Debunking the Misunderstandings Surrounding C-PACE Financing
Commercial Property Assessed Clean Energy (C-PACE) financing is among the fastest-growing sources of capital for new construction and redevelopment projects across the country. More owners, sponsors, and developers are utilizing C-PACE financing’s efficient structure to enhance their project’s sustainability. However, as is typical with emerging financing mechanisms, mischaracterizations and misunderstandings about PACE and its implications remain.
C-PACE allows PACE Loan Group to provide long-term, fixed-rate financing for 100% of the cost of energy-efficient measures such as renewable energy, water conservation, lighting, building envelope, roofing, and HVAC. Often, C-PACE financing replaces more expensive bridge or mezzanine debt or preferred equity. C-PACE financing can typically fund up to 30% of a project’s cost. It is repaid as a special assessment levied against the property collected in the same manner as real estate taxes.
For a property that secures existing debt, C-PACE requires the consent of senior lenders before the assessment can be funded. Here are common misconceptions about C-PACE transactions:
Misconception: PACE conflicts with a senior lender’s collateral position
C-PACE is a special assessment to real estate taxes and does not accelerate. C-PACE, like real estate taxes, does not accelerate in the event of non-payment. Only the past due portion of the C-PACE financing is in default. Once that payment is made, the assessment delinquency is cured. A senior lender can underwrite the annual PACE assessment to quantify its incremental exposure should it need to make a protective advance to cure the real estate tax delinquency that includes PACE.
C-PACE financing does not restrict a secured lender’s remedies or foreclosure rights. The lender can still foreclose on its mortgage interest in the property as if it was the sole lienholder. The C-PACE provider does not have any right to prevent, restrict, or otherwise impact the senior lender’s foreclosure. As an additional risk mitigant, a senior lender can require a monthly escrow of the annual C-PACE assessment obligation, like it normally might for property tax and insurance.
Misconception: Owners start paying interest on C-PACE assessments before the work is completed, diminishing cash flow.
At closing, C-PACE funds are deposited into an escrow account, to be withdrawn as eligible costs are incurred. PLG can help reduce payments by allowing for stabilization of the project by capitalizing one to three years of payment, without increasing debt. Generally, improvements financed through C-PACE increase the value of the senior lender’s collateral and reduces its risk. C-PACE projects require an energy audit be completed on the project, confirming that there is a savings-to-investment ratio which results in reduced operating costs, increasing its net operating income and valuation of the property.
Misconception: C-PACE interest rates and costs are high
C-PACE interest rates average 5.75-6.25%, which is 300-400 basis points below mezzanine/gap financing or private equity hurdle rates. Costs associated with C-PACE transactions mirror costs of conventional real estate loan products.
Despite misconceptions, the truth is that C-PACE is a rapidly growing and cost-effective financing alternative. Adding C-PACE to a property’s capital stack increases the efficiency of the project both operationally and financially. Today, C-PACE can be utilized in multiple states, and C-PACE loan amounts are growing nationwide.
“Despite misconceptions, the truth is that C-PACE is a rapidly growing and cost-effective financing alternative. Adding C-PACE to a property’s capital stack increases the efficiency of the project both operationally and financially.”