BILL ANALYSIS Ó
AB 2618
Page 1
ASSEMBLY THIRD READING
AB
2618 (Nazarian)
As Amended May 2, 2016
Majority vote
------------------------------------------------------------------
|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Local |9-0 |Eggman, Waldron, | |
|Government | |Alejo, Bonilla, Chiu, | |
| | |Cooley, | |
| | | | |
| | | | |
| | |Beth Gaines, Gordon, | |
| | |Linder | |
| | | | |
| | | | |
------------------------------------------------------------------
SUMMARY: Authorizes a Mello-Roos community facilities district
(CFD), formed pursuant to an alternate procedure in existing
law, which authorizes private property owners to pay Mello-Roos
special taxes to finance specified energy improvements, to also
finance seismic safety improvements necessary for compliance
with seismic safety standards or regulations.
AB 2618
Page 2
FISCAL EFFECT: None
COMMENTS:
1)Property Assessed Clean Energy (PACE) Programs. Utilizing the
legal authority to create a financing district as a charter
city, the City of Berkeley, in 2007, established a citywide
voluntary program to allow residential and commercial property
owners to install solar systems and make energy efficiency
improvements to their buildings and to repay the cost over 20
years via an assessment on the property tax bill. Since the
inception of PACE as a financing tool in Berkeley, the
Legislature has granted the authority to local governments to
provide up-front financing to property owners to install
renewable energy sources or energy efficiency improvements
that are permanently fixed to their properties, which is
repaid through the property tax system. Most PACE programs
are implemented and administered under two statutory
frameworks: AB 811 (Levine), Chapter 159, Statutes of 2008,
amended the Improvement Act of 1911 to allow for voluntary
contractual assessments to finance PACE projects; and, SB 555
(Hancock), Chapter 493, Statutes of 2011, amended the
Mello-Roos Community Facilities District Act to allow for
Mello-Roos special taxes (parcel taxes) to finance PACE
projects.
The Legislature has expanded PACE for residential and
commercial property owners to pay for renewable energy
upgrades, energy or water efficiency retrofits, seismic
improvements, and other specified improvements for their homes
or buildings. Local agencies create PACE assessment districts
under AB 811 or establish a CFD under SB 555, allowing the
local agency to issue bonds to finance the up-front costs of
improvements. In turn, property owners enter into a voluntary
contractual assessment agreement with the local agency or
agree to annex their property into a CFD to re-pay the bonds
via an assessment or special tax (parcel tax), secured by a
priority lien, on their property tax bill. The intent of the
AB 2618
Page 3
program is that the assessment or parcel tax remains with the
property even if it is sold or transferred, and the
improvements must be permanently fixed to the property.
In California, there are several models available to local
governments in administering a PACE program. Only the
counties of Sonoma and Placer administer their own PACE
programs.
The majority of local governments contract with a private
third-party or join a Joint Powers Authority (JPA) which
contracts with a private third-party to carry out their PACE
programs.
The cost of third-party administration is not borne by the
local agency, but is built into PACE loan financing. Some of
these programs focus on residential projects, others target
commercial projects, and some handle both residential and
commercial portfolios.
Only a few local governments have begun to use voluntary
contractual assessments for seismic improvements. For
example, the City of Berkeley and the City and County of San
Francisco began to offer financing for improvements to soft,
weak and open front (SWOF) buildings and additional voluntary
seismic retrofits by a voluntary contractual assessment
program administered by Alliance NRG.
2)PACE and Mello Roos. The Mello-Roos Community Facilities Act
authorizes local governments to form a CFD and levy special
taxes (parcel taxes) to finance a wide variety of facilities
and services. Current law establishes the process for the
formation of a CFD, and requires two-thirds voter approval for
the Mello-Roos special tax. A CFD issues bonds secured by
AB 2618
Page 4
these special taxes to finance the facilities and services.
SB 555 authorized the use of Mello-Roos taxes to help finance
renewable energy, water conservation, and energy efficiency
improvements on private property. The improvements financed
by a CFD must be affixed to or on real property and may only
be installed with the prior written consent of the owner or
owners of the building or real property. SB 555 also
prohibited a CFD from financing renewable energy, water
conservation, and energy efficiency improvements on privately
owned property in connection with the initial construction of
a residential building, unless the initial construction is
undertaken by the intended owner or occupant.
Additionally, SB 555 authorized an alternate procedure for
establishing a CFD that initially contains no parcels of land,
but consists only of territory from which parcels may
subsequently be annexed to the CFD with the unanimous approval
of parcel owners. This process allows a property owner to opt
into the PACE program by voting to annex their property into
the CFD, which authorizes the levy of the special tax and
special tax lien on their property.
3)Bill Summary. Existing law authorizes CFDs to finance seismic
safety work on buildings or real property, privately or
publicly owned, that must be done to comply with seismic
safety standards or regulations. The alternate procedure
established by SB 555 is the statutory authority used by third
party providers, like the sponsor of this bill, to administer
PACE programs. CFDs, formed pursuant to this alternate
procedure established by SB 555, are limited in the types of
facilities they can finance or refinance: energy efficiency,
water conservation, and renewable energy improvements. This
bill would add seismic safety improvements necessary for
compliance with seismic safety standards or regulations to the
list of improvements to facilities that can be financed by a
CFD formed for the more specific purposes of allowing
voluntary participation by property owners to annex their
AB 2618
Page 5
property into the CFD to utilize PACE financing to make these
types of improvements. This bill is sponsored by Ygrene.
