Let's Not Keep PACE

[XLFD]

The City of Ludington plunged themselves into the expensive proposition of leasing their vehicle fleet in February, then last month they introduced us to the next new shiny concept of Property Assessed Clean Energy (PACE), a California innovation designed to transition over to a greener earth, and indicated that they may want to adopt PACE after a public hearing scheduled for the 6PM meeting on Monday, April 13th.

Some potential resistance was shown at the March 23rd meeting with Councilor Mike Shaw asking some questions that needed to be asked, if only because none of the rest of the council did their homework on the concept and zero discussion over the topic when it was at the committee level.  But even those questions about whether local lenders would be used and what would happen if lenders defaulted on their payments were insufficient to gauge much about the program, which was explained to the council by Mary Freeman, whose job at Lean & Green Michigan is to peddle PACE programs to as many municipalities that she can to maintain her position.

Reading those minutes and listening to the video of that meeting has you recognize that her presentation was little more than a Sham-wow! commercial aimed at weak councilor minds for her product.  Her props were a power point (starting on p. 38) and Rob McMahon, president/CEO of Great Lakes Castings LLC, who spoke of how he planned to use the program in order to do big things for his company and the foundry.

Indeed, it would potentially give him plenty of additional capital without having to disrupt his other lines of credit, but McMahon of GLC LLC was an interesting choice for being the poster boy of approving a PACE District for the city limits.  The local facility had a bad assessment from the state's environmental oversight agency, EGLE, citing three violations in 2024 which McMahon replied to in this letter sent to EGLE.  This appears to be an unresolved issue, and one wonders if the CEO's as yet unstated specific reason for taking an interest in PACE loans was to mitigate one or more of the violations found a couple of years ago without dipping deep into their other creditor's pockets.

The Ludington Daily News did a respectable job of NOT totally shilling for the program in an article called "Ludington to consider PACE district", it objectively explains the program and cites the positive aspects of PACE that were presented at the council meeting, but they also unexpectedly explored criticisms of the program:

"While widely used, PACE programs have drawn criticism from some lenders and regulators. The Office of the Comptroller of the Currency, a federal banking regulator within the U.S. Department of the Treasury, has warned that PACE assessments may take priority over existing mortgages, creating safety and risk concerns for lenders. The Mortgage Bankers Association has similarly said the structure can increase lender risk. Analysts and program materials also note the obligation is tied to the property, which can complicate refinancing or property sales in some cases."

Assuredly, these criticisms are well documented yet incomplete, and none actually apply to the city's involvement, which is portrayed in the article to "be limited to placing and collecting the assessment used for repayment".  "The approach gives property owners access to private capital for upgrades without requiring upfront payment, while limiting risk to local governments because no public funds are used", says program materials.

Limiting risks to local governments?  Mary Freeman told us that there is no cost to local governments and her agency would ease any administrative tasks that arise from the program at the March 23rd meeting, but nothing about risks according to the minutes.  If the local government has risks, and they are funded primarily by us taxpayers, shouldn't we expect a potential concrete reward for that risk in any analysis?  Or does that reward only go to the company that seeks it, as is so often the case in programs involving public-private partnerships, with government picking winners while the winner's competitors suffer for being fiscally responsible?

Local governments are enticed to support PACE because programs are said to spur local jobs for contractors and create additional revenue through permit fees for PACE projects. They anticipate that PACE projects will increase property values, creating another tax revenue enhancement.  Despite these alleged benefits, many municipalities, including our county government which has been approached to do so, have not jumped aboard the PACE train.  Let's see why that is the case.

The PACE program started in California in 2008 as a high-minded mechanism for encouraging green economies, individual residences also qualified for these loans if they wanted to do qualified projects.  Problems quickly arose with predatory lenders peddling loans with very little pain up front as the payments would come with the property tax bill-- which could be quite substantial.  This led to many cases where the house/property would go into foreclosure with a hefty amount of debt to be overcome by any subsequent buyer.  When Michigan entered the PACE program with legislation in 2010, the problem with residential property that was evident in the program was not considered; it was only usable for commercial properties, including multi-unit rental properties.

The program was expanded in 2023 with passage of a package of new bills that among other things expanded the C-PACE program with state Democrats in control of the governorship and congress.  We were told that these would target high energy costs in the state, but that hasn't happened at all, just the opposite.  This appears to be a pattern in states where 'clean energy' programs are prioritized and/or subsidized over energy policies that rely more organically on free market factors.

The risks for commercial properties entering into a PACE program may be less than for residential properties but are still there and can lead to financial problems that may lead to the company becoming insolvent as they put more and more debt on their tax role.  When this happens, the local government will potentially lose a large source of taxes, but that is not the big risk.  

For by the simple act of the municipality entering into what is a facilitating middleman role for a loan between two private entities, they expose themselves to a substantial amount of potential liability.  This liability does not exist when such a program is not in place, Google AI states some of these issues:

Lawsuits against cities regarding Commercial Property Assessed Clean Energy (C-PACE) loans often stem from disputes over the program’s administration, the validity of liens, or the delegation of authority to third-party lenders.

