Public Finance Update - July 2010

Property Assessed Clean Energy (“PACE”) programs, which offer homeowners access to public dollars to help pay for the installation of solar panels and other energy efficiency upgrades, have become extremely popular across the country. So popular, in fact, that the U.S. Department of Energy recently committed $150 million in stimulus funds to help continue and expand PACE programs and give an economic boost to companies that install energy systems.

Recently, however, the Federal Housing Finance Agency (“FHFA”), which oversees the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), announced that the PACE programs are unacceptable for mortgage lenders in their current form. This announcement follows the issuance by Fannie Mae and Freddie Mac of guidance letters to mortgage lenders and servicers that reiterate each agency’s prohibition against any loan (such as a PACE loan) that has a senior lien status to a mortgage.

The announcement and the guidance letters represent a blow to the Department of Energy, which backs the PACE programs. Many local and state officials have objected to the FHFA’s position, noting that the liens that secure PACE loans are secured on the same basis as other types of special property taxes or assessments, like those used to finance sidewalks and underground utilities, which liens have previously been approved by Fannie Mae and Freddie Mac.

This week, California filed suit in the U.S. District Court against FHFA, Fannie Mae and Freddie Mac, asserting that the position taken by those entities violates the California law that authorizes the PACE programs in the State. Among other things, the lawsuit asks the court to issue an injunction prohibiting Fannie Mae and Freddie Mac from taking action against homeowners with PACE loans secured by their property and to declare that participation in a PACE program does not violate the standards of either mortgage company. According to California Attorney General Jerry Brown, if California loses its PACE programs, the State could lose more than $100 million in federal stimulus money.

Impact fees, as the name suggests, are intended to help pay municipal costs that arise as an impact of development. The precise relationship between impact fees and those costs, however, has long been debated. In California, the appellate court recently addressed this issue in the case Homebuilders Association of Tulare/Kings Counties, Inc. v. City of Lemoore, 2010 Cal. App. LEXIS 859 (Cal. Ct. App. 2010).

In the City of Lemoore case, the local building association challenged several impact fees imposed by the City for various purposes, including parks and recreation, police, public safety, municipal facilities, solid waste and fire protection. The court upheld all of the fees except certain of the fire protection fees. Unlike the other fees, the fire protection fees assessed on property located in the City’s east side were being levied on property that already had been substantially developed, and to reimburse the City for facilities that already had been constructed. The court held that such fees had been imposed for general revenue purposes, and were therefore invalid.

Notwithstanding the invalid fire protection fees, this case otherwise reinforces the validity of impact fees as a method by which California municipalities can compel developers to help finance certain infrastructure associated with a development. For larger projects, developers can sometimes negotiate a more favorable financing structure, utilizing public financing tools such as development agreements, tax sharing agreements and special assessment districts or Mello-Roos community facilities districts. Nevertheless, impact fees continue to increase in popularity in California and across the nation and represent a critical consideration when assembling a development financing package.

The Internal Revenue Service (“IRS”) recently released revised Forms 8038, 8038-G, 8038-TC and 8038-CP. Issuers are required to complete and file the revised Form 8038 to report the issuance of private activity bonds and the revised Form 8038-G to report the issuance of tax-exempt governmental obligations. The revised Form 8038-TC must be filed in connection with the issuance of tax credit bonds, including qualified forestry conservation bonds, new clean renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds, qualified school construction bonds, clean renewable energy bonds, Midwestern tax credit bonds and all other qualified tax credit bonds, including specified tax credit bonds.

Build America Bonds (“BABs”) are still required to be reported on Form 8038-B, which was revised in January 2010. The revised Form 8038-CP is required to be used by issuers of BABs, recovery zone economic development bonds and specified tax credit bonds who elect to receive a direct payment from the federal government equal to a percentage of the interest payments on such bonds. Form 8038-CP must be filed no later than 45 days prior to each interest payment date.

The July 2010 yield on AAA-rated municipal bonds stayed level for 30-year bonds at 4.38% and decreased slightly for 10-year bonds from 3.07% to 3.00%. Yields on 30-year treasury bonds continued to fall from 4.10% to 3.89%, and yields on 10-year treasury notes dipped below munis for the first time since May 2009.

Source: Bloomberg (www.bloomberg.com)