Considerations On PACE Loans For Commercial Real Estate Lenders White and Williams LLP
PACE (Property Assessed Clean Energy) loans provide landowners with financing for “green” improvements designed to increase energy efficiency, water conservation, disaster resilience and renewable energy solutions. PACE programs are available for residential properties (R-PACE) as well as commercial properties (C-PACE) and allow homeowners to finance the initial cost of qualifying improvements over time through a voluntary property assessment.
The first C-PACE program was instituted in Sonoma County, Calif., In 2009. Although C-PACE loans are not new, they are growing in popularity as a tool to finance energy and renewable improvements. in real estate. PACE loans are likely to continue to grow in popularity, at least in the business environment. Here are a few things commercial real estate lenders should keep in mind when analyzing a property with a C ‑ PACE loan:
- Adopted by law. C-PACE loans are permitted by national and local law. There is currently no federal program for C-PACE loans. Currently, more than 30 states have adopted or are considering legislation to implement C-PACE programs. States with funded programs include New York, Texas, California, Florida, Connecticut, and Virginia. Not all C-PACE loan legislation is the same and nuances will exist between the different C-PACE loan programs.
- Main characteristics. A C-PACE loan is generally for a term of 15 to 20 years, but can have a term of 25 to 30 years. The associated lien will run with the land. In most jurisdictions, C-PACE loans are non-recourse for the borrower / owner and cannot be accelerated.
- Improvement value. While the improvements funded by C-PACE loans theoretically add to the value of an underlying property and, over time, are expected to improve cash flow, definitive empirical evidence is scarce and insurers should carefully examine the data they receive in this regard.
- Super priority link. C-PACE loan appraisals enjoy a lien priority similar to property taxes and, as such, would have priority over a registered mortgage or trust deed. The appraisal puts a strain on the property. Legal advisors to mortgage lenders should be alert to the indications of a C-PACE loan when reviewing title reports and drafting loan documents.
- Risk of foreclosure. Although C-PACE loans have existed since 2009, there have been no reported cases of foreclosure of a C-PACE loan. Nonetheless, the super-priority given to C-PACE loan evaluations remains a factor lenders need to be aware of and assess on a case-by-case basis.
- Protections for mortgage lenders. Since C-PACE loans share many similarities with property taxes, lenders should consider implementing procedures to evaluate them from an underwriting and transaction structuring perspective. In most cases, mortgage documents already require the consent of the lender before a borrower can obtain financing that would encumber the mortgaged property, and these types of loan document provisions would certainly require the borrower to apply for the mortgage. Prior approval of the lender to enter into a C-PACE loan transaction during the term of the mortgage loan.
If a C-PACE loan is already in place to initiate mortgage financing, lenders may also require initial and / or permanent reserves and / or escrow for C-PACE payments to ensure the appropriate and timely payment of assessments. similarly, many lenders set aside and / or sequester property taxes and insurance premiums.
In the residential context, some people are calling for greater consumer protection on the grounds that R-PACE loans should be subject to the same federal supervision as traditional residential mortgages. The Consumer Financial Protection Bureau, for example, is expected to review the regulation of R-PACE loans in 2019. It remains to be seen whether similar efforts will be made in the business environment, perhaps to alleviate concerns about the priority of privileges.