Exploring C-PACE Financing as the Real Estate Industry Evolves to Fight Climate ChangeBy Michael W. Hurwitz | February 3, 2020
During a recent conversation with Sam Elbarouki of Dividend Finance, I realized we are witnessing the collision of a global issue within the ecosphere of New York City real estate.
At this moment, Climate Change is gripping the world, and in our own backyard, the issue has been written into New York City’s future with the passing the Climate Mobilization Act in April of 2019. (The Climate Mobilization Act aims to reduce New York City’s carbon emissions by 40% over the next decade, and 80% by 2050.) And here’s the interesting part: through the innovative C-PACE program, which was approved in the state of New York as part of the Climate Mobilization Act, commercial real estate owners will now have a powerful tool to finance the energy efficient changes that can contribute to the future of our city and planet.
C-PACE stands for Commercial Property Assessed Clean Energy; it is an alternative financing arrangement that is gaining more popularity across the U.S. each day. The PACE concept, which also has residential applications (R-PACE), began as a pilot program in Berkeley, CA in 2008, and since then, programs have been legislated and are active now in in excess of 30 states and in D.C. In New York, there are currently nine counties that have passed C-PACE. New York City is slated to adopt C-PACE sometime in 2020. Primarily, it is a tool for the financing of energy efficiency, renewable clean energy, technology and resiliency upgrades of commercial properties. It is a great source of capital for both new construction projects and renovations, value-add projects and comprehensive retrofits. The popularity and growth of PACE programs nationally suggest that they are truly helping property owners finance green energy improvements in a reasonable (affordable) manner. The exciting thing about C-PACE is how it neatly helps bring commercial properties in line with the state, local and global sustainability goals.
Why the Buzz
For owners, developers and investors, adding more efficiency and sustainability to commercial investment properties was once a task which required costly investments with little-to-no return. The flexibility of C-PACE gives more incentive to finance these improvements. C-PACE financing can be implemented on any commercial asset class and covers both hard and soft costs as long as its permanently affixed to the property. Eligible improvements include energy efficiency, reduce energy bills, renewable energy, water conservation, building envelope and LEED-eligible measures.
As Sam put it, “C-PACE financing can often help create more leverage in the capital stack and lowers the weighted average cost of capital (WACC); a great substitute for mezzanine debt. Moreover, it is long term in nature (20-30 year terms), so payment amortization is spread out as such, which owners like. It can be a win-win-win: for the developers, it helps increase leverage and subs out Mezz debt, which in turns lowers the WACC. The asset itself is more efficient, aiding to help increase the overall value, while becoming more viable for the end-users and the lenders that capitalize the project.”
How It Works
Approved loan financing is treated as debt of the investment property; meaning the debt is tied to the property as opposed to the owners of the property. C-PACE covers 100% of eligible improvements and is based on the value of the real estate instead of the credit of the property owner or occupying business. C-PACE financing can attribute 20%-25% of the total loan-to-cost during a new build construction, and up to 20% of the value for renovation projects. C-PACE financing is repaid as a special assessment on the property’s real estate tax bill and is processed like other public benefit assessments.
Keep in mind that most standard non-recourse real estate loans give the senior mortgage-holder the right to call the loan if additional debt is placed on the property without the lender’s consent. Because of this clause and the complexities of commercial mortgages, the primary hurdle in obtaining C-PACE financing is that the program requires either direct consent or an affirmation acknowledgement from the existing first-secured mortgage lenders as the C-PACE financing / assessment impacts the property’s total debt service payments.
Sam also noted, “Over 200 lenders, both banks and non-banks nationwide, have now consented to C-PACE. That number is growing on a monthly basis, as lenders are getting more comfortable with the program and how to underwrite it. The super-senior lien aspect of C-PACE certainly gives lenders some heartache. However, once they understand that C-PACE is not accelerable, it provides more comfort. In the event of borrower default, C-PACE does not accelerate foreclosure. Ultimately, it’s a matter of lenders understanding their added exposure of the C-PACE payment in the event of borrower default, and what it takes to cure.”
PACE programs are somewhat fragmented and vary from region to region as they are created at the local city and county levels. State legislation is passed that authorizes local governments and other agencies to enact PACE programs. The programs are established locally by cities and counties to meet the region’s market needs and demands. Local governments seem excited about PACE initiatives as they lower the cost of doing business in their communities and encourage business owners to invest in the area and create jobs using the local workforce. The Department of Energy established a “working group” in March of 2018 to work with state and local governments to refine PACE programs and develop best practices to grow C-PACE investments.
There’s more to consider, and it’s truly remarkable to think about the impact that our industry can have on the future and on issues that exist on a global scale. I invite you to reach out to discuss C-PACE in New York or inquire about local initiatives in your community. Let’s keep the conversation going.
About Michael W. Hurwitz
Michael W. Hurwitz, CPA, MST, is a Partner and REIT Group Leader at Marks Paneth LLP. Mr. Hurwitz brings more than 30 years of experience and a versatile set of skills acquired through working for both public and private companies in the real estate sector. His industry knowledge spans a vast number of areas including real estate tax issues, public and private real estate investment trusts (REITs), opportunity funds, portfolio restructurings, acquisitions and dispositions, partnership... READ MORE +
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