BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2618


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          ASSEMBLY THIRD READING


          AB  
          2618 (Nazarian)


          As Amended  May 2, 2016


          Majority vote


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          |Committee       |Votes|Ayes                  |Noes                |
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          |Local           |9-0  |Eggman, Waldron,      |                    |
          |Government      |     |Alejo, Bonilla, Chiu, |                    |
          |                |     |Cooley,               |                    |
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          |                |     |                      |                    |
          |                |     |Beth Gaines, Gordon,  |                    |
          |                |     |Linder                |                    |
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          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.  










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          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  








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            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  








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            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  








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            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),  








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            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  








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            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.  










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          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

















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