Common Causes of Action in C-PACE Lawsuits
1) Validity of the Assessment: Legal challenges may claim that the municipality did not properly authorize the assessment or that it was not a legitimate "public purpose".
2) Lien Priority Disputes: Existing mortgage holders (banks) often sue to challenge C-PACE's superior lien position over their loans.
3) Municipal Liability for Third Parties: While some PACE ordinances protect city officials from personal liability, others may not. Lawsuits might target the city if the C-PACE administrator misrepresented terms or failed to comply with state legislation.
4) Failure to Obtain Consent: C-PACE programs typically require the consent of existing mortgage holders. Failure to secure this properly can lead to legal action.

Key Legal Considerations & Findings
Super-Priority Lien Status: C-PACE loans act as tax assessments and, in most cases, take priority over all prior recorded liens/mortgages.
Run with the Land: The liability runs with the property, meaning the new owner becomes responsible for the assessment upon sale.
Florida Legal Backlash: Florida's PACE Funding Agency has faced significant legal challenges over the program's administration and its impact on property insurance.
State vs. Local Authority: Some suits revolve around whether state-level PACE rules interfere with local government control.

It should be noted that the proposed resolution to be considered at Monday's public hearing (see p. 22-23) does not seem to address any of the common causes of action described above.  It doesn't:

1) Offer any mechanisms for validating the assessments they collect

2) Address the lien dispute process that can arise 

3) Shield city officials from any municipal liability

4) Allow city officials to verify consent has been obtained from mortgage holders

Administering the C-PACE program comes with a lot of potential liability that may seem insubstantial at this point, but nobody at Ludington City Hall foresaw all of the administrative and legal costs they have and will have accrued in the simple act of approving site plan reviews and resolving disputed claims as they have regarding the construction of AndyS and the position of its pillars.  

The City of Ludington would be well advised to not accept this additional risk, liability, and strain on city administrator resources in order to be a loan shark's enforcer, especially when there is nothing solid to be gained by the general public in the effort.

[Freedom Seeker]

Thanks for the alert and research, X on PACE (not to be confused with another acronymn for senior care that comes up when searching PACE).

It seems this could easily become a quagmir-like automatic "lein" on property sales or defaults, but what would be the percentage of failures, good over bad? Would it be an incentive to grow the property? Will there be huge contractor scams in the approved contractor sources? How will realtors disclose the "lien" if one is to buy a property that has a PACE (stupid vague name, imo). What does a city/deed recorder have to lose in subscribing except a new step in attaching the loan to the property?

With few other alternative options for improvement loans for qualifying properties, it seems it is at least something to help the many rundown commercial and multifamily buildings in many of the cities in USA, especially Michigan. I can see why it took a start and is headquartered in Detroit. I'm still researching and weighing. Heres a link to see if your property qualifies:

https://leanandgreenmi.com/about-pace/how-pace-works/#:~:text=PACE%....

[Freedom Seeker]

Below is a link for more info on the national level. What I cant easily find is the fixed interest rates, which most publications say is "between the lender and owner."

https://www.epa.gov/statelocalenergy/commercial-property-assessed-c....

Except for the quagmire of additional local administrative costs (which can be contracted out), i don't see how this would put a tax burden on other taxpayers. Will it be like the No "rental inspector" costs?

[XLFD]

Thanks for doing additional research, I could have easily missed some details or failed to convey them in the article due to an effort to keep it away from being too wonkish.  One thing not mentioned is that these PACE loans usually are granted at higher interest rates than regular loans, 2% or more higher for those with fair credit ratings, so we might assume any private company looking for PACE loans does not have the credit capacity to do clean energy project(s) on their own without being able to 'pace' themselves into debt for three decades.  

This is a similar red flag to what happened with the ideal of the residential PACE first created without much oversight.  The borrower using the PACE loan accepts the additional interest rate because normal loans are not an option due to the evaluations of loan officers from lending institutions saying it's too risky.  But PACE allows them to have that line of credit, and chances are good that without oversight, the hoped-for clean energy outcome politicians hoped for are not completed as it is used for other things deemed more important. 

Then payment comes due at tax time and that company without credit capacity finds itself with a large lump payment due and no way to get enough money-- with the possible exception of another PACE loan.

[Freedom Seeker]

The yearly? Loan payment attached to the tax bill could be scary--instead of breaking down over 12 months like a traditional loan. It seems like a loan designed to fail for already struggling entities.

[XLFD]

A struggling business needing credit to survive having one (or maybe two) balloon payments come due each year is a scary concept.  Maybe that's a hidden goal of the program: get environment-unfriendly entities like GLC LLC interested in the program to get deep into it and then see them go bankrupt and out-of-business for over-extending themselves.  

[Freedom Seeker]

Re-reading your arguments against,X, it comes to my mind of Michigan Tax-Sale on non-paid property taxes (after 3 years) which goes to a contract auctioneer (online now). So what happens when a PACE loan recipient can't pay the tax bill (with the increased loan amount built in) and walks away?

Most municipalities have first option to take the property so if the property has been improved, the city can use that to their advantage. If the PACE loan has been misused or other malfeasance or the lendee or contractor runs off with the money, for example the burden falls to whom? If bought, the auction winner of the tax-foreclosed property? If not bought, the lender? So, there may be more and bigger tax-foreclosurers if scammers take over or lendees can't pay the tax.

[Golf~6~Romeo]

If City council approves this they should all be removed.