Commercial Property Assessed Clean Energy (C-PACE) lending is a sustainable financing mechanism that has gained significant traction in commercial real estate. However, despite originating over $6.9 billion in loans in 2023 alone, it has surprisingly floundered in New York City. C-PACE has become an essential tool for property owners looking to enhance energy or water efficiency in their buildings.
This blog delves into the profound impact and advantages of C-PACE lending within the commercial real estate sector. By unraveling the intricacies of this innovative financing mechanism, we aim to shed light on how C-PACE can revolutionize and bolster commercial real estate projects, paving the way for a more sustainable and efficient future.
What is C-PACE Lending?
C-PACE is a financing mechanism that enables long-term, fixed-rate, and non-recourse loans for up to 30 years for any aspect of real estate construction that enhances energy or water efficiency. The financing is attached to the real estate rather than the property's sponsor, allowing sponsors to avoid collateral requirements. The debt is collected on the property tax bill, allowing building owners to pass on the cost as maintenance charges to tenants, who benefit from the improvements in energy efficiency.
Here are Some Ways Zero Circle Can Help
Zero Circle can help implement Commercial Property Assessed Clean Energy (C-PACE) financing, a mechanism for financing energy efficiency and renewable energy improvements on commercial properties. C-PACE allows property owners to finance the up-front cost of improvements and then pay the fees back over time through a voluntary assessment of their property tax bill.
This financing model has several advantages, including secure financing of comprehensive projects over a longer term, spreading repayment over many years, and low-interest rates due to the high security of loan repayments attached to the property tax bill. C-PACE programs can also help metropolitan areas encourage energy efficiency and renewable energy without putting general funds at risk as they tap into significant private capital sources.
Zero Circle can assist in promoting the adoption and implementation of C-PACE programs by providing resources, best practices, and innovative approaches for states and local governments. They can help navigate barriers to C-PACE financing and ensure that programs are designed and implemented effectively to generate project uptake, support underserved communities, or advance resilience objectives.
Zero Circle can also work with metropolitan to explore creative financing structures, such as tax incremental financing programs, and identify areas where programs can complement each other to maximize benefits.
In addition, Zero Circle can assist borrowers or mortgage holders whose claims to the property might become subordinate to the unpaid assessment amount if the property goes into foreclosure. Zero Circle can play a crucial role in expanding this innovative financing mechanism for clean energy projects in commercial properties by working with stakeholders and promoting the benefits of C-PACE financing.
- Filling the gap in new construction projects
With traditional lenders writing fewer checks for new construction projects, C-PACE has stepped in to fill the void. This green funding option has become critical in financing new construction projects, offering borrowers a reliable and sustainable financing source for their projects.
- Repositioning properties and recapitalizing existing buildings
C-PACE loans can also help reposition properties in all asset classes. Properties past their prime are attractive candidates for these loans because the loans stay with the property and don't carry over for the owner. Additionally, C-PACE loans can be used to recapitalize existing buildings, act as a bridge for stabilization in most states, and allow retroactive financing of up to three years.
- Bypassing the need for collateral
One significant advantage of C-PACE is that the financing is structured so it's attached to the real estate rather than the property's sponsor. This means the sponsor doesn't have to put up collateral, making it easier for borrowers to secure project funding.
- Encouraging energy efficiency and sustainability
C-PACE loans are designed to enhance energy or water efficiency in real estate construction. This encourages borrowers to adopt sustainable practices and technologies, reducing their environmental impact and promoting a greener future for the industry.
- A tool for policymakers
C-PACE lending is a policy tool that allows policymakers from both sides of the aisle to meet their goals. It's a simple policy that allows private capital to flow in, enabling jurisdictions to meet their sustainability and energy efficiency targets.
Benefits of C-PACE Lending
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Flexible Financing: C-PACE loans can be used for various projects, including new construction, renovations, and retrofits, making them a versatile financing option for commercial real estate projects. Long-Term Financing: With loan terms of up to 30 years, C-PACE provides long-term financing to help property owners manage their cash flow and reduce energy costs. Non-Recourse Financing: C-PACE loans are non-recourse, meaning that the borrower's assets are not at risk if they default. Energy Efficiency: C-PACE financing can fund energy-efficient upgrades, such as LED lighting, HVAC systems, and solar panels, which can help property owners reduce their energy costs and improve their buildings' sustainability. Pass-Through Costs: Building owners can pass on the cost of C-PACE loans to tenants as maintenance charges, making it easier to manage the financial impact of the upgrades. |
C-PACE Lending Can Help Communities
- Encouraging energy efficiency and renewable energy improvements on private property
- Allowing for secure financing of comprehensive projects over a longer term, making more projects cash flow positive
- Spreading repayment over many years, seldom requiring an upfront payment, and removing the requirement that the debt be paid at sale or refinance
- Helping some property owners deduct payments from their income tax liability
- Allowing municipalities to encourage energy efficiency and renewable energy without putting general funds at risk
- Tapping into significant sources of private capital
C-PACE Lending in Action
C-PACE has been successful in various jurisdictions, including California, Minnesota, Ohio, Texas, and Colorado. In some cities, such as Philadelphia, C-PACE has become a diesel engine for real estate deals, particularly in life sciences projects. However, not all jurisdictions have embraced C-PACE lending equally. For example, New York City has struggled to implement the program, with only three loans administered since its adoption in 2019.
Challenges and Solutions
| One of the main challenges facing C-PACE lending in New York City is the mandated savings-to-investment ratio, which requires every dollar of a C-PACE loan to generate at least a dollar of energy savings. This requirement is challenging in jurisdictions with high construction costs, such as New York City. Legislation can overcome this challenge by creating loopholes, such as counting interest rate savings as savings or eliminating this requirement. |  |
Conclusion
C-PACE lending is a powerful tool for commercial real estate projects, providing long-term, fixed-rate, and non-recourse financing for energy and water efficiency upgrades. While the program has been successful in many jurisdictions, challenges remain, particularly in cities with high construction costs. By addressing these challenges and creating a more flexible financing environment, C-PACE can help more commercial real estate projects achieve their sustainability goals.
