Keeping Pace with P.A.C.E. Loans
By Charles D. Nostra, Attorneys’ Title Fund Services, LLC
As we discussed a few months ago Property Assessed Clean Energy (PACE) loans, which are used to make certain qualifying energy efficiency and hurricane hardening improvements to commercial and residential properties, are increasing in popularity but unfortunately many buyers and sellers do not understand how they work and how they can complicate the real estate closing process. Here is what you, as a real estate professional, need to know about this increasingly popular financial product.
As we discussed a few months ago Property Assessed Clean Energy (PACE) loans, which are used to make certain qualifying energy efficiency and hurricane hardening improvements to commercial and residential properties, are increasing in popularity but unfortunately many buyers and sellers do not understand how they work and how they can complicate the real estate closing process. Here is what you, as a real estate professional, need to know about this increasingly popular financial product.
Getting a PACE loan is easy. Qualifying requirements for PACE financing agreements are relatively simple and are based on the home’s equity and tax payment history. The approval process typically takes less than an hour. In May 2018, President Trump signed the Dodd-Frank Wall Street Reform Act which directed the Consumer Financial Protection Bureau (CFPB) to create federal oversight of, and rules for, the program so new requirements may be added, requiring residential consumers to pass an “ability-to-pay” analysis before they are approved. Florida, California, and Missouri are the only three states with PACE programs. While California has already imposed new requirements for its state program, Florida has no current plans to require a more comprehensive approval process, and the CFPB has no timetable or deadline for the creation of the new rules. For now, Florida’s PACE program qualification requirements remain unchanged, and the number of PACE agreements continues to increase from year to year.
Once the property owner is approved for a PACE loan, a memorandum of financing agreement is recorded in the official records of the county where the property is located within five days of execution of the agreement by the property owner. Even though the agreement is of record, the first yearly assessment may be postponed up to eighteen months based upon the timing of the funding of the project.
Seller Disclosure of the PACE Lien and Non-Ad Valorem Assessment
Sec. 163.08(14), F.S., requires sellers to disclose, in the contract or by a separate writing, the existence of the PACE assessment prior to the execution of the contract by the buyer. The disclosure must be as set forth in the statute:
Qualifying Improvements for Energy Efficiency, Renewable Energy, Or Wind Resistance.
The property being purchased is located within the jurisdiction of a local government that has placed an assessment on the property pursuant to s. 163.08, Florida Statutes. The assessment is for a qualifying improvement to the property relating to energy efficiency, renewable energy, or wind resistance, and is not based on the value of property. You are encouraged to contact the county property appraiser’s office to learn more about this and other assessments that may be provided by law.
Despite the statutory requirement, it appears that most sellers, and many real estate agents, may not be aware of the disclosure obligation; therefore, many buyers may not be aware of the existence of the lien until after the contract is executed.
The PACE Loan Payoff Process
Getting rid of the lien created by a PACE loan can be complicated. Through interviews with PACE administrators and experiences shared by our attorney members, it appears that the methodology by which PACE loans are released has a few unique twists, which can create some challenges pre- and post-closing.
Title Insurance Requirements
A PACE lien is a super-priority home improvement loan secured by a recorded lien and paid through the tax bill. “Super-priority” means that it is superior to every other type of lien - like taxes. So even though the PACE program provides that the financing agreement is fully assumable, many lenders are unfamiliar with PACE lien agreements and require their mortgage be insured in a first lien position. As a result, most title insurers will require a satisfaction of the lien where financing is being obtained by a buyer or an existing owner is refinancing.
However, if the lien is to be assumed by the buyer, pursuant to the contract and without objection from the insured lender, payoff of the lien may not be required. If the buyer agrees to assume the PACE lien, then only the current year’s assessment should be prorated at closing.
The Payoff Request and Calculation Process
When improvement projects are funded before June 30 of the current year, the assessment will typically appear on the current year’s tax bill in November. Assessments for projects funded on or after July 1 will typically not appear on the tax bill until the following year. PACE Assessments do not appear in the Truth-in-Millage Act (TRIM) notice, because PACE assessments are not subject to appeal. The PACE assessment will only show up in the November tax bill once the assessment amount is relayed to the assessor by the plan administrator.
