Issue: The Operating Agreement proposes that property value be based on assessed value only.

Provider Comment: PACE financing in the State of California is based on market value. To qualify for PACE financing, a property owner must have no more than a 90% loan to value (LTV) on their property before the PACE assessment. Assessed value is normally lower than market value so property owners who otherwise would have qualified based on market value, wouldn't qualify with assessed value. For example, if the market value of a property is $500,000 and the assessed value is $300,000, if the loan amount exceeds $270,000 the property owner wouldn't qualify for PACE financing. Using assessed value would also exclude many of the property's under Proposition 13 from participation because these properties haven't been reassessed in decades. Please see the attached letter from Sonoma County which addresses why they transitioned from assessed value to market value for their own local government run program. As you know, Sonoma County created the first successful PACE program in the nation and set the gold standard for PACE underwriting, and every PACE program to date has been modeled after Sonoma County's SCEIP program. Below is a section from the Governor's Loan Loss Reserve Program that refers to property value. The type of property value isn't specified because the State of California allows the value of the property for PACE financing to be based on market or assessed value, which can be confirmed by CAEATFA, administrator for the program. Like Sonoma County, Hero uses an Automated Valuation Model ("AVM"), which is used throughout the mortgage industry to provide real estate property valuations for purposes of lending against the valuations.

§10081. Application by PACE Program to the PACE Loss Reserve. A PACE Program seeking to participate in the PACE loss Reserve Program shall complete an application that shall include the following information: (9) The Financing is for less than fifteen percent (15%) of the value of the property, up to the first seven hundred thousand dollars ($700,000) of the value of the property, and is for less than ten percent (10% of the remaining value of the property above seven hundred thousand dollars ($700,000). (10) The total mortgage-related debt and PACE Financing on the underlying property does not exceed the value of the property.

Provider Proposed Solutions: (1) Allow for market value to be used. Until this change is implemented, we request that property owners who don't qualify for financing based on the assessed value be allowed to use a BPO (Broker's Price Opinion), drive by appraisal, or full appraisal to demonstrate they meet the 90% loan to value (LTV) requirement. (2) Allow “the greater of Assessed Value or Fair Market Value” to be used.

Staff Comment: Property value is used to determine the eligibility of a property for PACE financing and defining the maximum amount of a PACE lien that the property may carry. Staff has previously recommended using assessed value rather than market value. Should the Committee and the Board wish to use fair market value as the basis for PACE financing, staff recommends that fair market value be established with a qualified independent appraisal or, in the absence of such an appraisal, that assessed value be used. In order to avoid actual or perceived conflicts of interest, property value should be determined independently. As to methods, AVM valuation can vary significantly from a qualified independent appraisal (see attached article on problems with relying on AVM). BPOs are generally cheaper than full appraisals but may not be as complete or accurate. Establishing fair market value through appraisal by an independent licensed appraiser is standard for the mortgage industry because it is the most accurate method and eliminates the potential for a conflict of interest.

Consider also that many properties that have not been reassessed due to Proposition 13 will have a low LTV ratio because the long-term owners have built up equity over time. A low LTV means higher equity and capacity for PACE financing. Using the provider's example, if the market value of a property is $500,000 but due to Proposition 13, the assessed value is only $300,000, the owner still may be able to qualify for a PACE loan depending on his/her equity, which can be high in this situation.

Issue: The Operating Agreement proposes that contractors release, defend, indemnify, protect, save and hold harmless the County of Contra Costa to the same extent as the indemnity and release provided by the PACE Provider to the County.

Provider Comment: Contractors are required to sign a Participation Agreement (see attached) whereby they agree to indemnify the participating jurisdiction as it relates to their work performed under the program. Requiring participating contractors to provide the same level of indemnification as the PACE provider would add undue risk and liability to the contractors. The county has no contractual relationship with the contractor nor with the property owner in the context of any individual PACE transaction. Thus the county has no liability and thus no financial exposure should anything lead to a lawsuit.

Provider Proposed Solution: We request that the County remove the requirement that contractors indemnify the County, and that the County instead adopt the contractor indemnification language in the Contractor Participation Agreement, to which all participating contractors have agreed.

Issue: The Operating Agreement proposes that contractors maintain commercial general liability insurance, including contractual liability (or blanket contractual) coverage, owners' and contractors' protective coverage, and broad form property damage coverage, with a minimum of $2M per occurrence; maintain builders' risk insurance in an amount equal to the construction contract amount, with a waiver of subrogation for the County, and naming the County as additional insured. The Operating Agreement also proposes that Contractors add the County as additional insured on the contractor's general liability and auto liability policies.

Provider Comment: The standard coverage amount for commercial general liability insurance is $1M per occurrence. Any amount over $1M would require the purchase of an excess policy at an additional premium. Additionally, Builder's Risk, aka Course of Construction, policies are designed for new construction and structural remodels to provide protection for the structure and the contractor's materials. These types of projects cannot be financed with PACE. And, contractors would incur an annual cost of $250 to add the County as an additional insured, which will greatly hinder contractor participation as contractors will utilize other forms of financing over PACE to avoid this annual cost.

