When Taconic Partners structured financing for a $120 million building transformation at 730 Third Avenue to fund lighting upgrades, roof insulation and the installation of smart windows, the firm included a $28 million C-PACE loan in the capital stack.
Work on the building includes the creation of outdoor terraces, a dining room, a conference center, a fitness center, a lounge and a bicycle storage, which does not would not have been possible without the inclusion of C-PACE funding.
It was a great example of how, for real estate owners trying to fill gaps in their capital or reduce the cost of more expensive sources of gap financing, C-PACE (Commercial Property Assessed Clean Energy) is one of the best ways to get financing at low cost.
In fact, it’s so attractive that commercial real estate borrowers in New York — or the nearly three dozen other states in which C-PACE is available — would be hard-pressed to find a single reason to leave this type of financing behind. off their checklist.
C-PACE’s financing terms are so advantageous that we believe it has the potential to replace other types of financing, including mezzanine or even “stretch senior” debt. In addition to filling the gap in a development’s capital stack, leveraging C-PACE offers the added benefit of enabling developers to “do good by doing good.”
Elected officials have already created the program in New York and other locales to help meet carbon reduction goals. The onus is then on the promoters to pursue funding to avoid hefty fines.
From the borrower’s perspective, C-PACE financing is more favorable than other forms of financing for several reasons. On the one hand, it allows a homeowner to borrow 100% of the material and soft costs of green improvements. Because C-PACE is structured like a property tax, it is based only on the value of the asset and energy improvements, not the developer’s credit; therefore, it does not require corporate or personal guarantees.
C-PACE financing is fixed rate and fully amortized — and paid into a tax bill — over the useful life of the improvements, which is typically 20 to 30 years. Unlike other forms of construction financing, it won’t have to be refinanced after a few years. The fixed rate nature of C-PACE has become even more attractive in an increasingly volatile interest rate environment.
C-PACE is about ownership, not the owner. As such, it is entirely assumable by the purchaser in the event of the sale of the building; the term of the loan does not accelerate as a result of the sale. Finally, due to C-PACE’s low-risk position in the capital stack, it is cheaper than other financing and can lower the overall blended cost of construction capital.
The only real barrier to pursuing a C-PACE loan is the property’s mortgage lender. Because payments for a C-PACE loan are collected on the property tax bill, the amount owed is greater than existing debt holders on the property, which means the lender must provide consent before a loan can be made. C-PACE is granted.
Historically, some lenders have bristled at the idea of signing financing that would take precedence over their first mortgage. But the financial benefits are so strong that a growing number of lenders feel comfortable with it. As C-PACE financing becomes more entrenched in the market, mortgage lenders unwilling to allow C-PACE loans into their capital will put themselves at a distinct competitive disadvantage.
For the C-PACE lender, the loan is clearly advantageous. Although interest rates are not high, the level of risk is extremely low and many lenders are currently on a waiting list for approval to issue C-PACE loans.
Because the program is so new, C-PACE lenders play a more advisory role than traditional lenders. They guide borrowers through the C-PACE process, including assessing eligible upgrades, providing the technical assistance needed to subscribe to planned energy savings (thus determining the amount of financing) and acting as a liaison between the owner and the local C-PACE. PACE Authority.
Given its appeal to borrowers, there is no doubt that this form of financing will continue to grow rapidly. And any property owner currently contemplating a program to renovate and reposition their properties would be remiss not to consider C-PACE financing as part of their equity.
Jessica Bailey is the CEO of Nuveen Green Capital. YuhTyng “Tyng” Patka is co-chairman of the PACE Finance Group at Duval & Stachenfeld LLP.