COVID -19 – Is PACE Financing an Option?

Last week’s blog post covered whether your existing loan possibly allows for additional financing (see blog post). Consistent with that theme, in this blog post I cover a related as just as popular question I have been getting recently – is CPACE financing an option?

Property Assessed Clean Energy (“CPACE”) financing is a unique type of financing available for properties that allows the financing of energy efficient and renewable energy related improvements. It can be used for all asset classes – commercial, residential, industrial, etc. In Florida, the legislature has determined that energy conservation and efficiency should be a focus in Florida, resulting in a finding that “there is a compelling state interest in enabling property owners to voluntarily finance such improvements with local government assistance.” This has been directly codified in the Florida Statutes (see Fla Stat. 163.08).

Real estate professionals are becoming increasingly interested in PACE financing during the COVID-19 pandemic in order to take advantage of an alternative funding source and make improvements to their properties. However, before moving forward with any PACE financing, all real estate professionals should understand the details of PACE financing under Florida Statute 163.08 and how it relates to their existing loan:

What Improvements Qualify for PACE Financing?

• Per Fla Stat 163.08(2)(b), a “Qualifying improvement” includes:
  • (i) an energy conservation and efficiency improvement;
  • (ii) renewable energy improvement; and
  • (iii) wind resistance improvement.

Is PACE Financing a Typical Loan?

• Not really, as it is government funded form of financing done through a non-ad valorem tax assessment and repaid through the property’s annual tax bill.
• However, per Fla Stat 163.08(8), “[a] local government may enter into a financing agreement only with the record owner of the affected property. Any financing agreement entered into pursuant to this section or a summary memorandum of such agreement shall be recorded in the public records of the county within which the property is located by the sponsoring unit of local government within 5 days after execution of the agreement.” Thus, the PACE financing can be documented similarly to a typical loan and even have such financing agreement recorded in the public records.  

Do I need to inform the lender under my current loan?

• The answer is yes. Per Fla Stat 163.08(13): “At least 30 days before entering into a financing agreement, the property owner shall provide to the holders or loan servicers of any existing mortgages encumbering or otherwise secured by the property a notice of the owner’s intent to enter into a financing agreement together with the maximum principal amount to be financed and the maximum annual assessment necessary to repay that amount. A verified copy or other proof of such notice shall be provided to the local government.”
• Accordingly, you must inform your existing lender and show proof of same to the local government.

Will PACE Financing be allowed under my current loan?

• It will depend on the terms of your existing loan documents, but it is very likely that PACE financing can violate negative covenants that do now allow additional financing or liens to be placed on the property without the lender’s prior consent.
• An argument can be made that PACE financing is not really a “loan” or “additional financing”, but rather it is a non-ad valorem tax assessment. However, as stated above, Fla Stat 163.08 provides language that calls for a financing agreement to be entered into and recorded, making this non-ad valorem assessment take the form of hat your lender may consider a “loan” or “additional financing.”
• Regardless, the PACE financing will constitute a lien being placed on your property. Per Fla Stat 163.08(8): “The recorded agreement shall provide constructive notice that the assessment to be levied on the property constitutes a lien of equal dignity to county taxes and assessments from the date of recordation.”

What rights does my existing lender have should I breach and obtain PACE Financing?

• This will again depend on your specific loan documents and the default/remedy provisions contained therein.
• However, Fla Stat 163.08(13) does provide some protections from your existing lender from accelerating your loan due to entering the PACE Financing: “A provision in any agreement between a mortgagee or other lienholder and a property owner, or otherwise now or hereafter binding upon a property owner, which allows for acceleration of payment of the mortgage, note, or lien or other unilateral modification solely as a result of entering into a financing agreement as provided for in this section is not enforceable.”
• This does not stop the lender from still putting you in default (which could trigger certain negative outcomes) and/or instituting other remedies. In fact, Fla Stat 163.08(13) specifically allows the lender to require escrowing for the assessment: “This subsection does not limit the authority of the holder or loan servicer to increase the required monthly escrow by an amount necessary to annually pay the qualifying improvement assessment.”

The above is a basic introduction to the issue of whether PACE financing is possibly an option for you. As you can see, entering into PACE financing may seem like a great idea, but it is not as simple as it seems. The improvements must qualify under the statute, you must inform your existing lender, the PACE financing has a high likelihood of violating your existing loan documents, and although your lender will not be able to accelerate your loan, they will still be able ton have certain recourse against you. Nevertheless, every situation is different and demands the proper attention and handling to navigate these uncertain times. If you are a borrower or related real estate professional and want to discuss any of the above or have a similar situation and would like to discuss with an attorney, please do not hesitate to contact me.