While real estate agents are not directly involved in obtaining loan payoffs in preparation for a closing; you should have a reasonable understanding of the process so you can prepare your client, especially if you represent the seller.
Settlement agents requesting payoff information related to the PACE lien should keep in mind that whether an estoppel letter received from the plan administrator will be for a complete payoff amount depends on when the assessment is made and when the figure is relayed to the tax assessor. Since the PACE program and its administration appear to have been set up for the agreements to be assumed by a subsequent buyer and not paid off upon sale, it may be a struggle to get a complete payoff from the administrator.
If a payoff request is made after the effective date of the agreement, but before the submission of the assessment information to the tax collector, it may be possible for the homeowner to negotiate for removal of the assessment from the planned submission to the tax collector. If the administrator has already submitted the assessment for collection by the tax collector, the process of taking it off the tax roll will likely be very difficult. The most likely scenario is that the payoff letter will have a notice that the payoff amount does not include the current year’s assessment because it will be included on and paid through the tax bill.
For most transactions, settlement agents are likely to encounter a PACE lien payoff statement issued by the PACE administrator containing language indicating that the payoff amount does not include the current year’s assessment in the tax bill (whether the tax bill has been issued yet or not). The settlement agent will have to review the recorded memorandum and any documents provided by the seller, as well as inquire of the administrator about what the current year’s assessment will be (if not already on the tax bill from the prior year). The assessment will never be higher than the maximum amount listed in the recorded memorandum. For the payoff line on the closing disclosure, the settlement agent should use the PACE administrator’s payoff amount. The full amount of the current year’s assessment should be charged to seller on a separate line in the prorations section of the closing disclosure.
PACE Proration Considerations
Since the PACE lien results from financing improvements to the property, and the value of those improvements were likely factored into an increased property sale price, the PACE assessment should not be prorated, but should be charged 100 percent to the seller.
There are typically two components of the tax bill that are subject to proration, ad-valorem taxes and non-ad valorem assessments. When there is a PACE lien, the “prorating” of the tax bill requires three steps.
Step 1: The entire PACE assessment is charged to the seller;
Step 2: The ad valorem taxes are apportioned between the seller and buyer based on a calendar year in arrears; and
Step 3: The non-ad valorem assessments are apportioned between seller and buyer based on the charging entity’s tax year, fiscal versus annual, and on whether it posts payments in arrears or in advance. Each charging entity’s program could be different, so multiple lines on a settlement statement may be required for the proper proration of the non-ad valorem assessments.
Release of Lien and Post-Closing Considerations
Finally, correspondence from PACE administrators indicate that the final release of lien (satisfaction of the PACE Agreement) will not be recorded until the property tax payment window closes in March and taxes are confirmed as paid.
We are aware of at least one instance where the PACE lien was paid off and the lien was satisfied, but the assessment continued to be included in the non-ad valorem assessments the next year. Real estate agents should remind buyers to double check the next year’s tax bill to confirm removal of the assessment.
Seller Issues
Real estate agents should work with their real estate attorney partners to explain the proration nuances to a seller who may not fully understand how the program works. Particularly, sellers may require assistance in understanding lender priority requirements and the program’s “assumption of the lien by the next owner,” or “the lien runs with the land” features that may have been overlooked at the time the contract was negotiated. Whether a PACE lien may be assumed is the buyer’s and lender’s choice to make, not the sellers. Sellers may be surprised (and upset) to learn that in most transactions the lien will have to be paid at closing, and that they may incur pre-payment penalties in doing so.
Settlement agents who encounter a PACE lien in their title examination should be aware that a payoff amount may not include the assessments portion being collected with the first installment under a financing agreement, and the complications that may arise when prorating the assessment on a closing statement.
Real estate agents, especially those in areas where PACE programs are popular, should ask sellers if they have a PACE loan at the beginning the listing process for two reasons. First, the seller is required to disclose the PACE loan prior to the execution of the contract by the buyer. Second, so you can work with your settlement agent to address the nuances of these loans promptly so the parties can close on time. As you can see PACE loans are complicated and we encourage you to partner with a real estate attorney as your settlement agent to ensure they are handled appropriately and you close with happy buyers and sellers.