DAN HAMBURG Supervisor Fifth District COUNTY OF MENDOCINO BOARD OF SUPERVISORS CONTACT INFORMATION 501 Low Gap Road Room 1010 Ukiah, California 95482 TELEPHONE: (707) 463-4221 FAX: (707) 463-7237 Email: bos@co.mendocino.ca.us Web: www.co.mendocino.ca.us/bos December 6, 2012 Employers Council of Mendocino County Attn: Barbara Reed 597 B South Main Street Ukiah, CA 95482 Dear Ms. Reed: Re: PACE Program Letter Dated November 23, 2012 Thank you for your letter dated November 23, 2012 concerning the County considering the development of a Property Assess Clean Energy (PACE) Program in Mendocino County. Below are responses to your questions in that letter. Questions/Responses: 1. What is the program s statutory authority? Response: The Program s statutory authority is AB 811 or SB 555. 2. Who at the state and federal levels of government is responsible for regulatory oversight of PACE programs? Response: There is no State or Federal agency that is charged with implementation and/or oversight of PACE programs (AB 811 or SB 555). State level legislation allows cities and counties to create districts and it is up to the local jurisdiction to decide if they want to administer in house or hire a 3rd party administrator. a. Are there any new or proposed regulations on the horizon? Response: Currently I am only aware of proposals regarding addressing the federal housing issues relating to FNMA / FMAC residential mortgages. b. Why is the Federal Housing Financing Agency (FHFA) proposing policy restrictions on PACE financing? What were the safety and soundness concerns that FHFA had about PACE when they directed Freddie Mac and Fannie Mae to not purchase mortgage loans of properties with outstanding PACE obligations? Response: The current ruling from the 9th District Court of Appeals says FHFA did not follow Federal rule making processes and therefore has to go back and do so. The concerns expressed by FHFA may not be enforceable. The court also said jurisdictions and/or property owners who have undertaken PACE programs/liens will NOT be subject to any rule resulting from the process in the future.
Page 2 of 8 December 6, 2012 c. Will PACE interfere with the county s affordable housing goals as it relates to homebuyer loans assisted by Fannie Mae and Freddie Mac programs? How many home mortgages do those programs assist? Response: PACE is a voluntary self-assessment so no property owner is being forced to participate (AB 811 Program). The SB 555 program has deemed votes into districts and is not voluntary contractual assessments. No PACE financing can be applied for until the federal issues have been resolved so there is NO impact to affordable housing at this time until and unless the issues are resolved at the federal level (under AB 811). d. What is the guidance on commercial PACE programs? Response: Commercial PACE loans require existing lender lien holder s permission before placing a new PACE loan under the AB 811 program. Under the SB 555 program the lien holder s permission is not required. 3. Is there a state or federal mandate that is requiring the county to adopt this program? Response: There is no State or Federal mandate, this is a voluntary program. 4. What is the program s targeted purpose(s)? Response: The targeted purpose is to increase energy and water conservation investments in Mendocino County that will lower costs for property owners, reduce GHG emissions and provide additional support for local contractors, suppliers and service providers enhancing job retention and creation. 5. Who are the program s clientele? Response: Current AB 811 providers only offer commercial financing. The third party turn key vendor can make the program available to all property owners under the SB 555 model and the law also allows for public building/school financing. The re-payment mechanism for public financing has not been developed yet. Please note that the issue with the FHFA currently restricts participation for homeowners with FHFA mortgages in the AB 811 program but does not in the SB 555 program. 6. What sort of demand analysis forecasting has been done to justify the creation of a PACE program. Response: The County has not performed any demand analysis on this program, however the State would not have developed such a program had there not been a clear need for more financing specifically for energy and water conservation projects and especially in the commercial sector. Should the County opt to enter into a PACE Program the turn key vendor will be able to provide market data.
