On March 25, 2015, Virginia Governor Terry McAuliffe signed into law Chapter 389 of the 2015 Acts of Assembly (the Amendments).
The Amendments modify Virginia's existing laws regarding property assessed clean energy (PACE). Most notable among the modifications are the provisions
supporting commercial PACE projects that allow for the imposition of a voluntary special assessment lien.
PACE in Virginia and How it Should Work
Prior to the Amendments, Virginia's statute lacked certain provisions found in other states' laws that make PACE an attractive form of financing. For
instance, under the prior Virginia statute, PACE provided a property owner a means to finance eligible improvements, such as "distributed generation
renewable energy sources" or "energy efficiency improvements" with a loan secured by a lien on the improvements sized to the value of the loan. The
collection of those loan payments could be accomplished through a variety of means, including real property tax assessments or a locality's utility
services billing (i.e., "on bill" financing).
Under the Amendments, a voluntary special assessment lien on commercial or multi-family buildings is allowed subject to the qualifications that are
addressed below. The Amendments affect voluntary special assessment liens only on buildings "other than a residential dwelling with fewer than five
dwelling units or a condominium project" as defined in Section 55-79.2 of the Code of Virginia of 1950, as amended. The Amendments do not affect current
law with respect to single-family residences; however, the Amendments do add a new category for water efficiency improvements available to any property
owner. Specifically, the eligible improvements are now modified to include “energy usage efficiency,” “water usage efficiency” and “renewable energy
production and distribution facilities.”
Steps to Secure a PACE Loan
The typical steps to financing a PACE improvement are shown below.
A locality creates a PACE program, identifies lenders or other sources of capital willing to participate and considers whether to hire a third party to
administer the program.
A property owner desiring to add a PACE-qualifying improvement to the property applies to the locality for PACE financing.
The owner and the locality's PACE program work with the sources of capital to obtain the requisite approvals and negotiate applicable terms.
The property owner receives the capital and installs the PACE improvement and the locality imposes the special assessment.
The locality is repaid from the special assessment on the property and remits those repayments to the capital provider.
Here is a conceptual diagram showing the relationships of the capital provider, locality and property owner in a program without a third-party
Click here to view chart full size.
Authorization of "Voluntary Special Assessment" Liens for Commercial PACE Projects
Under the prior statute, the lien of a PACE loan was equal to the value of the PACE loan, was placed on the underlying property and was junior to any
existing mortgage holder. The Amendments now allow for commercial PACE improvements to be repaid from a "voluntary special assessment." The lien on the
voluntary special assessment will have equal priority with a property tax lien against real property and may have priority over pre-existing mortgage liens
so long as the existing lender consents. The Amendments also stipulate that the PACE liens "run with the land," meaning the liens remain in full force and
effect until paid regardless of any transfer of ownership.
The goal of the changes is to improve the underlying credit of the loan through the ability to recoup the voluntary special assessment. The special
assessment is the means by which a locality recovers the costs of the PACE improvement over the life of the asset. The Amendments permit a locality to
contract with a third-party program administrator and to pass the costs of administration to the property owner. As a result, the locality may enforce
delinquent installments of the voluntary special assessment in the same manner as a delinquent real property tax payment.
Lender Consent Requirements
The Amendments contain a "lender consent" provision. Before a property owner may obtain a PACE loan with priority over existing mortgage liens, the
existing mortgage lienholder must consent to the PACE loan by signing a subordination agreement. PACE loans are designed to enhance the value of the asset
by funding improvements that generate savings or revenues equal to or greater than the loan payments. Significantly, before consenting to a PACE loan, an
existing creditor is able to vet projects in advance and exercise a unilateral veto over projects that may decrease property value or cash flow.
Growth to Date; Benefits of PACE
Other states have previously implemented commercial PACE programs. In New York, a major financial institution has committed $75 million to commercial PACE
Energy Improvement Corporation Announces Agreement...) Connecticut recently securitized over $30 million of its commercial PACE loans with a private lender. (See
CEFIA Announces Sale of Commercial Property Assessed Clean Energy Benefit Assessment Liens.) PACENow (http://www.pacenow.org/), a nonprofit group tracking the development of PACE, reports a
pipeline of over $400 million in commercial projects nationwide. (See PACENow December Market Update.) PACE is intended to
provide a number of benefits to both lenders and property owners:
The improvements can increase the value of the improved property through increased cash flows of the property, allowing borrowers to invest in other
improvements or new projects.
Because the lien on the improvement runs with the land, loan terms can be longer, helping to keep rates competitive.
Increased demand for capital improvements spurs local economic development and creates jobs.
Capital providers can rely on a strong underlying credit: a special assessment levied by the locality.