What Is C-Pace Funding?
One of the largest trends in real estate right now has to do with making sure buildings are as efficient as possible. From the massive retrofits required in New York City to the green-friendly designs preferred by ESG-minded investors, along with California's ambitious plans to be carbon neutral within the next two decades, this is one of the biggest shifts happening in the built world. The looming question of course is how to pay for it all. That's where the C-PACE program comes in. C-PACE is a form of real estate financing that allows a property owner to fund their energy efficiency improvements or additions to a new project through a special type of CRE (commercial real estate) loan. While it is not a government program, it is only available in markets where there is energy-efficiency legislation in place. It began in 2007 and can be used on retrofits, renovations, and ground-up construction projects. C-P is available for both residential and commercial properties, with the "C" denoting it as commercial financing. It has grown rapidly, from $111.2 million in 2014 to $2.07 billion through 2020, and is expected to continue to expand as more areas focus on green building practices. What PACE can be used for tends to vary depending on the state legislation. In general, eligible improvements could be anything that reduces carbon emissions or increases energy efficiency. Solar panels, better insulation, new windows, and updated plumbing for water conservation are all examples of types of things that could be funded, but the only way to know for sure is to ask a PACE lender in your area. How C-PACE differs from other loan types  C-PACE is not a traditional mortgage or loan. It is a financing tool that offers 100 percent financing for improvements at a low interest level and is paid back over a long-term assessment against the property based on the expected life of the improvements, which can be as long as 30 years. There is no down payment required to access this financing mechanism. "You can only have PACE where the government has stepped in and passed legislation to enable it," explained Thomas O'Connor of Duval & Stachenfeld, a law firm based in New York City, in an interview with Millionacres. "They pass legislation that provides for private lenders and private equity funds to lend money to these owners, but the local taxing authority places the assessment on the property, collects the repayment back like a tax, and then pays the private lender." PACE financing is similar to mezzanine financing but there is a big difference: C-PACE is senior to the main loan used to finance the property. The interest rates for C-PACE are currently around 5% to 6%, which is lower than many traditional loan options. Because C-PACE financing is placed ahead of the primary loan, that is a concern for many large lenders. This is one reason C-PACE hasn't seen widespread adoption yet. C-PACE receives some of the same tax benefits as other commercial loans and the interest can be deducted. The benefits of C-PACE financing  Right now a lot of lenders aren't operating C-PACE, but that is expected to change as more areas roll out energy-efficiency legislation. For developers and sponsors, C-PACE is another way to get the money needed to comply with both local and federal legislation and the growing desire from building owners and tenants to have green buildings. The improvements funded through a C-PACE loan may also help reduce energy costs for the building owner for years to come. It can also help improve the internal rate of return for investors in a commercial real estate project. What's even more appealing for many owners is that in some areas, such as New York City, they will be able to use C-PACE retroactively to finance improvements they have already installed. New York City is often the bellwether for major changes. The first C-PACE deal in New York City was announced in June 2021 and should open the door for many more projects. There's also a hope that as it becomes more widespread, lenders will get on board. "People take out these loans when they're building a building or retrofitting a building, they get a construction loan from a mortgage lender, and then they get a PACE loan to fund the green stuff," said O'Connor, "That's a great competitive advantage they're going to have. No one's done it yet, but someone's going to figure it out." The future of C-PACE and clean-energy upgrades  C-PACE is still a relatively new program, and there will be more changes to come as states roll out and refine their energy efficiency legislation. The fact that 37 states and Washington, D.C., have passed laws that allow C-PACE is one sign that this program will play a larger role in commercial real estate financing in the future. PACE programs are active in 26 states, and that number is increasing. C-PACE represents an intersection between public policy and private financing that should help many developers achieve the renewable energy improvements their local communities demand.