as they "present significant safety and soundness concerns that must be addressed by the regulated entities."
Since Leon County was the leader in Florida, and nationally, with regard to LEAP, and because of the refusal of Fannie/Freddie to allow their borrowers to participate in our program, the Board of County Commissioners authorized the Leon County Attorney's Office to institute litigation challenging the position that Fannie/Freddie has taken in federal court. On October 8, 2010, Leon County and the Leon County Energy Improvement District filed its Complaint in the U.S. District Court for the Northern District of Florida against the Federal Housing Finance Agency, et al.
As a result, the residential component of LEAP was effectively placed on hold. At the Board of County Commissioners' meeting of December 14, 2011, the County Attorney's Office was given direction to bring back an agenda item that addressed the potential addition of commercial elements to the function of the Leon County Energy Improvement District and, on February 14, 2012, the Board of County Commissioners adopted an amended ordinance addressing the implementation of such commercial element provisions. As a result of the amended scope, staff immediately began exploring the design of a commercial PACE component to the LEAP initiative.
After minimal discovery, the Defendants' filed a Joint Motion to Dismiss Leon County's claims and, after response and reply briefs were filed by both parties, Judge Robert Hinkle entered an Order granting the Defendants' Motion to Dismiss the Complaint on September 30, 2011. After the entry of this Order, the County Attorney's Office briefed the Board of County Commissioners via memorandum dated October 3, 2011 and during the County Attorney's time at the Board of County Commissioners' meeting of October 11, 2011. The Board at that meeting, authorized the County Attorney's Office to file an appeal with the U.S. Court of Appeals for the 11th Circuit. The Notice of Appeal was filed with the 11th Circuit on November 28, 2011.
The Plaintiffs and the Defendants have filed their respective briefs and the matter is scheduled for oral argument before the 11th Circuit on October 29, 2012 in Atlanta, Georgia.
Additionally, complaints were filed in the U.S. District Court for the Northern District of California by the Attorney General of California, Sonoma County, California and the last case by the Sierra Club. The State Attorney General filed its complaint for Declaratory and Equitable Relief asserting violations of the National Environmental Policy Act and unfair business practices. The Sonoma County complaint is also for Declaratory and Equitable Relief but they assert that FHFA has exceeded its statutory jurisdiction and authority, there has been a failure to adhere to rulemaking procedures under Federal Administrative Procedures Act and they request a judicial declaration to prevent harm to their PACE program, disruption of contractual relationships with existing participants in program. Unlike the District Court of Florida, the Court in California granted Sonoma County's Motion for Summary Judgment, in part, and the Court ordered FHFA to engage in the federal rulemaking process (APA).
The Town of Babylon, NY filed a complaint in Eastern District of New York alleging many of the same claims plus local claims including geographic discrimination (adjustment of loan to value ratios/threats of redlining by Fannie/Freddie), tortuous interference and local assessment arguments. However, these cases were likewise dismissed, and the Plaintiffs have appealed.
On January 26, 2012, the Federal Housing Finance Administration commenced the Court ordered rulemaking process by requesting comments for the FHFA Rule concerning mortgage assets affected by PACE programs. Leon County, along with other local governments and municipalities throughout the U.S. provided comments to FHFA on March 26, 2012. On June 15, 2012, the Federal Housing Finance Administration introduced a proposed Rule regarding under what conditions Fannie Mae and Freddie Mac will purchase mortgages for properties participating in PACE programs (77 Fed. Reg. 36086). Under the process of adopting the proposed Rule, Leon County, along with scores of other local governments and municipalities, as well as environmental agencies, could provide comments regarding the proposed Rule. Leon County submitted its proposed comments on September 13, 2012.
While residential PACE is at a standstill around the nation, commercial PACE was not affected by the FHFA statement because the majority of commercial real estate mortgages are not owned by Fannie Mae or Freddie Mac. There are other differences between residential programs and commercial that staff has taken into consideration.
Commercial projects are large in scale with each one being very different from the next.
The financial components of each project are individualized and cannot be carried out based on a "cookie cutter" approach.
Property owners, mortgage lenders and financial providers for commercial properties are typically more sophisticated; therefore, they are primarily concerned with return on investment
The role of the PACE program should be to draw private sector investment and decision-making, not dictate it.