Page 3 of 8 December 6, 2012 a. What other forms of financing are available to make energy related improvements? Who provides those services and products? Response: Local lenders offer a wide array of products; however, they have been very restrictive in lending following the financial crises and this has made loans to local businesses harder to get. One difference with conventional financing is that credit-based and turn key vendors offer asset-based financing. Under PACE, financing is dependent on equity in property and not personal credit score. b. Who is asking for PACE financing? What is the quantity of and type of services and products they need? Have they been denied financing from conventional sources? Response: Local contractors, suppliers, service providers and businesses have been interested in the development of this program in Mendocino County. Loan sizes range from small to large and many have been denied financing from conventional sources. c. Given the size of the marketplace, will a PACE program be a cost effective and a productive use of County resources? Response: County staff believes the answer is yes. There are no costs to the county and the PACE vendor takes care of all setup and implementation. Some PACE vendors reimburse the County for any costs and staff time to set up the program. The improvements will add to the county s property tax values while lowering energy and water costs for Mendocino County property owners. 7. What are the program s funding sources? Response: Some PACE vendors have their own startup funds, interim loan funds and eventually sell loans to the bond market recovering the interim funds to loan out again. Some PACE vendors have fully funded districts, meaning they have upfront project funds and will eventually aggregate projects and replenish the pool of funding through a secondary market offering. 8. Will this program be limited to the unincorporated area of the County? Response: The County and all four cities have previously passed resolutions supporting the PACE program. If the County chooses to apply this program to the unincorporated areas, it will require approvals from each city to apply to their jurisdiction via an adoption of a resolution. 9. What would the program s organizational structure within the County look like: a. What will be the program s demand on existing county resources? How many county departments/ agencies will be involved? What will be their respective roles and responsibilities?
Page 4 of 8 December 6, 2012 Response: There should be minimal county resources dedicated to this program, as the PACE vendor provides funds for all work to be completed. Turn Key Vendors do come and provide training to local contractors on how the financing works so that the jobs they are working on can get completed. This would be similar to adding a School or Sewer Bond to the county property tax rolls and collecting and paying out. b. Who are the key people to manage this program? Who will be the responsible person in charge? Will this program require new staff? Response: The key people that manage the program would be the Auditor and the Tax Collector as far as the assessments are concerned. There would be no additional staff needed for this program and a member of the County Executive Office will be in charge of the contract management. c. Will the program use the County s loan committee? Response: There are no county funds being utilized for this program and therefore no county loan committee is needed. d. What is the estimated timeline, staffing and budgetary requirement for program setup? Response: Once the County approves proceeding with the PACE Program, it takes approximately six to nine months for the process of securing a PACE vendor, approving the County (and each city) financing authority and establishing the procedures needed to begin the program. As noted above, any County staff time spent on the program set up is reimbursed by the vendor. e. What is the program s net-county cost requirements? Response: There is no increase in any net-county costs for this program. f. Will the startup of this program take a superior position of the administration and management of existing county priorities? Response: The Board would leave the prioritizing of the set up of this program as compared to other County administrative funds to the CEO. g. Who and how will the program be evaluated to see if the program has achieved its intended outcome? Response: Should the Board direct staff to implement a PACE program, the CEO will work with the selected vendor to develop program evaluation criteria and implementation. Some turn key vendors base their success on market penetration rates (i.e., 3% of property over a 5-year contract term). They also can set targets for funding goals once they get further along in their market analysis.
Page 5 of 8 December 6, 2012 10. Do similar sized jurisdictions have this program? Response: Yes. a. How have those programs performed? Response: This varies by location. Berkeley became oversubscribed for their limited funds, Lake County has had a hard time starting up due to the PACE vendor not having access to interim loan funds, Sonoma County and the City of Sacramento have had really positive results from their programs. The County of Sacramento just adopted an SB 555 program. Sonoma County has the most successful program and has funded about $60 million in projects in 3 years. b. What are the staffing and budgetary requirements of those programs? Response: There is no cost to the County and minimal staff time when selecting a turn key vendor style PACE program. The County of Sonoma has an entire division dedicated to this program as the County runs the program in its entirety. 11. Will this program be subject to LAFCO? Response: No. 12. This is an assessment added to a client s property tax bill; if the client does not pay their property tax, is the County General Fund or the Teeter Plan used to guarantee PACE program payments to creditors and/or program operators? Response: If property taxes are not paid, the County proceeds (as it normally would) through the default procedures through the Teeter Plan. When and if the property ends up being sold after five years, the Teeter is reimbursed all of its expenses as well as any penalties for lack of payment of property taxes. a. What is the county s policy and procedures for recovery of delinquent tax payments, interest and penalties? Response: Under California law, after a period of five years from the first year of tax-default, during which time the assessee retains the legal title to the property and has the privilege of redeeming it upon payment of the amount due, the tax collector records a Notice of Power to Sell Tax-Defaulted Property in the Mendocino County Recorder s Office. Once this document is recorded, the tax collector prepares the tax-defaulted property to be sold at public auction. The minimum bid at public auction is the amount of taxes, penalties, interest, and additional costs incurred through the process. b. What is the current balance of the Teeter Plan debt? What is the county s plan to payoff that debt?
