Hybrid C-PACE Taking Hold as CRE Financing Strategy: Marcus & Millichap


The increased use of Commercial Property Assessed Clean Energy (C-PACE) financing as an alternative debt strategy is taking on more creativity in a blended form.

Hybrid C-PACE financing, which combines C-PACE loans with senior mortgages, is gaining steam with sponsors seeking lower borrowing costs in a higher interest rate environment, according to a new report from Marcus & Millichap (MMI)’s Institutional Property Advisors (IPA) division. The report was shared exclusively with Commercial Observer. 

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The strategy involves raising a subset of funds to originate senior financing to go on top of the C-PACE financing.

“It gives you another arrow in your quiver to potentially put together a stack that may be relatively more difficult to raise in the more traditional financing market,” Steven Buchwald, senior managing director at IPA and author of the report, told CO. “As rates have gotten higher and higher, it’s become a more and more reasonable alternative to utilize.”

Buchwald noted that lenders in a hybrid C-PACE deal can benefit from a higher yield in the partnership, which can enable lenders to take on a little more risk on the senior piece of the deal. He said the trend began to take hold in late 2022, especially for construction loans or renovation projects.

C-PACE financing can be particularly advantageous for planned capital projects on riskier property assets like office and hospitality where borrowers are seeking cheaper debt solutions.  The hybrid solution enables more loan proceeds at a lower all-in interest rate compared to 2021 before the Federal Reserve began to hike interest rates, according to Buchwald, who said he expects C-PACE to remain a major part of financing deals until interest rates are brought down. 

“Where C-PACE financing is really slotting in today is as a replacement for the underlying leverage that these lenders typically get,” Buchwald said. “I was probably the biggest and the staunchest C-PACE opponent in the market prior to last year, and I’ve had to very quickly change my tune because now I see how it can be effectively utilized when we’re in this kind of leverage and rate situation given the conditions of the market.”

Andrew Coen can be reached at acoen@commercialobserver.com