In reflection of these factors, staff developed a prospective program structure, which differed from that devised for the residential segment. Generally the residential program structure contained more safeguards such as specific audit requirements to protect homeowners and help guide wise investment in energy conservation measures. A draft commercial program structure was created by staff. Assessment of program features included three funding models.
Bond - Issuance of a single large bond or micro-bonds to directly fund the PACE program.
"Warehouse" - An investor such as a large nation bank makes available a line of credit to fund the PACE program. These loans are warehoused until a critical mass is reached, at which time bonds or other securities are issued to replenish the line of credit.
Open Market - Also referred to as owner-arranged, the open market approach. The County acts as a conduit for private investment. Individual property owners arrange their own financing directly with the project lender such as rates, terms, conditions and schedules.
To confirm the program parameters would yield support and participation from the community two-stakeholder meetings were held. Each stakeholder received a personal letter of invitation from the County Administrator (Attachment #1).
The first stakeholder group represented the financial sector. Twenty-three organizations were invited including area banks, national banks, investments groups and credit unions. Of the 23 invitees, one responded with interest but had a schedule conflict and five attended the meeting. Discussion among the financial stakeholders was in-depth as they expressed cautious optimism. Specifically the meeting revealed:
The need to require lender consent rather than simple notification.
A belief that PACE structure offers little value over 2nd mortgage alternative.
A belief that PACE programs would not qualify for 7A lending (SBA flagship loan guarantee program).
Generally, micro-bond approach was preferred.
Mandatory energy audit not needed, as cash flow will be the primary concern of the applicant and necessary steps will be taken.
Most comfortable with "owner-arranged" program model, where Leon County serves merely as the conduit for private investment, leaving the owner to negotiate rates, terms and conditions that best suit the specific project.
The second stakeholder group represented the would-be applicants of a commercial PACE program. Twenty-two organizations were invited including land management companies, commercial property owners, the Tallahassee Building's Association, the Building Owners & Managers Association, and Sustainable Tallahassee. Of the 22 stakeholders, four groups attended including Tallahassee Builder's Association. Discussion among the property stakeholders was neutral to negative in terms of supporting PACE. Much of the discussion seemed to directly contradict common assumptions surrounding PACE. Specifically the meeting revealed:
A concern of disconnect between property owner and payment of utility by occupant, despite the ability to restructure lease terms to align the incentive to reduce utility cost.
A concern for carrying extra debt during time of vacancy.
A sense by land managers that utility consumption not key to lease negotiation and would not add much to marketability of a property.
Audits should not be required.
PACE process (even simplified approach) is too cumbersome.
Likely target audience will be owner-occupied and replacement program for failing equipment.
However, subsequent to the stakeholders meetings, the Tallahassee Builders Association recently passed a resolution of support for PACE (Attachment # 2). In light of this interest and support, staff is recommending proceeding with the implementation of a commercial PACE program. There are successful models being developed throughout the state of Florida which utilize a Third Party Administrator (TPA) approach. A TPA can facilitate independently or in partnership with the County various components of a PACE program including; planning, development, financing, implementation, marketing, and management. Utilization of a TPA is anticipated to reduce the County's commitment of funding and staff time as they have existing expertise, program frameworks, and partnerships established. The County's main role would be in helping to market the program and once a loan is established act as the conduit to place the repayment (through the non-ad valorem process) on the owner's tax bill.
There are multiple communities in Florida who have solicited third-parties to administer a commercial PACE program, including Broward County, Lee County, Hillsborough County, Flagler County, Town of Cutler Bay, City of North Port, and City of Miami. Each location is in a various stage of program development and implementation. There are currently at least three TPAs operating in Florida. Staff recommends proceeding with the development and issuance of an RFP for a third-party administrator to develop, implement, and manage a commercial PACE program. It is anticipated that Leon County would play an active role alongside community partners such as the Tallahassee Builders Association to market the program in addition to the TPA marketing.
1. Accept the status report.
2. Authorize staff to draft and issue a Request for Proposals for third-party administration of a commercial PACE program.
3. Do not accept the status report and do not authorize staff to draft and issue an RFP for third-party administration of a commercial PACE program.
4. Board direction.
Options #1 and #2.
1. Letter of Invitation
2. Tallahassee Builders Association Resolution