C-PACE As Rescue Capital

By Michael Jarmolowich

Current economic/market headwinds of inflationary concerns with rising costs and rising rates caused mostly by supply chain issues have many CRE developers/sponsors in “unchartered territory.” Due to construction price escalation and logistical bottlenecks, CRE players are forced to deal with overspending/budget overages along with missed on-time project deliverables. If that is not concerning enough, layer in the legislative mandates to cut carbon emissions along with the hyper focus on environmental, social, and governance objectives (ESG). Enter Commercial Property Assessed Clean Energy (C-PACE), a highly adaptable form of low-cost, non-recourse rescue capital.

The Landscape

  • Current legislative mandates compel property owners/developers to cut carbon emissions when developing ground up buildings and renovating older ones.

  • Corporations worldwide have a hyper focus on ESG. Consumers are making buying choices based on the environmental impact of their purchase. Commercial and residential tenants will have the same behavior.

  • Inflation, rising costs, and rising interest rates have put many developments on hold or slowed construction. Combined with the current landscape of supply chain and labor shortages, timelines for construction and development are uncertain.

According to JLL’s 2022 US Construction Outlook report, this landscape will tighten. Several major sources of uncertainty amid high demand are likely to keep construction costs growing at a rapid pace over the course of 2022. Construction labor costs will continue to grow at an elevated rate. Continued labor shortages, heightened demand and elevated inflation are likely to drive wage increases in the 4 to 6 percent range.

 

C-PACE financing can be used retroactively in many states as rescue capital. Generally, with retroactive C-PACE, property owners/developers can reimburse themselves for work they’ve already started or completed over the past 1-3 years, depending on eligibility. This funding reimbursement can be applied directly to budget overages and capitalize reserves.

For example, a retroactive C-PACE loan could be used on a project with a major cost overrun due to supply chain shortages and construction delays. In this hypothetical project, applying C-PACE to already installed energy efficient measures (typically included in all buildings built to code), could return up to 30% of the project’s cost back to the developer. The resulting funds would fund interest reserves, pay unforeseen escalation of construction costs, and balance the budget, keeping the project on track for an on-time completion.

 What it means for developers:

The commercial real estate (CRE) industry is seeing a confluence of several factors, resulting in cost overruns, delays, and pressure to build better, more sustainable buildings. As an alternative financing mechanism specifically for energy conservation measures, C-PACE sits at the intersection as a solution to today’s CRE conundrum. Pace Loan Group (PLG) can uniquely provide C-PACE financing as an opportunity for rescue capital.