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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2018

Help Clients Soar With C-PACE

Digital lending platforms are increasing access to low-cost green financing

Help Clients Soar With C-PACE

As the Commercial Property Assessed Clean Energy (C-PACE) financing sector matures, more real estate owners, developers and mortgage brokers are discovering that C-PACE offers the kind of flexibility and lower costs of capital that can move the needle on certain projects. It can play a critical role in the capital stack.

Commercial mortgage brokers who are educated on the versatility of this product are using it to create new business opportunities and to differentiate themselves from their fellow brokers in the marketplace.

At its roots, C-PACE is a financial tool that was developed to help update the nation’s aging and inefficient infrastructure, and to make it easier for property owners to invest in energy efficiency, water conservation, renewable energy and safety upgrades that improve their buildings and the environment. These tangible benefits are heralded by lenders that are now considering how C-PACE helps increase collateral value.

As importantly, commercial mortgage brokers who include C-PACE in their product offerings can provide potential clients with access to a direct form of less-expensive capital. C-PACE lenders typically charge interest of 6 percent to 7 percent. As a result, C-PACE financing gives brokers a competitive advantage with potential clients. It also ultimately helps to close more deals.

Brokers, developers and investors who stay on top of financing trends are learning how to execute successful C-PACE deals, including how to use new online lending platforms to prequalify certain projects and get indicative pricing that can be easily included in deal proposals. If you’re still learning about this product, however, you may have some questions, including: Why is C-PACE’s popularity growing so fast and where is it available?

Rapid growth

C-PACE financings have roughly doubled annually since 2011 and reached $588 million in cumulative investments on more than 1,400 properties nationwide as of December 2017, according to PACENation, an industry association. The C-PACE market is well on its way to becoming a multibillion-dollar industry within the next five years.

Wall Street is on board, too. This past July, the first 144A securitization of C-PACE assets was completed — a $103 million, AAA-rated single tranche of more than 80 U.S. properties. Securitizing these types of assets will help generate a more liquid and vibrant secondary market for C-PACE which, over time, may help drive down the costs of capital. C-PACE is now approved for retrofit and rehab projects in 35 states and the District of Columbia, and for ground-up construction in 12 states and Washington, D.C.

From a purely financial perspective, C-PACE is attractive for its flexibility, interest rates and terms. A recent mixed-use development deal that included C-PACE, for example, reduced the weighted average cost of capital to 7.46 percent. If traditional mezzanine debt had been used instead, the blended cost would have been 9.29 percent.

C-PACE’s long-term financing structure stays with the property, even if it is sold, so the costs of the improvements are aligned to the ongoing benefits for owners and tenants. This is similar to common tax assessments, such as sewer or school bonds. The longer terms of C-PACE deals, which can range up to 25 to 30 years, further align costs with the improvements’ expected useful life. 

This product [C-PACE] provides the kind of flexibility and improved costs of capital that have quickly earned it a foundational role in the capital stack.

Enhanced technology

Understanding and utilizing C-PACE is becoming easier with a growing network of mortgage brokers offering this financing option to their clients. Lenders that have listened to feedback from market participants have evolved their digital-lending platforms to better serve the borrower, as well as brokers and other partners who facilitate these transactions.

Online applications and prequalification assessments are enabling property owners and mortgage brokers to test the waters and see how C-PACE can work for a specific property upgrade, with tools to adjust specific aspects of a proposed transaction and tailor it to the owner’s objectives. Online prequalification assessments are offered by several state entities, such as Colorado C-PACE as well as Energize NY, which offers New York state property owners a process for eligible projects involving commercial and residential properties.

Private-money lenders may offer online tools to quickly determine eligibility for specific states or municipalities, for viewing indicative pricing and terms, and for getting cash-flow estimates for solar-energy projects. Whether the process is initiated online or by working directly with a lender’s sales representative, C-PACE financing involves steps similar to traditional loan underwriting.

Case studies

The following examples illustrate how C-PACE can make a critical difference for commercial real estate owners and investors. The first case study involves two California office buildings.

A real estate investment company utilized C-PACE financing for a rooftop array of solar panels, as well as related heating and cooling improvements, at its headquarters. The company also upgraded a multitenant suburban office building with a 76-kilowatt solar array.

The suburban office project is estimated to save the company more than $933,000 over the life of the 30-year loan and reduce the property’s carbon-dioxide emissions by 432 tons per year. The property’s annual utility bill prior to the solar enhancements was about $28,000, which is expected to drop to $3,350 in the first year following improvements — a savings of 88 percent. The company’s principal indicated that amortizing the loan over 30 years helped to maximize cash-flow benefits while offering a less-expensive form of capital.

The second case study involves a mixed-use development of a century-old building in Texas. A commercial real estate developer borrowed $24 million in C-PACE funds to help transform a former office building and warehouse into retail and office space, apartments and a dual-branded hotel. The building had been empty for some time and is now helping to spur development in the city’s downtown area.

The C-PACE financing replaced mezzanine debt — which can often include a double-digit interest rate — and significantly reduced the debt-service requirements while increasing project returns. The developer is projected to save $2 million per year in utility costs, savings that will be passed on to tenants. The improvements included an energy-efficient heating, ventilation and air conditioning (HVAC) system, as well as lighting, insulation, roofing, glazing, exterior waterproofing, plumbing and irrigation.

• • •

As C-PACE financing continues to gain popularity, commercial mortgage brokers, owners and investors are finding this product provides the kind of flexibility and improved costs of capital that have quickly earned it a foundational role in the capital stack.

Whether a property owner uses it for more common upgrades to energy, water and other resource systems, or in newer applications such as property resilience or seismic improvements, C-PACE is poised to become a multibillion-dollar financing sector in the coming years. 


Chris Robbins is managing director for CleanFund Commercial PACE Capital Inc. For more on the company go to cleanfund.com. Reach McKernon and Robbins at (415) 256-8000 or info@cleanfund.com.

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