The C-PACE Opportunity for Ground-Leased Properties

Ground leases underlie some of the country’s most valuable commercial real estate. They are common in high-value markets such as Manhattan and are frequently used when land is owned by a university, public authority, institution or large corporate entity. 

They can also provide the long-term site control needed for projects involving new market tax credits or historical tax credits while allowing the landowner to retain fee ownership.

Despite their widespread use, ground leases are often treated as an obstacle to efficient property financing. Lease provisions governing assignments, subletting, mortgages and ownership transfers can complicate a transaction. Mortgage lenders must also consider what happens to their collateral if the lease expires or is terminated.

Those concerns are legitimate, but they should not prevent an otherwise viable project from moving forward. Commercial Property Assessed Clean Energy (C-PACE) financing can serve as an effective solution.

Ground-leased developments often have many of the same financing objectives as fee simple properties. Sponsors seek to preserve equity, lower the weighted average cost of capital, improve project cash flow, finance energy-related improvements over their useful life, and reduce refinancing risk through long-term, fixed-rate capital. 

C-PACE is typically fully amortizing with fixed rates over the long term, often up to 30 years. It can complement construction and permanent financing while improving the efficiency of the overall capital stack.

Ground-leased properties face additional obstacles when seeking mortgage financing that C-PACE may be able to address. There are no financial covenants in C-PACE requiring explicit consent or approvals that restrict assignments, subletting, mortgaging or transferring ownership.

A mortgage lender may risk losing its collateral if the ground lease terminates. The obligations associated with the C-PACE assessment do not end with termination of the ground lease and transfer to the subsequent owner. As C-PACE payment obligations run with the land, a maturing ground lease presents a lower risk to the C-PACE capital provider than a mortgage lender.

Since there is little standardization nationally in C-PACE, capital providers consider specialized legal reviews a routine part of all PACE transactions, with a strong focus on keeping legal costs down.

Ground lessor consent and ownership still matter. The fee owner of the parcel generally must consent, and many programs require owners of record to execute transaction documents. CounterpointeSRE works with ground lessees, legal counsel, senior lenders, program administrators and ground lessors to address these requirements and help the transaction proceed efficiently.

Public ownership can add another layer of complexity. State laws and local program rules differ in their treatment of publicly owned land. Eligibility may depend on how the assessment is billed and collected, how lien rights are treated, and what occurs if the lease terminates and the property reverts to a tax-exempt owner. Some states expressly permit C-PACE on publicly owned land, while others restrict or preclude it.

The ground lease may also need to cover the entire eligible property or tax parcel, be properly recorded or eligible for recording, and remain in effect for at least the term of the C-PACE financing. The specific requirements depend on state law, local program rules and the terms of the ground lease.

University-owned land offers a useful example. The developer of a 504-unit multifamily development on land leased from a local university in Washington, D.C., faced a high interest-rate environment for a leasehold construction loan. With the ground lessor’s consent, C-PACE provided the solution as CounterpointeSRE provided $90 million in C-PACE financing to lower the blended cost of capital alongside a senior loan for $214 million in full-stack financing. Repayment of the C-PACE was structured to begin after the three-year construction period to lower risks in development.

The project included all-electric HVAC with roof-top units (RTUs), dedicated outdoor air systems, and heat pump variable refrigerant flow systems, and an almost 26,000-square-foot green roof to manage stormwater. ECMs over code were projected to reduce annual energy consumption by almost 1.3 mega-watt hours.

C-PACE can also work alongside tax-credit structures. A former Zenith television factory in Chicago was converted into a 113,000-square-foot facility containing 64 commercial kitchens for food manufacturers. The ground-leased structure was created for tax credit investors.

CounterpointeSRE provided $4.6 million in C-PACE financing as a portion of source loan working well within the ground lease structure and with the consent of a consortium of new market tax credit investors. The project included a new HVAC system with packaged RTUs, hoods, water heaters and indirect fired gas furnaces as well as LED lighting. The U.S. Green Building Council later selected the project for presentation at the international Greenbuild conference.

A ground-leased property should be evaluated for C-PACE early in the financing process. The lease structure, remaining term, ownership arrangement, program requirements and proposed improvements can all affect eligibility.

Despite the added complexities, ground leases will continue to play an important role in institutional development, adaptive reuse and projects involving public or tax-advantaged ownership. 

With careful review and the consent of the necessary stakeholders, C-PACE can provide these properties with long-term capital for new construction and building improvements.

Michele Pitale is managing director and head of C-PACE at CounterpointeSRE, a sustainable finance solutions firm.