4)Author's Statement. According to the author, "According to
the United States Geological Survey, there is a 99.7% chance
that a major earthquake of 6.7 in scale will strike California
in the next 30 years. A major earthquake occurring is only a
matter of when - not if. Unfortunately, the number of
residential and commercial buildings lacking appropriate,
seismically safe features is far too high when considering the
level of seismicity in California. In Los Angeles alone,
nearly 1,500 older concrete buildings have been identified as
at-risk and the potential, statewide damage from the next big
earthquake could far exceed economic loss of past California
earthquakes.
"As more local jurisdictions begin to follow suit of San
Francisco and Los Angeles when considering mandating
retrofitting, innovative ways to accelerate compliance for
property owners are needed. Along with energy efficiency,
water conservation, and renewable energy projects, contractual
assessment districts and some types of community facilities
districts already allow for seismic safety improvements to be
financed through PACE programs. This bill clarifies that all
community facilities districts under the Mello-Roos Act may
finance seismic safety improvements. By creating financing
mechanisms for commercial and residential property owners,
this bill provides property owners with another tool to make
the necessary investment to improve the safety of their home
or business before the inevitable "big one" strikes."
5)Federal Housing Finance Agency. In 2010, Federal Housing
Finance Agency (FHFA), which oversees the nation's largest
mortgage finance companies, Fannie Mae and Freddie Mac, raised
concerns that residential PACE financing could pose a risk for
federal mortgage enterprises (Fannie Mae and Freddie Mac),
AB 2618
Page 6
because PACE loans are a first-priority lien in the case of
foreclosure and lenders would have to pay outstanding PACE
assessments before paying mortgage costs. In August of 2010,
Fannie Mae and Freddie Mac announced they would not purchase
mortgages for homes with first lien priority PACE obligations.
The FHFA's action triggered many local governments to suspend
their residential PACE programs.
SB 96 (Budget and Fiscal Review Committee), Chapter 356,
Statutes of 2013, sought to address FHFA's concerns by tasking
the California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA) with administering a PACE loss
reserve program of $10 million to keep mortgage interests
whole during a foreclosure or a forced sale. CAEATFA filed
regulations and most PACE administrators participate in the
program.
The PACE Loss Reserve Program will compensate first mortgage
lenders for losses resulting from the existence of a PACE lien
in a foreclosure or forced sale. The program will cover PACE
payments made during foreclosure, if a mortgage lender
forecloses on a home that has a PACE lien, and any losses to a
first mortgage lender up to the amount of outstanding PACE
payment, if a county conducts a forced sale on a home for
unpaid taxes. The intent of the Program is to put the first
mortgage lender in the same position it would be in without a
PACE lien.
The FHFA issued clarity to their position following the
creation of the PACE Loss Reserve Program, in a letter to the
Governor dated May 1, 2014, which reads, "I am writing to
inform you that FHFA is not prepared to change its position on
California's first-lien PACE program and will continue to
prohibit the Enterprises from purchasing or refinancing
mortgages that are encumbered with first-lien PACE loans... In
making this determination, FHFA has carefully reviewed the
AB 2618
Page 7
Reserve Fund created by the State of California and, while I
appreciate that it is intended to mitigate these increased
losses, it fails to offer full loss protection to the
Enterprises. The Reserve Fund is not an adequate substitute
for Enterprise mortgages maintaining a first lien position and
FHFA also has concerns about the Reserve Fund's ongoing
sustainability."
6)Federal Housing Administration. In August 2015, the Federal
Housing Administration (FHA) announced the development of
Single Family FHA PACE guidance. "The Single Family FHA
guidance will address the impact of PACE assessment on
purchases, refinances and loan modification options available
to borrowers experiencing distress and will require the
subordination of PACE financing to the first lien FHA
mortgage. The guidance will address the eligible methods of
subordination of existing PACE liens."
The FHFA has not issued anything further following the
announcement from FHA regarding the development of guidelines.
7)CAEATFA. As part of the 2015-16 Budget, the Legislature
tasked CAEATFA, in consultation with the California Public
Utilities Commission, to create a working group with
stakeholders to develop criteria for the comparative
assessment of energy efficiency financing programs in
California, including PACE financing. CAEATFA has created a
public process to ensure stakeholder participation and draft
criteria for the comparative assessment of energy efficiency
financing programs for public comment. The draft criteria,
includes energy saving attributable to program financing,
cost-effectiveness, and customer experience, which includes
customer satisfaction and customer protections.
AB 2618
Page 8
8)Related Legislation. AB 2693 (Dababneh), of the current
legislative session, seeks to address a number of issues
raised since the creation of PACE regarding consumer
protection and disclosures, and the lien status.
9)Arguments in Support. Ygrene argues, "There are currently at
least 10 statewide and regional PACE programs in the State,
most of which have been formed based on the AB 811 statute.
There are also two known programs based on the SB 555 statute.
On behalf of the Golden State Finance Authority, Ygrene
operates a SB 555 based program in approximately 200 counties
and incorporated cities, including Los Angeles, San Jose,
Oakland and other jurisdictions where there are mandates and
strong demand for seismic retrofits to 'soft-story'
multi-family residential, commercial and other properties.
Given these facts it is imperative that as much private
capital and program choice as possible - this bill would
result in an increase to the available capital and choices for
property owners."
10) Arguments in Opposition. None on file.
Analysis Prepared by:
Misa Lennox / L. GOV. / (916) 319-3958 FN:
0002843
AB 2618
Page 9