BILL ANALYSIS Ó
AB 2618
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
2618 (Nazarian)
As Amended August 19, 2016
Majority vote
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|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
session.
FISCAL EFFECT: None
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COMMENTS:
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
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
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
financing.
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
program.
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
sustainability."
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:
0004488