Local Option - Property Assessed Clean Energy

Summary

Note: In 2010, the Federal Housing Finance Agency (FHFA), which has authority over mortgage underwriters Fannie Mae and Freddie Mac, directed these enterprises against purchasing mortgages of homes with a PACE lien due to its senior status above a mortgage. Most residential PACE activity subsided following this directive; however, some residential PACE programs are now operating with loan loss reserve funds, appropriate disclosures, or other protections meant to address FHFA's concerns. The Federal Housing Administration (FHA), a branch of the U.S. Department of Housing and Urban Development (HUD), has released initial guidelines for using PACE with FHA-secured single or multifamily properties. This guidance is independent of FHFA policy. Commercial PACE programs were not directly affected by FHFA’s actions, as Fannie Mae and Freddie Mac do not underwrite commercial mortgages. Visit PACENow for more information about PACE financing and a comprehensive list of all PACE programs across the country.

Property-Assessed Clean Energy (PACE) financing effectively allows property owners to borrow money to pay for energy improvements. The amount borrowed is typically repaid via a special assessment on the property over a period of up to 20 years. Vermont has authorized local governments to establish such programs, as described below. Over 40 municipalities have passed local ordinances to implement PACE programs.

Vermont authorizes local governments to create PACE Districts to provide financing to owners of a "dwelling" for renewable energy and energy efficiency projects. The Vermont definition of dwelling comes from the federal Truth in Lending Act, and is applicable to residential properties (not commercial properties). Voter approval is required to establish a PACE district. Eligible renewable energy technologies include solar water and space heating, photovoltaics (PV), biomass energy heating systems, small wind systems, and micro-hydroelectric systems.* Eligible energy efficiency projects, determined by Efficiency Vermont and Burlington Electric Department,** include efficiency measures that are permanently attached to the property and reduce the net energy requirements of the building. Some examples include insulation and blower-door guided air sealing, window replacements/renovations, energy efficiency heating systems, among others. See 2016 Vermont PACE Eligible Measures for detailed information.

Property owners may opt-in to a program by signing a contract with the municipality's district. The contract specifies the amount of the loan, the terms of repayment and the associated risks (the language of the contract must include certain provisions, according to the Vermont law on PACE Districts). Participating property owners will be required to conduct an energy audit to quantify project costs, energy savings, and carbon impacts. Properties that have successfully participated in formal energy efficiency programs may be able to waive the full energy audit requirement for thermal envelope improvements and instead be eligible based on energy performance criteria.

Participating property owners must agree to a special assessment and lien on the property and pay a one-time, non-refundable fee (equal to 2% of the financed amount) to support the reserve fund created to cover losses in the event of foreclosure of participating properties. (Efficiency Vermont will administer the reserve funds). The municipality may release a lien on a property once the property owner has met the terms of the loan.

The Department of Banking, Insurance, Securities, and Health Care Administration (BISHCA) of Vermont has established underwriting criteria and standards as well as established rules on the reserve fund supported by participating property owners, as required per the law.

Legislation passed in May 2011 (H. 56) made several important improvements to Vermont's PACE legislation, which was originally passed in 2009. The legislation specifies that PACE liens are subordinate to existing liens and first mortgages but superior to any other liens on the property recorded after the PACE lien is recorded (except for municipal liens, which also take precedence over the PACE lien). This was done in direct response to the FHFA statement concerning the senior lien status, which was previously in place in Vermont. 

In addition, the legislation creates the state PACE reserve fund, in addition to the reserve fund supported by participating property owners. An amount equal to 5% of the assessment (not to exceed $1 million) will be transferred from Regional Greenhouse Gas Initiative/Forward Capacity Market funds to an escrow account maintained by the State Treasurer. This account will provide funds to cover 90% of losses due to defaults of participating properties not covered by the reserve account. The main purpose of the state PACE reserve fund is to reduce risk for potential investors interested in investing in a municipality to finance a PACE district.  

Legislation enacted in May 2012 authorized the Department of Public Service in collaboration with other state agencies and stakeholders to study the costs, benefits, and feasibility of expanding Vermont PACE to include commercial real estate. The study was released on January 15, 2013.

Additional resources are available on the Vermont Energy Investment Corporation's web site.

*The definition of renewable energy comes from 30 V.S.A. § 8002.

**Efficiency Vermont and the Burlington Electric Department are the state's Energy Efficiency Utilities, tasked with providing energy efficiency services to Vermont electric customers. See DSIRE's entry on Efficiency Vermont for more information.