BILL ANALYSIS                                                                                                                                                                                                    

                                                                    AB 2618

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          2618 (Nazarian)

          As Amended  August 19, 2016

          Majority vote

          |ASSEMBLY:  |77-1  |(May 12, 2016) |SENATE: |32-7  |(August 23,      |
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          Original Committee Reference:  L. GOV.

          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.  

          The Senate amendments add chaptering out provisions to avoid  
          conflicts with AB 2693 (Dababneh) of the current legislative  

          FISCAL EFFECT:  None


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          1)Property Assessed Clean Energy (PACE) Programs.  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  
            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  
            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  


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            borne by the local agency, but is built into PACE loan  

            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  
            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. 


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          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  
            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, "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  

            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 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  

            In August 2015, the Federal Housing Administration (FHA)  
            announced the development of Single Family FHA PACE guidance.   
            In July 2016 both the Department of Veteran's Affairs (VA) and  
            the Housing and Urban Development (HUD) released guidance  
            regarding the purchase and refinance of properties with PACE  
            liens with FHA and VA insured mortgages.  The FHFA has not  


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            issued anything further following the announcement from FHA.  

          6)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.  

          7)Arguments in Support.  Ygrene argues, "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: