diff --git a/host/src/FunctionsNetHost/Grpc/IncomingGrpcMessageHandler.cs b/host/src/FunctionsNetHost/Grpc/IncomingGrpcMessageHandler.cs
index af0a5c43f..55b088487 100644
--- a/host/src/FunctionsNetHost/Grpc/IncomingGrpcMessageHandler.cs
+++ b/host/src/FunctionsNetHost/Grpc/IncomingGrpcMessageHandler.cs
@@ -56,15 +56,17 @@ private async Task Process(StreamingMessage msg)
 
                     if (workerConfig?.Description is null)
                     {
-                        responseMessage.FunctionEnvironmentReloadResponse = BuildFailedEnvironmentReloadResponse(new FunctionAppPayloadNotFoundException());
+                        Logger.LogTrace($"Could not find a worker config in {envReloadRequest.FunctionAppDirectory}");
+                        responseMessage.FunctionEnvironmentReloadResponse = BuildFailedEnvironmentReloadResponse();
                         break;
                     }
 
                     // function app payload which uses an older version of Microsoft.Azure.Functions.Worker package does not support specialization.
                     if (!workerConfig.Description.CanUsePlaceholder)
                     {
-                        Logger.LogTrace("App payload uses an older version of worker package which does not support specialization.");
-                        responseMessage.FunctionEnvironmentReloadResponse = BuildFailedEnvironmentReloadResponse(new EnvironmentReloadNotSupportedException());
+                        Logger.LogTrace("App payload uses an older version of Microsoft.Azure.Functions.Worker SDK which does not support placeholder.");
+                        var e = new EnvironmentReloadNotSupportedException("This app is not using the latest version of Microsoft.Azure.Functions.Worker SDK and therefore does not leverage all performance optimizations. See https://aka.ms/azure-functions/dotnet/placeholders for more information.");
+                        responseMessage.FunctionEnvironmentReloadResponse = BuildFailedEnvironmentReloadResponse(e);
                         break;
                     }
 
@@ -98,27 +100,37 @@ private async Task Process(StreamingMessage msg)
             }
         }
 
-        private static FunctionEnvironmentReloadResponse BuildFailedEnvironmentReloadResponse(Exception exception)
+        private static FunctionEnvironmentReloadResponse BuildFailedEnvironmentReloadResponse(Exception? exception = null)
         {
-            var rpcException = new RpcException
-            {
-                Message = exception.ToString(),
-                Source = exception.Source ?? string.Empty,
-                StackTrace = exception.StackTrace ?? string.Empty
-            };
-
             var response = new FunctionEnvironmentReloadResponse
             {
                 Result = new StatusResult
                 {
-                    Status = StatusResult.Types.Status.Failure,
-                    Exception = rpcException
+                    Status = StatusResult.Types.Status.Failure
                 }
             };
 
+            response.Result.Exception = ToUserRpcException(exception);
+
             return response;
         }
 
+        internal static RpcException? ToUserRpcException(Exception? exception)
+        {
+            if (exception is null)
+            {
+                return null;
+            }
+
+            return new RpcException
+            {
+                Message = exception.Message,
+                Source = exception.Source ?? string.Empty,
+                StackTrace = exception.StackTrace ?? string.Empty,
+                Type = exception.GetType().FullName ?? string.Empty,
+                IsUserException = true
+            };
+        }
         private static FunctionMetadataResponse BuildFunctionMetadataResponse()
         {
             var metadataResponse = new FunctionMetadataResponse
@@ -136,6 +148,7 @@ private static WorkerInitResponse BuildWorkerInitResponse()
             {
                 Result = new StatusResult { Status = StatusResult.Types.Status.Success }
             };
+            response.Capabilities[WorkerCapabilities.EnableUserCodeException] = bool.TrueString;
 
             return response;
         }
diff --git a/host/src/FunctionsNetHost/Grpc/WorkerCapabilities.cs b/host/src/FunctionsNetHost/Grpc/WorkerCapabilities.cs
new file mode 100644
index 000000000..749788fc2
--- /dev/null
+++ b/host/src/FunctionsNetHost/Grpc/WorkerCapabilities.cs
@@ -0,0 +1,10 @@
+// Copyright (c) .NET Foundation. All rights reserved.
+// Licensed under the MIT License. See License.txt in the project root for license information.
+
+namespace FunctionsNetHost.Grpc
+{
+    internal static class WorkerCapabilities
+    {
+        internal const string EnableUserCodeException = "EnableUserCodeException";
+    }
+}
diff --git a/host/tools/build/Microsoft.Azure.Functions.DotnetIsolatedNativeHost.nuspec b/host/tools/build/Microsoft.Azure.Functions.DotnetIsolatedNativeHost.nuspec
index 36c3591a6..0f198f5a2 100644
--- a/host/tools/build/Microsoft.Azure.Functions.DotnetIsolatedNativeHost.nuspec
+++ b/host/tools/build/Microsoft.Azure.Functions.DotnetIsolatedNativeHost.nuspec
@@ -4,7 +4,7 @@
     <id>Microsoft.Azure.Functions.DotNetIsolatedNativeHost</id>
     <title>Microsoft Azure Functions dotnet-isolated native host</title>
     <tags>dotnet-isolated azure-functions azure</tags>
-    <version>1.0.1</version>
+    <version>1.0.2</version>
     <authors>Microsoft</authors>
     <owners>Microsoft</owners>
     <projectUrl>https://github.com/Azure/azure-functions-dotnet-worker</projectUrl>