C-PACE Financing Finds Solid Footing in the Capital Stack

Fall 2022 Issue
  • By:
  • Mansoor Ghori
C-PACE helped fund $89 million for retrofits at 111 Wall Street in Manhattan in 2021. Upgrades included a new building envelope and high-efficiency glass. Nightingale-Wafra

This rapidly growing alternative funding method can help developers meet a wide range of goals.

New financing vehicles can take time to achieve market acceptance, but with more than $3 billion in transactions since its inception more than 10 years ago, Commercial Property-Assessed Clean Energy (C-PACE) funding is now a go-to green finance alternative for many owners, investors and developers.

Now available in 37 states and the District of Columbia, the special advantages of C-PACE’s long-term, low-cost, fixed-rate, non-recourse financing are making it a favored option over more expensive mezzanine debt or preferred equity. However, many CRE professionals are still unfamiliar with it. What is C-PACE? What makes it attractive to commercial real estate owners and developers? How have trends including the environmental, social and governance (ESG) movement further fueled its adoption?

How it Works

 C-PACE is an alternative financing mechanism, enacted by state legislation, that provides low-cost, long-term financing to owners and developers of commercial and industrial properties for energy efficiency, water efficiency, renewable energy and resiliency projects. C-PACE payments are secured by and repaid through a voluntary assessment on the property’s tax bill, similar to how local water and utility bills are paid. The C-PACE assessment is known as a ”debt of property.” This means the financing is tied to the property via its tax bill as opposed to the property owner, and the repayment obligation transfers with the property if it is sold. Assessment financing has been used for more than 200 years to repay municipal bonds attached to property taxes to fund projects for the public good, such as fire stations, street lighting, and sewer and sidewalk improvements. The difference is that C-PACE uses the model for energy efficiency and sustainability projects that benefit building owners (and also the general good).

Advantages for Owners/Developers

C-PACE financing is typically used for improvements that provide an environmental or energy-related benefit. These include air conditioning/heating (HVAC) and associated mechanical systems; electrical improvements such as LED lighting; updated building envelope and fenestration such as high-performance windows; water efficiency, including low-flow plumbing and irrigation; and full-on energy systems such as solar power and back-up capabilities. In some states including California and Washington, C-PACE can also be used for seismic strengthening and resiliency such as seismic bracing, foundation improvements, shear-wall reinforcement and the like. 

Trends Accelerating Adoption

 C-PACE has seen strong growth over the years, including during the COVID-19 pandemic. Industry trends can often accelerate adoption or draw new attention to C-PACE, and several current factors are pushing it forward again.

Facilitating green finance for ESG requirements. The surge of interest in ESG property investing, performance and reporting has drawn further attention to C-PACE. Whether in new construction or retrofit projects, C-PACE offers an immediate tool to help meet ESG objectives.

Meeting local/regional environmental regulations. Local and state jurisdictions are increasingly mandating climate-responsive real estate policies. One recent example is New York City’s Local Law 97, also known as the Climate Mobilization Act. The 2019 legislation created hard targets for reducing the environmental impact of individual commercial buildings, and owners-developers are scrambling to respond.  

A relief valve for market swings. The COVID pandemic essentially froze many capital sources in 2020-21.  This sparked a surge of owner-developers turning to C-PACE to replace struggling senior and mezzanine lenders so they could complete development projects that could not be paused. Others used C-PACE to provide emergency refinancing and capital restructuring where needed. For many real estate owners, the COVID-induced downturn quickly established C-PACE as an alternative source of capital that is counter-cyclical and more reliable than traditional sources.

Retroactive application of C-PACE. Many states allow “look-back” C-PACE financings of up three years, enabling developers to do retroactive C-PACE funding for qualifying improvements on recently completed buildings and renovation projects.

Larger C-PACE transactions. As the C-PACE market has gained traction, the size of deals has also increased. According to a December 2020 report from Morningstar, the average size of C-PACE transactions is increasing exponentially, due in large part to the growing price tags of new construction. For Petros PACE, a $500,000 loan transaction was considered large in C-PACE’s infancy, but today’s average is between $15 million to $17 million.

How is C-PACE Used in Commercial Properties?

Transactions and case studies are some of the best tools for illustrating how C-PACE is used. Here are a few from among the hundreds of deals closed in recent years across office, hotel, industrial, multifamily, retail, mixed-use, historic and other commercial property types:

High-rise Office. In 2021, C-PACE financing provided $89 million for retrofits at 111 Wall Street in Manhattan, the largest C-PACE funding effort in the U.S. at the time. Joint-venture owners Nightingale and Wafra Capital utilized C-PACE as part of a major transformation and upgrade of the 1.1-million-square-foot property including a new building envelope and high-efficiency glass, upgraded mechanical, electrical and plumbing systems, and energy-efficient elevators.

Senior Living/Multifamily. In Lebanon, Ohio, Leo Brown Group tapped $8 million in C-PACE financing for a 142-unit independent living, memory care and assisted care facility’s efficient envelope. The project included windows, siding, doors and foundations along with HVAC and LED light fixtures. 

Warehouse/Industrial. In Troy, Michigan, global manufacturer Heller Machine Tools arranged $979,000 in C-PACE funding for efficient lighting with controls, compressed-air upgrades, server room cooling, HVAC improvements with controls, and a partial roof replacement for its 93,000-square-foot industrial facility. 

Hotel/Hospitality. The new 260,000-square-foot Marriott Hotel & Residence Inn in Columbus, Ohio, utilized $16 million in C-PACE for lighting systems with controls and a comprehensive building envelope upgrade. 

Historic property renovation. The century-old 21,000-square-foot Whitney restaurant and events property in Detroit utilized $863,000 in C-PACE financing for a new HVAC system and high-efficiency stoves, upgraded electrical systems, replacement of 214 storm windows and conversion of 1,865 incandescent light bulbs to more efficient and longer-lasting LED lighting, among other improvements. Whitney owner Bud Liebler said the restaurant will see savings of more than $450,000 in utilities, operations and maintenance expenses over the fixed-rate, 20-year term.

As the commercial real estate industry continues embracing C-PACE, developers are finding this innovative tool can provide a green financing alternative to more expensive, less flexible funding sources.


Benefits of C-PACE

  • Better cash flow because there are no upfront costs or down payment requirements, which generates immediate cash-positive impact.
  • Increased property value from making important property improvements, which also helps position the real estate for potential future sale.
  • Increased marketability to potential tenants who are seeking environmentally responsive real estate.
  • Decreased maintenance costs from clean-energy retrofits that equip buildings with sustainable amenities, which offer less expensive ongoing maintenance.
  • Lower cost of capital as C-PACE displaces more expensive forms of funding in the capital stack and is non-recourse and non-accelerated.
  • Achieves ESG goals.
Updates on state-by-state C-PACE adoption and other information is available from the C-PACE Alliance, www.c-pacealliance.org.

Mansoor Ghori

Mansoor Ghori is CEO of Austin, Texas-based Petros PACE Finance.