Finance better buildings with C-PACE


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Joel Poppert

By Joel Poppert, Managing Director, Imperial Ridge Real Estate Capital

Seeking ways to encourage the creation of more efficient buildings, states across the country have authorized programs such as C‑PACEor Commercial Property Assessed Clean Energy financing, which allows owners to borrow money from private investors for a variety of capital improvements that impact building performance and then make the repayments through an assessment on their property tax bill.

This type of financing offers a host of benefits and can help companies achieve increasingly aggressive ESG goals for themselves and their tenants. C-PACE is made more attractive because the payback is an appraisal, so landlords, developers and asset managers can pass on all or part of the annual appraisal costs to their tenants through their triple net lease agreements, or on guests for hospitality projects. These appraisals are also tied to the property, so they are fully transferable to the new owner if the property is sold.

But, as C-PACE funding grows across the Front Range (including more recently in Colorado Springs), there are still a number of misconceptions about what it can (and can’t). ) doing on a project that often results in a cumbersome, if not downright painful process. Reaping the environmental and bottom line results of C-PACE financing starts with understanding the basics of this relatively new financing mechanism and partnering with a capital provider who will walk you through the process.

Avoiding C-PACE Myths

For all its benefits, C-PACE presents obstacles that often frustrate new users, primarily the legislative requirement to obtain the consent of all lien holders on the property, i.e. mortgages. Often for development projects the owner has been sold on the idea that the C-PACE can replace equity, a common marketing angle to get an owner in the door. Spoiler alert: it can’t be. And for building owners looking to upgrade an existing property, it can be a tricky time to get lender consent. Generally speaking, lenders are much more likely to agree on a refinance, for example, than they would be if the mortgage has not reached its term.

Leveraging C-PACE for Better Buildings

C-PACE can typically provide between 10% and 30% equity for a development project and up to 100% financing for rehabilitation/renovation and renewable energy projects. While “clean energy” is embedded in the C-PACE name, a more apt description would be “capital expenditure”, because while the C-PACE can cover investments such as solar panels and storage batteries, investing in on-site power generation is certainly not a requirement to reap the financial benefits of the program. The most common applications include everything from building systems and envelope improvements to roofs, water and sewer system upgrades and hazard mitigation (earthquakes, wildfires and storms). wind, for example).

Determine if C-PACE is a Fit

C-PACE funding can be used at different stages of a building. For development, this can help supplement or improve the project’s capital stack to get shovelfuls of dirt as quickly as possible. For rehabilitation/renovation projects, C-PACE may be suitable if an owner/operator may have deferred maintenance of their property during COVID and are looking to make improvements to future proof the asset. It is important to understand that lenders generally have no incentive to do anything that would impact their security on an existing loan, so we generally see more success during the refinance process. C-PACE is so attractive that many homeowners actually decide to refinance their loans early to incorporate C-PACE.

Since the C-PACE is relatively new to the market, many developers and owners don’t know where to start. Too often they are first approached by well-meaning third parties who are unfortunately ill-equipped to help secure C-PACE. (Assume that anyone who has no hands-on experience in financing and underwriting commercial real estate is ill-equipped.) Alternatively, for development projects, beware of brokers who avoid C-PACE as it adds complexity to their fundraising. There are certainly cases where they are justified, but it is good to get along regardless.

The best place to start determining if C-PACE is a good fit for a project is with the capital provider. They should be able to quickly help assess the viability of the planned project and determine appropriate next steps, including providing an honest perspective on how the lender would underwrite the deal. Assuming the homeowner has reason to believe their lender will consent, the next step in a renovation project is a pragmatic and unbiased energy audit. This is especially useful upfront if a landlord is unsure which upgrades will be most profitable for their building, both in terms of improved operating profit and overall valuation. In the case of a development project, this process is much simpler, as there are benchmarks typically tied to local energy codes that the project should exceed to leverage C-PACE in the capital stack.

Obtain lender consent

From there, the project goes through approval, underwriting and lender consent. To ensure closing certainty here, it is essential to have expert coordination of the capital stack and in particular sources of debt. For this reason, it is more efficient to work with a capital provider who can verify that they are the direct lender of their capital. As a direct lender, they have a fiduciary responsibility to manage risk, much like a bank, and won’t waste anyone’s time chasing an unrealistic promise (like the idea that you can replace all your equity with C- PACE!).

As more people become familiar with C-PACE financing and understand its environmental and financial benefits, it has the potential to become a more readily accepted participant in the capital stack. Successful adoption will ultimately depend on the commercial real estate industry developing a more realistic understanding of the fundamentals of C-PACE, defining more practical expectations of this financial product, and coordinating with C-PACE direct lenders to facilitate obtaining lender consent.
and provide certainty of closure.

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