C-PACE stands for Commercial Property Assessed Clean Energy. It's essentially a financing program that can boost your leverage on a commercial property in exchange for making it more energy efficient.
Sustainability and energy efficiency has been a growing topic as of late — especially with the new Biden Administrations infrastructure plan. While sustainability traditionally has been a luxury many can’t afford, a government financial product has made it not only financially feasible but potentially profitable.
What is C-PACE? How does it work?
The property assessed clean energy (PACE) model is an innovative mechanism for financing energy efficient and renewable improvements for private property. PACE programs exist for both residential and commercial properties each being referred to as: Commercial PACE or C-PACE), Residential PACE or R-PACE).
While PACE financing has grown in popularity recently, the idea and general structure for this type of program has been around since early 2001.
It wasn’t until 2008, after funding from the US Environmental Protection Agency along with more favorable legislation, did the program gain its footing. This program was also designed to help lower the pollution rate to help overall climate goals.
Impetus for this legislation began in Northern California; and to date, 36 states have passed legislation to allow PACE program funding. To find if your state is eligible click here.
PACE is a voluntary financial program to increase a property’s energy efficiency and renewability while simultaneously increasing its value. These improvements can include disaster resiliency improvements, water conservation measures, or renewable energy installations of residential, commercial, and industrial property owners.
What makes the PACE program so compelling is its payback structure and that it lowers the required equity needed at closing. An example commercial real estate deal may have 70% senior construction debt, 20% CPACE financing, and 10% additional Sponsor equity.
Note: The usage of C-PACE financing, in terms of a capital stack, accomplishes the same goal as mezzanine debt or preferred equity (lowering Sponsor’s equity needed in the deal); BUT, it is structured differently.
The payment on this type of loan is uniquely tailored for this government program. Instead of being structured as typical junior debt that is paid monthly, this financing is added to the property tax bill, gets paid when the respective tax bills are due, and is amortized at between 10–30 years and at a relatively low rate (4.5% — 6.0%).
Since the financing structure is tied directly to the property tax bill as opposed to the borrower. There are additional benefits:
Many senior lenders will not allow C-PACE as part of the capital stack because property tax bills and anything related to the tax bill (C-PACE in this case), technically primes the mortgage in the event of a default.
That means that if the project goes sideways, C-PACE will get paid back before the senior lender. This can be a problem for senior lenders.
Some lenders also look down on a project with PACE financing because that means the Sponsor has less “skin in the game.” Most lenders want to see their borrowers have between 25–35% of cash equity in the deal.
The above were only general rules of thumb.
Luckily, StackSource has been proactive in having individual discussions with lenders around C-PACE financing and has built relationships with over 50 lenders nationwide that are either already comfortable with this structure or are open to the idea.