One of the faster growing segments of the construction industry, especially in California, is green construction. Green construction can provide a myriad of benefits. While the altruistic goal of reducing the impact a business has on the environment is a primary driver of green construction projects, secondary benefits, such as tax credits, also come into play. Previously we have written a blog post asking where the litigation is in green construction, and we have contemplated whether or not mechanics liens apply to the field. Well, California residents have been filing suits over green improvements to their homes which have also created super priority liens on their properties through the California PACE program. As a result, legislation has been passed to help relieve the issue.
Wait, what is the California PACE program?
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The PACE (Property Assessed Clean Energy) program is designed to allow more people to go green. By using PACE, a property owner can make alterations to their property that make their home or business more energy efficient without the hefty cost up front. Instead, the price of the project is assessed through property taxes over an extended period of time. A quick look at the PACE website shows that California is home to quite a bit of PACE activity. Through a program called HERO (Home Energy Renovation Opportunity…sorry for all the acronyms!), California residents can take advantage of PACE. HERO has partnered with California local governments to create an opportunity to fund green construction projects through property tax assessments. For more on the PACE program, Greentech Media does a great job covering the subject.
The idea behind the program, making energy efficiency accessible and affordable, is one that many of us can get behind. Unfortunately, ethics and construction don’t always go hand in hand. This has lead to issues with the California PACE program.
To understand the issues the program has faced in California, it’s important to understand how the program works. When a party uses the PACE program to fund their home, they avoid paying the upfront cost by allocating the cost of the work, plus interest, to their property tax assessments for some amount of time. Because these incremental payments are attached to their tax bill, a failure to pay can result in a tax lien on a home. Typically this lien receives first priority, even if it has been attached after a mortgage or other first lien.
With the California PACE program, there have been issues with the costs assessed at the outset of these projects. In many instances, contractors have overcharged homeowners for the work they have performed. What’s more, the interest rates assessed to the incremental payments have been extremely high in some instances. After these questionable (at best) billing methods have been used, it’s ultimately a homeowner’s local government that comes knocking. If the assessment is not paid, the home may have a lien placed on it and eventually foreclose. As pointed out in this piece from MarketWatch, the high interest rates associated with such a low risk don’t make an awful lot of sense. The high costs associated with he program have created a serious burden on consumers, and those that try to get out from under their homes have found prospective buyers unwilling to take on the increased tax assessments.
In September, legislation was passed to promote transparency in the California PACE program. With the passage of the PACE Preservation and Consumer Protections Act, consumers must now be provided with a printed copy of a detailed financial estimate that explains the costs for the project. While this will certainly help keep homeowners from overextending themselves, the act goes one step further. Under the new legislation, payments are capped – the total amount of annual property taxes and assessments may not exceed 5% of the property’s market value. As a last line of defense, the act also establishes a period of 3 business days during which an owner may cancel their contract (before work has begun) without being hit with a cancellation fee.
The PACE program provides an excellent opportunity to go green for those who may not otherwise be able to afford it. However, due to the mechanics of the program, it can be abused by bad actors. Without further regulation, contractors can over bill customers and create what is essentially a mega mechanics lien that is enforced by the local government and can leap other liens and mortgages in priority. Luckily, the California PACE program will now be subject to more oversight. As evidenced with the injunction placed on the Fair Pay and Safe Workplaces Order, the lofty goals of new legislation must also be rooted with workable oversight. With the PACE program catching on across the country, states should make sure the proper safeguards are in place.
For more on the Golden State, check out our California Lien Law FAQs and our other California posts. With posts under our New Legislation tag, we work to keep up with the construction industry’s ever-changing legal landscape.