Page 6 of 8 December 6, 2012 Response: The balance of the Teeter debt as of June 30, 2012 is $6,537,767. The County plans to pay at least $769,205 annually. 13. What will be the program s lending policies, underwriting standards and control practices? Response: Each turn key vendor has different approaches to this. a. What are the specific statutory requirements governing PACE underwriting? Response: Each jurisdiction determines its own specific program guidelines for loan purposes, amounts and underwriting requirements for example, only allowing up to 10% of the assessed value as a loan amount maximum, only investments in certain energy and water conservation measures, energy audit required for larger commercial projects, etc. b. Who will be responsible for creating and adopting written polices, operating procedures, and control mechanisms that reflect prudent credit practices, subordination requirements, and compliance with applicable regulations? Response: Should the Board direct staff to implement a PACE program, the CEO would work with the selected PACE vendor to determine the County s program policies and procedures. i. Who will be responsible to see if those polices and underwriting standards are followed? Response: The PACE vendor and a representative of the CEO s office will be responsible for monitoring performance. ii. If the County hires an independent contractor to offer products and services to clients on the County s behalf, who will be responsible for interfacing and auditing the contractor s work for compliance with polices and standards? Response: A member of the CEO s office will be in charge of contract management. iii. If the County s independent contractor makes a bad loan, who pays? Response: Currently bad loans are on the property tax roll just as all other assessments. This program is based on 100% Property Owner approved selfassessment. Underwriting standards are universal. Risk for default situations resulting from turn key vendor s financing is very low given the very small bi-annual payment when compared to property taxes as a whole, mortgage payments, and property values. c. What is the minimum supporting credit and financial information requirements? Response: Turn key vendors determine things like mortgage delinquencies, bankruptcies or other bad credit and how they play into potential loans.
Page 7 of 8 December 6, 2012 d. What methodology is used to determine whether the improvements will generate the cash flow to repay the debt? Response: An energy audit shows available savings that can be used to determine loan amount and term. e. What are the requirements for collateral/proposed loan to value limits? Response: Typically this is limited to a percentage (10% typical) of assessed value of the property. f. Is this a financial program of last resort (i.e. was the client denied conventional financing)? Response: No this is not a program of last resort. Loan denials are not required prior to obtaining a PACE loan. This is another option for property owners to improve the efficiency of their buildings and increase property values. g. What is the typical interest rate that this advance will carry? Response: The interest rate is typically 7% to 8% depending on the vendor and the type of program that is created. h. Is a subordination agreement requested to required to be authorized by existing mortgage holders and other lien note holders, including being notarized and recorded in the official county records prior to approving a PACE loan? What happens when an existing mortgage or other lien note holder does not agree in writing to subordinate? Response: This varies depending on which program the County adopts. If the County adopts a program under AB 811 (which is currently only commercial properties), then approval of the lien holder is required. If the County adopted a program under SB 555 (which includes not only commercial but residential as well), then approval from the lien holder is not required. i. Who will be responsible for inspecting and approving the work to authorize the disbursement of funds? Response: The PACE vendor works with local contractors on approving the work performed. Local building permit and inspection requirements are required for each project. Turn key vendors will also employ inspectors on larger projects that require progress payments. j. Who is responsible for loan disbursement? Are these advances, partial or lump sum reimbursements? Who receives the disbursement, the client or the contractor? Response: Loans are disbursed by the PACE vendor and can have progress payments on larger projects. k. If there is a delinquency, is the county responsible for making the loan payment to the financing sources (e.g. bondholder)? What source of funding would the county use to make that payment?
Page 8 of 8 December 6, 2012 Response: Please see the County s response to question number 12. The turn key vendor and its investors take all of the financing risk. l. If there is a loss who pays? Response: Please see the County s response to question number 12. m. Who is responsible for servicing and collecting (including delinquent accounts)? Response: Servicing and collecting is the responsibility of the PACE vendor through a third party administrator that it hires. The assessments are paid to the County Treasurer and distributed out to the PACE vendor. 14. Does PACE financing trigger government contractor and prevailing wage requirements? Response: No. 15. Will clients be required to hire licensed contractors to perform the work? Response: Licensed contractors are required under the PACE program and will go through the standard construction and permitting processes. 16. If the work were done in a less than workmanlike manner, would the county assume any liability? Response: There is no liability for the County or any Cities that choose to participate in the program for work that is performed. Thank you for the opportunity to answer your questions and I look forward to seeing you at the December 11, 2012 meeting on this program. Sincerely, Dan Hamburg 5 th District Supervisor Cc: Board of Supervisors Meredith Ford, Auditor-Controller Susan M. Ranochak, Assessor/Clerk Recorder Shari L. Shapmire, Treasurer/Tax Collector Carmel Angelo, CEO Kristin McMenomey, GSA Director