Provider Proposed Solution: We're requesting the County to require contractors to carry the industry standard amount of $1M per occurrence for commercial general liability insurance, strike the requirement for a Builder's Risk policy as this coverage is not applicable, and strike the requirement for contractors to add the County as an additional insured as it would greatly hinder contractor participation and therefore greatly hinder the program's overall success.

Staff Comment: Risk Management has reconsidered the matter and has indicated that coverage of $1 million per occurrence will be sufficient. County Counsel will clarify the indemnification language used in the program documents. It is not necessary that the program documents be revised for this purpose, although this could be done if that is the Board’s preference.

Issue: Both the Sonoma and Sacramento agreements require "lender consent" or "lender acknowledgement" for non-residential properties, but only for the primary mortgage lender. The Contra Costa agreement requires lender consent from "any lender that has outstanding loans to the Program Participant."

Provider Comment: As written, the Agreement’s terms are far too broad in this instance. The consent should not have to come from any lender, as the Program Participant may have many non-property-related lenders.

Provider Proposed Solution: (1) Require lender consent/acknowledgment from only the primary mortgage lender. (2) We request that the lender consent requirement for non-residential properties be modified to read: "Require Program Participants who own non-residential properties to obtain written consent to participate in the PACE Program from lenders who have made loans to the Program Participant where the property in question serves as security for the loan."

Staff Comment: Staff concurs with the second proposed solution.

Issue: The limit of 10% of value for the PACE lien amount for residential properties whose value is over $700,000. The PACE assessment contract financing maximum of no more than 20% of a non-residential property’s value.

Provider Comment: It is unnecessarily intrusive of the County to impose this limit on a transaction that is purely among private parties. Given that the first mortgage lender must already provide consent to a PACE project in order for the deal to be able to move forward, and given that the first mortgage lender will be providing that consent after a review of the PACE project's economics and its impacts on the overall economics and finances of both the property and the property ownership’s ability to meet all of their financial obligations related to the property going forward, the Agreement's 20% limit is arbitrary.

Provider Proposed Solution: Modify the County's operating agreement to mirror the PACE Reserve Fund Regulatory Language with respect to properties valued at over $700,000, and eliminate the 20% cap on non-residential PACE financings.

Staff Comment: Regarding residential properties valued at more than $700,000, this was a drafting error in the County's operating agreement. Staff concurs with the proposed solution, and that the County's operating agreement should be modified to mirror the PACE Reserve Fund Regulatory Language which states, "The Financing is for less than fifteen percent (15%) of the value of the property, up to the first seven hundred thousand dollars ($700,000) of the value of the property, and is for less than ten percent (10%) of the remaining value of the property above seven hundred thousand dollars ($700,000).

Regarding the 20% of value cap on non-residential PACE loans, staff can agree to eliminate this limitation, given that we keep the limitation in our Operating Agreement that a PACE assessment cannot result in property taxes exceeding 5% of assessed value (paragraph 4.g. in our Operating Agreement). This provision provides a limit on annual loan payments, which has the effect of limiting loan size.

Issue: The operating agreement lacks a clear definition of the difference – in the context of PACE financing – between residential and non-residential properties.

Provider Comment: We suggest the following definition: “Non-residential property” is any property that is a multi-family property containing five or more units of housing, or any commercial, agricultural, or industrial property that would otherwise be eligible for PACE financing.

Staff Comment: Staff concurs with the suggestion except that we propose that non-residential property be defined as multi-family properties of 4 or more units (not 5, as proposed), which corresponds to the State’s definition of residential property as 3 or fewer units..

Issue: Some PACE providers may be representing to customers that the full PACE assessment payment is tax deductible.

Provider Comment: No PACE provider nor a PACE provider's contractors operating in Contra Costa County's unincorporated areas should be permitted to claim that the full amount of the PACE assessment is deductible from one's income taxes.

Provider Proposed Solution: Provide in the County's operating agreement that PACE providers may recommend that property owners consult with a tax professional prior to claiming any tax deductions associated with the project, and shall not recommend or indicate that homeowners take any particular filing position regarding their annual or semi-annual PACE assessment payments, and shall imply, through discussions or calculations, that the full assessment payment amount may be tax deductible but rather only the interest."

Staff Comment: Staff concurs.

Issue: Neither Sonoma nor Sacramento require a $5,000 fee from the Program Provider.

Staff Comment: PACE providers are commercial businesses and the County has chosen to regulate the manner in which PACE loans are made in the unincorporated area. Each PACE provider's application and program will be reviewed by staff of the Conservation and Development Department as the lead County department for PACE, County Counsel with respect to the operating agreement, and the Auditor and Treasurer-Tax Collector with respect to the administration of property tax. Depending upon the particulars of each provider submittal, we anticipate that each review may require 20-40 hours of staff time. The $5,000 administrative fee is a deposit to defray the County's actual cost of processing a PACE provider application. Any portion of the deposit that is not required by the County will be refunded to the provider. The County does not intend to earn a profit in the administration of the PACE program.