Started in the green revolution’s holy land, Berkley, California, PACE financing is shorthand for Property-Assessed Clean Energy Financing (Wikipedia entry).

The concept is simple: cities loan money to property owners to install clean energy equipment. The loans are then repaid to the city through annual property tax assessments.

As originally conceived, it’s a win/win/win situation really. Property owners get funds to improve their property, paying back the loan with money saved in the the property’s reduced operating expenses. Cities and communities benefit by upgrading its overall energy efficiency. Businesses and efficient energy investors benefit because the market grows for its products.

All was going very well for PACE Financing. PACE legislation was passing across the country, and President Obama’s administration wholeheartedly supported PACE programs.

This progress came to an abrupt halt in June 2010, when the Federal Housing Financing Authority (FHFA) dropped this news: Properties with PACE loans cannot be purchased by mortgage giants Fannie Mae and Freddie Mac.

Why not?

Well, PACE loans create a lien against properties similar to a tax lien, meaning that the lien has priority over all other debts (including mortgages). The value of these loans can be between $10,000 and $100,000, and sometimes more. The problem for these mortgage holders is obvious, as they are losing priority on their collateral.

The news from the FHFA caused more than $150m in funding to get yanked by the US Department of Energy, and has some predicting the demise of PACE Financing as we know it. And they may be right.

Can PACE Be Saved?

The question now is whether these PACE Programs can be saved. While I believe they can be, I don’t think the programs will be unaffected by the FHFA determination. Here is a few things that are happening to help PACE stage a comeback, and a glimpse at how this might affect the PACE Programs:

1) California is Fighting It: First, Sonoma County and the California Attorney General have both separately filed suit against the FHFA claiming that the determination is wrong, or that FHFA lacks jurisdiction to make the determination on behalf of states and counties.

2) Legislation is Being Proposed: The US Congress (as well as local reps and senators) are introducing bills aiming to protect PACE financing programs. One such bill is the PACE Assessment Protection Act of 2010.

3) Re-Thinking PACE: States may be ready to re-think the way they structure these PACE programs, and provide some protections for mortgage companies. While not passed in response to the FHFA announcement, Louisiana’s new PACE egislation may have predicted these problems, as it greatly accommodated mortgage holders. The PACE legislation from the 2010 session, for example, requires enough equity in the house to support the loan, and requires permission from the mortgage holder for commercial loans greater than $100k (talked about in this post)

4) Commercial Focus: The FHFA restriction really affects the residential markets only. As such, many states and municipalities may be re-focusing their PACE programs on the commercial market. One example of this is New Orleans, who anticipated launching a PACE district with the help of funding from the US Department of Energy’s America’s Solar Cities program. The city says they plan on moving forward with the district, except it will only be for commercial PACE loans.

Hey, What Does This Have To Do With Construction?

The PACE Financing Programs has a lot to do with construction and construction law. You may or may not know, but our firm publishes two blogs that focuses on green building laws: The Louisiana Green Building Law Blog and the Northwest Green Building Law Blog. I am also a LEEP AP, and focus part of my practice on green building issues.

I recently wrote a blog post called: Think Green Building is Irrelevant? Think Again. The post discussed a report published by NPR saying that green building accounts for 33% of new construction in the United States. That’s a remarkable number. And if these PACE Programs get off the ground, the existing construction green building numbers will be driven up significantly.

Stay tuned.

If you were to survey green building critics, it’s safe to guess most will argue that the cost to build green do not outweigh the benefits.

Indeed, many have suggested that the cost of building green (especially gaining LEED certification) is significantly higher than building to ordinary standards. Others argue that LEED certification can be achieved through an everyday budget.

Regardless of where you fall on this issue, everyone should agree that green building projects have certain specifications, and bidding contractors must project the construction costs responsibly.

And so, one of the most challenging components of a constructing a green building may be the process of bidding it.

Since green building work is just starting to take hold in the construction industry, many contractors and subcontractors are working on little-to-no experience on green projects. And sometimes the data behind green building techniques and products are thin (see greenwashing).

On Wolfe Law Group’s Construction Law Monitor, we published a 2-part article on the Bidding Process and Change Orders: Bidding Errors and Change Orders: Avoiding a Nightmare [Part One and Part Two].

How do we suggest you avoid Bidding Error nightmares? Spend time with the Contract Documents pre-bid.

With green building projects, this is more true than usual.

When preparing your green bid, here are some example thoughts that should be considered:

• If the project is being certified with LEED or another standard, who will be responsible for the submittal process? Who will be responsible for monitoring the construction process?
• Contact vendors who will be providing the project’s materials, and review the data they have to back-up their performance and environmental claims. It would be a pity to plan on using one product, and being forced to later use a more expensive substitute. See this article on how to shop for green building materials.
• If the builder is anticipating a tax credit, do you understand the requirements to qualify for the credit? Will this increase your construction costs?

A successful green building project starts where successful ordinary projects begin: during the bidding and contracting period.

Whether your green building project will increase costs, or not, understand the green building expenses associated with your project, and avoid bidding errors and change order nightmares.

Just recently, the U.S. Green Building Council published an update to its readers explaining Risk Management issues to its readers, explaining that while green building is growing even in the current U.S. Economy, it presents unknowns that makes it difficult for the industry and insurance underwriters to manage risks.

Here is a snippet:

Underwriting insurance coverage is the art of understanding, assessing, and mitigating risk. Green building has presented challenges to insurance carriers stemming from the fact that green building design and construction is new. New things are tougher to understand from a historical loss perspective, requiring leading insurance carriers to take a proactive approach to understanding the possible ramifications of providing expanded coverage to meet the needs of firms engaged in the green building industry, while anticipating the market demand for these specialty insurance products.

As mentioned in previous posts, as the green building market continues to boom, green litigation and losses becomes more likely. What if the planned LEED certification is not achieved? What if the design is not as energy efficient as planned?

And the questions go on and on.

One question that is still unanswered, as hinted by the USGBC above, is with regard to Risk Management & Insurance.

In December 2008, Wolfe Law Group published an informative article on its Construction Law Monitor titled Green Building Insurance & Limiting Exposure. The article discusses the need for specialty insurance, the packages available to contractors and the idea of green building performance bonds.

Just last week, ACE USA announced the launch of a Green-Specific Contractors Insurance Program, joining the ranks of companies like Fireman’s Fund, Travelers & AON.

Like everything else in the green building industry, the waters here are untested. While we can read the policies and the brochures on the policies, it’s too early to determine what types of claims will be paid versus those denied, or the role green building insurance will play – or ever play – in protecting a contractor from professional liability losses.