Why CRE Companies Should Consider C-PACE Financing Now
By Jessica Bailey and YuhTyng Patka June 22, 2022 12:48 pm
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When Taconic Partners was structuring the financing for a $120 million building transformation at 730 Third Avenue to fund lighting upgrades, roof insulation and the installation of smart windows, the firm included a $28 million C-PACE loan in the capital stack.
Work on the building includes the creation of outdoor terraces, a food hall, a conference center, a fitness center, a lounge and bike storage, which would not have been possible without the inclusion of C-PACE financing.
It was a great example of how, for real estate owners trying to fill gaps in their capital stack or reduce the cost of more expensive sources of gap financings, C-PACE (Commercial Property Assessed Clean Energy) is one of the best ways to procure low-cost financing.
In fact, it’s so attractive that commercial real estate borrowers in New York — or the nearly three dozen other states in which C-PACE is available — would be hard-pressed to find a single reason to leave this type of financing off their checklist.
The terms of C-PACE financing are so beneficial that we believe it has the potential to replace other types of financing, most notably mezzanine or even “stretch senior” debt. In addition to filling the gap in a development’s capital stack, leveraging C-PACE provides the added benefit of enabling developers to “do well by doing good.”
Elected officials have already created the program in New York City and other locales to help hit carbon-reduction targets. It behooves developers, then, to pursue the financing to avoid harsh fines.
From the borrower’s perspective, C-PACE financing is more favorable than other forms of financing for several reasons. For one, it enables a property owner to borrow 100 percent of both the hard and soft costs of green improvements. Because C-PACE is structured like a property tax, it is based solely on the value of the asset and the energy improvements, not the credit of the sponsor; therefore it does not require corporate or personal guarantees.
C-PACE financing is fixed-rate and fully amortized — and paid in a tax bill — over the useful life of the improvements, which are typically from 20 to 30 years. Unlike other forms of construction financing, it won’t have to be refinanced after a few years. The fixed-rate nature of C-PACE has become even more attractive in an increasingly volatile interest-rate environment.
C-PACE attaches to the property and not the owner. As such, it is fully assumable by the buyer if the building is sold; the loan’s term does not accelerate as a result of the sale. Finally, because of C-PACE’s low-risk position in the capital stack, it is cheaper than other financing and can drive down the overall blended cost of construction capital.
The only real hurdle to pursuing a C-PACE loan is the property’s mortgage lender. Because payments for a C-PACE loan are collected on the property tax bill, the amount due sits senior to existing debt holders on the property, which means the lender needs to consent before a C-PACE loan is made.
Historically, some lenders bristled at signing off on financing that would take precedence over their first-mortgage position. But the financial advantages are so strong that a growing number of lenders are comfortable with it. As C-PACE financing becomes more entrenched in the market, mortgage lenders who are unwilling to allow C-PACE loans into their capital stacks will put themselves at a distinct competitive disadvantage.
For the C-PACE lender, the loan is clearly advantageous. While the interest rates are not high, the level of risk is extremely low, and many lenders are currently on a waiting list to get approved to originate C-PACE loans.
Because the program is so new, C-PACE lenders play a more consultative role than traditional lenders. They guide borrowers through the C-PACE process, including evaluating which improvements qualify, providing the technical assistance needed to underwrite the anticipated energy savings (thus determining the amount of financing), and acting as a liaison between the property owner and the local C-PACE authority.
Considering how attractive it is for borrowers, there is little doubt that this form of financing will continue its rapid growth. And any building owner currently considering a retrofit and repositioning program of their properties would be remiss not to consider C-PACE financing as part of their capital stack.
Jessica Bailey is the CEO of Nuveen Green Capital. YuhTyng “Tyng” Patka is the co-chair of the PACE Finance Group at Duval & Stachenfeld LLP.
