PACE Loan Group Combines Real Estate with Sustainability Through C-PACE

C-PACE provides developers with low-cost, long-term financing for energy-efficient and otherwise environmentally friendly aspects of both new and redeveloped projects. Partner Insights spoke with Rafi Golberstein, president & CEO of PACE Loan Group, one of the country’s leading C-PACE lenders, to learn more about C-PACE’s potential for financial savings and energy improvements in today’s development landscape.

Commercial Observer: Can you tell us about PACE Loan Group?

Rafi Golberstein: PACE Loan Group (PLG) is a real estate focused direct lender of C-PACE loans. I founded PLG in 2017 on the heels of a career in real estate lending. We work nationwide on projects large and small, and our goal is to provide certainty of close that is both efficient and smooth. It’s our job to make C-PACE easy for our clients.

What is C-PACE financing?

C-PACE, which stands for Commercial Property Assessed Clean Energy, has been around for about 10 years, but only started to gain traction about five years ago. It’s used to fund energy conservation measures such as building envelope, HVAC, electrical and plumbing improvements. It’s available in more than 35 states. Developers and owners can use it as a financing tool to supplement their capital stacks. In today’s rising interest rate environment, C-PACE is especially effective in reducing overall cost of capital.

How can C-PACE financing be used for new construction?

C-PACE can be used for both new construction and renovations. In new construction, if a building is built above code or has an element of renewable energy, then it is generally eligible for C-PACE. What most developers may not realize is that their ground-up projects are usually C-PACE eligible without needing scope modifications. PLG has a unique expertise in finding energy conservation measures within projects that are C-PACE eligible on behalf of our borrowers.

How does a developer determine if C-PACE financing is right for a project?

For most projects, there is going to be some level of C-PACE that works. But it really depends on what the rest of the capital stack looks like to see how and where we fit in. So, there’s two parts to this question. One, is this project C-PACE eligible? To which the answer is 99 percent yes. Two, how does C-PACE fit within my financing plan to lower my blended cost of capital? PLG’s real estate lending expertise and experience helps us answer the second question.

What amount of a project does C-PACE typically cover?

C-PACE can cover energy conservation measures which generally account for around 30 percent of total project cost. However, in specific cases, like solar installations, or seismic improvements in certain states, C-PACE can cover 100 percent of the cost. PLG works with our clients to find what we call the “max possible” C-PACE loan and find opportunity where others might not. For a recent deal for the Four Seasons Hotel in Minneapolis, we identified C-PACE eligibility within the building envelope that ultimately increased loan size and saved energy. C-PACE is best approached on a project-by-project basis, and we work to find the ideal result for our clients.

Why is C-PACE financing preferable to traditional financing for certain projects?

Many reasons. C-PACE financing is nonrecourse. It’s also long-term, fixed-rate paper, which is very appealing, especially in today’s rising interest rate environment. C-PACE is also non-accelerable, which is unusual for a debt product. Some people think about C-PACE like a mezzanine replacement because it’s cheaper, but there’s also a structural benefit to a C-PACE loan. For example, if there’s a default on a mezz loan, the lender can foreclose very quickly. Because it’s non-accelerable, C-PACE doesn’t have any of those rights and remedies, so it’s a lot less risky and more appealing for developers.

Generally, C-PACE loans are cheaper than other debt fund, mezz or pref equity alternatives. Especially as interest rates rise, we continue to quote loans in the mid-5 percents, which is clearly more cost effective than the alternatives.

Talk about how C-PACE financing can be used retroactively on completed or near-completed projects.

Many states have retroactive financing that allows property owners to look back typically one to three years from the time an improvement was completed. (Every state has its own C-PACE program, so there could be different standards and requirements per state.) The owner can say, “Eighteen months ago we installed a new solar system. Can we retroactively use C-PACE to pay for that?” The answer in many states is yes, and retroactive C-PACE becomes a return of equity to the borrower.

Let’s talk through a case study. Walk me through how this applied to the Four Seasons Hotel in Minneapolis.

The Four Seasons Hotel is the first five-star hotel in Minneapolis. We entered this project right before completion and looked at all the different measures. We found $20 million in eligibility that the developer was able to put back in their pocket and redeploy into other projects across the country. Also, they benefited financially from the energy-efficient measures – they have a more efficient building. For this project, we qualified items such as the building envelope, the windows, some of the curtain wall, the roof materials, all of the HVACs and water pumps, and a lot of the electrical components, both in the elevator systems and the lighting and control systems. 

A pretty good rule of thumb is that anything mechanical, electrical or plumbing-related will be the lowest-hanging fruit for C-PACE.

Why is PACE Loan Group uniquely qualified to handle C-PACE loans for clients?

PACE Loan Group is rooted in real estate. I built PLG off of my previous expertise from New York investment banks and REITs. We understand how C-PACE works within the capital stack and how to structure our loans for the largest benefit to our client. We know the nuts and bolts of real estate lending, which, when you’re writing a real estate loan, is pretty important. Our clients appreciate this expertise. PLG makes what can be a really nuanced and confusing program into something that makes sense and is easy to transact on. 

Last year, we closed over 40 C-PACE loans, which is a staggering amount in one year, and this year we closed nine loans in May alone. We’re also internally managed, so we have no outside influence on our credit committee, which increases our certainty to close. That has been another really interesting distinction for us in the marketplace — we can control that internally and really commit to our clients. We do what we say we’re going to do, and we honor our terms.

What is next for C-PACE?

C-PACE is growing rapidly, both in terms of rollout across the nation and prominence in the capital stack. We’re seeing larger loan amounts across more project types. Not only are we expanding to different states, but C-PACE as a concept is expanding. For example, Washington state’s new statute incorporates “resiliency” as an eligible C-PACE measure, growing beyond traditional energy efficiency. We will see C-PACE as a tool to compliment ESG goals, as developers begin to view C-PACE as an integral part of the capital stack rather than an alternative financing option.