Green Building Law Blog : Green Building Lawyer & Attorney : Shari Shapiro: Calliope Communications, LLC

 Property Assessed Clean Energy (PACE) is a property assessment used to finance the upfront costs of energy efficiency upgrades.  A local government provides funding, and the assessment is paid back as a line item on a property’s tax bill.

PACE became a controversial issue in 2010, when the Federal Home Finance Authority (FHFA), the regulator of Freddie Mac and Fannie Mae, issued an order prohibiting Freddie Mac and Fannie Mae from purchasing mortgages with PACE assessments on them. The concern was that, as property tax assessments, the PACE loans would have priority over the Freddie Mac and Fannie Mae-backed mortgages, so the PACE loans would get repaid first out of any foreclosure sale proceeds.

FHFA proposed a rule on PACE financing on June 15, and is available for download here. The FHFA has not changed its position, and the proposed rule is a blanket prohibition on purchasing mortgages on PACE encumbered properties, and from consenting to PACE liens on properties with existing Fannie Mae and Freddie Mac backed mortgages. The argument is that the threat of default is immeasurable, and the environmental benefits difficult to calculate, so it is not worth the risk.  If the FHFA rule becomes final, PACE is dead. Comments on the rule are open until the end of July. 

If the FHFA rule goes into effect, what happens to the homeowners who already took PACE loans?  Many communities have had PACE programs in place for some time.  The FHFA rule will certainly prevent Fannie Mae and Freddie Mac from backing loans when those homes are sold unless the PACE loan is paid off.  Likewise, the PACE loan will have to be paid off if the home is refinanced. This will be an ugly surprise for those homeowners that took a PACE loan specifically because it was transferable with the property. 

More concerning is whether the FHFA rule could be read to require Fannie Mae and Freddie Mac to call the mortgages on properties with a PACE assessment.  The proposed rule states that Freddie Mac and Fannie Mae are required to:

immediately  take such actions as are necessary to secure and/or preserve their right to make immediately due the full amount of any obligation secured by a mortgage that becomes, without the consent of the mortgage holder, subject to a first lien PACE obligation.

In other words, if you take on a PACE loan, you have to pay off your mortgage. 

The rule doesn't specifically address retroactive application of the rule, but the phrase "becomes...subject to a...PACE obligation" seems to be proactive, as opposed to retroactive. With a hammer as big as calling a mortgage, however,  the final FHFA should specifically state that it does not apply to existing PACE loans. 

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On June 26, 2012, the United States Court of Appeals for the Ninth Circuit decided the BIA v. State of Washington case. The opinion can be downloaded here.

 In its decision, the Ninth Circuit held that the Washington State energy efficient building code was not preempted by Federal law.  This ruling was contrary to the ruling in a companion case, AHRI v. City of Albequerque, which was before the Federal District Court for the District of New Mexico. In the Albuquerque case, the court held that the code was preempted. 

Because there was a split, the interesting question is whether the cases, when read together, create a clear legal framework for ensuring that local energy efficient building codes are not preempted. In my opinion, the Washington court did not articulate a clear rule that can be used to guide local governments through the preemption waters. 

Both Albuquerque and the State of Washington passed building codes requiring that new buildings acheive certain levels of energy efficiency. In their suits, the trade associations alleged that the codes were invalid because they were preempted by Federal law.  Specifically, the trade associations alleged that the codes mandated the use of heating, ventilation and air conditioning systems that exceeded the energy efficiency standards set by the Energy Policy and Conservation Act of 1975 ("EPCA"), 42 U.S.C. Sec. 6295, et seq.

The Albuquerque code offered two paths--a prescriptive path, under which the installation of HVAC exceeding the Federal standard was required, and a performance path, under which a builder could choose how to acheive the required level of efficiency.  Early on, the Albequerque court held that the prescriptive path was preempted.  Ultimately, the court found that the performance path was not severable from the prescriptive path, and did not reach a verdict on the preemption of the performance path. 

The Washington code did not have a prescriptive path.  Rather, the Washington code had a point system, where different building techniques, including the installation of energy efficient HVAC systems, acheived different "scores."   

The Washington court differentiated the Washington and Albequerque codes based on the costs imposed on the builder for not using high efficiency HVAC equipment, not to the difference between a prescriptive and a performance standard.  The court reasoned:

Albuquerque’s ordinance imposed costs, as a matter of law, on builders who installed certain covered products meeting federal standards, by requiring the builder to install additional products that would compensate for not using a higher efficiency product. As the [Albequerque] court explained, “if products at the federal efficiency standard are used, a building owner must make other modifications to the home to increase its energy efficiency.” The Albuquerque ordinance thus effectively required use of higher efficiency products by imposing a penalty through the code itself.

Here, by contrast, the Washington Building Code itself imposes no additional costs on builders. The district court noted that there are “substantial differences” between the Washington Building Code and Albuquerque’s ordinance. It correctly rejected the Plaintiffs’ argument concerning subsection (B), explaining that the Washington Building Code created no penalties, and did not require higher efficiency products as the “only way to comply with the code.”

In the Washington code, however, it appears that the same costs are imposed on the builders.  If a builder chooses to use a standard HVAC system, the builder must make other changes to acheive the required points.  Later in the opinion, the Court acknowledged that the cost of adopting the other changes (and not installing more efficient HVAC equipment) could be higher. 

Unfortunately, I do not see how the Washington court's analysis works to differentiate the Albuquerque code from the Washington code.  As a result, it does not make clear what type of structure is "safe" for local governments to adopt, and not risk a preemption fight. 

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