Picking Up the PACE: Revitalizing a Private, Market-Driven Solution to Rising Energy Costs and Environmental Policy

Since the energy crisis of 1973, Americans have steadily beaten the energy independence drum. The escalating costs of energy, in recent years, provided renewed vigor to the debate regarding energy consumption. Renewable energy, conservation, and efficiency projects come with hefty, upfront costs that hinder the average homeowner's attempt to individually address energy issues. In answer to this problem, and in spite of the fruitless debate among politicians and environmental activists, a new program emerged: Property Assessed Clean Energy ("PACE"). PACE is a local government initiative with unique legal consequences. In keeping with the principles of federalism, states authorize their municipalities to create special tax assessment districts, which allow bonds to be issued. A property owner receives money from the bond issuance to make the qualified improvements. Then, the property owner repays the amount he borrowed through an incremental increase on his property tax bill. The PACE loan creates an appurtenant lien on the property. Since its inception, twenty-six states and the District of Columbia have enacted PACE enabling statutes that serve each jurisdiction's unique needs and energy goals. This rapid support of PACE is bolstered by support from the White House and the Department of Energy. Two unique challenges, however, hinder PACE. First, the Federal Housing and Finance Agency ("FHFA") stated that it will not allow Fannie Mae or Freddie Mac to finance PACE-encumbered mortgages. The agency feared it would not get paid in the event of foreclosure. Second, states and municipalities rely on public funding despite the original intent that PACE be funded solely by private investment. In the wake of the recent foreclosure crisis in America, this reliance on public funding proved detrimental. Declining property values translated to declining tax revenues. Because of t Student Development Editor, LIBERTY UNIVERSITY LAW REVIEW, Volume 7. J.D. Candidate, Liberty University School of Law (2013); B.S., Finance, Liberty University (2009). LIBERTY UNIVERSITY LAW REVIEW this decline, municipalities can no longer afford to issue new PACE bonds. These obstacles caused PACE to grind to a halt. To overcome these obstacles, states should amend their statutes to allow private developers to fund PACE within their communities. Commoninterest communities ("CICs") are authorized by enabling statutes to make costly infrastructure improvements on behalf of the municipality. The municipalities repay the communities by assessing the property owner an incremental tax increase. Since property assessments are appurtenant, they remain attached to the property. Like the current tax assessment paradigm, owners who enjoy PACE funding can repay the developer through non ad valorem property tax assessments.' The developer will realize market-driven returns on the investment without having to be a bill collector. Because most mortgages-if not all-in CICs are non-FHFA, there is no conflict with the agency. A corollary to this proposal is for municipalities to utilize incentives to entice private investors who will fund PACE in areas outside of a CIC. PACE is an outstanding program that promotes energy security and independence with little federal regulation. PACE solves the problem of high upfront costs that hinder the average homeowner. With the suggested modifications and extensions to the current PACE paradigm presented in this Comment, PACE can once again be available and active throughout the United States.