High interest rates and economic uncertainty are making it more difficult for your team to secure capital and get complex projects off the ground. Firms like yours are turning to alternative financing sources to round out their capital stack, from government programs such as Low-Income Housing Tax Credits (LIHTC) or Transit-Oriented Community Incentives to green loan products from private investors. Understanding the private and public funding options available to developers, and identifying the strategies and tools necessary to meet program requirements, can benefit your portfolio in any economic environment.
One such financing option, Commercial Property Assessed Clean Energy (C PACE) financing is a combination of private and public funding. C PACE is a state-policy-enabled financing program designed to help owners and developers access capital to make energy-related upgrades in existing properties, support new sustainable construction, and make the installation of renewable energy accessible to developers. C PACE financing is an option for most commercial properties where the developer is willing to invest in energy-efficient and sustainable features.
Here’s everything you need to know about C PACE financing, including how your team can take advantage of funding opportunities through the program and overcome its unique challenges:
Understanding C PACE Financing
Commercial Property Assessed Clean Energy (C PACE) is a tool to finance energy efficiency and renewable energy improvements on commercial properties. Similar to other funding programs, C PACE uses borrowed capital to pay for upfront costs associated with implementing sustainable components on a project. Depending on the legislation in individual states, C PACE is available for industrial, commercial, agricultural, and multifamily properties. Unlike other funding sources, the borrowed capital is repaid over some time via a voluntary tax assessment.
The funds from C PACE have unique benefits as supplementary financing and can be a key tool for developers interested in eco-efficient projects. “C-PACE is supplemental to senior financing but offers a significantly lower interest rate than conventional mezzanine debt with the ability to cover up to 100% of a project’s hard and soft costs,” said Matt Swerdlow, Director of Capital Services at Ariel Property Advisors, explained in an interview with Forbes. “In the right situation, it can be a very cost-effective tool to stay ahead of or meet carbon mandates.
Clean energy improvements eligible for C PACE financing can include energy efficiency improvements, such as HVAC systems, lighting, insulation, roofing, car charging stations, and more. Renewable energy sources, such as solar panels, wind turbines, or geothermal heating and cooling methods, are also included. Disaster-hardening features, such as structural retrofits, such as seismic structural retrofits, and wildfire-proofing buildings with flame-resistant materials, can be eligible as well.
C PACE Financing Process
Unlike traditional financing, C PACE financing is fulfilled through a voluntary property tax assessment. The assessment is tied to the property and paid semi-annually with the property taxes. When the property is sold, the repayment obligation is passed onto the next property owner. There are three essential steps in securing C PACE financing programs for your team:
Program Set Up
C PACE financing programs are set up on the state level through a multi-step process. First, state legislatures adopt C PACE enabling legislation, and then a decision-making body is assembled to start a C PACE program. Program guidelines are created and adopted to supplement enabling legislation. An administrator is then selected as part of a public or third party to launch the program, and local governments either join the program or start their own.
Applying for Funding
Developers also undergo a specific project approval and financing process. The C PACE program administrator will approve a project. Then, a tax assessment is placed on a property and the financier provides project capital. Once funding is secured, a contractor completes the C PACE-eligible building improvement or features. Finally, property owners pay for completed work via property tax assessment, and payments are returned to the lender.
Project Completion and Repayment
Once work on a project is completed, the contractor’s involvement in the C PACE financing process ends. The cost of work will be reflected in the building’s property taxes, and the lien remains attached to the buildings– even if it changes owners.
Benefits of C PACE Financing for Developers
C PACE financing is considered an attractive alternative funding source for developers, allowing teams to pursue sustainable and energy-efficient projects even in a challenging investment environment. Here are a few ways your team can benefit from C PACE financing:
Public-Private Partnerships Offer Favorable Loan Terms
Lenders can offer developers and owners favorable loan terms on C PACE financing because the program is a public-private partnership that leverages private capital but utilizes a public-benefit funding mechanism usually reserved for public infrastructure. The program therefore allows debt to be repaid as a benefit assessment on the property tax bill over a term that matches the useful life of the improvements or the new construction infrastructure, usually about 20-30 years.
Flexibility
C PACE financing can cover up to 40% of project costs and is available for all types of commercial real estate assets, requires no equity investments, and can be used to upgrade sustainability features in existing buildings or ground-up construction that reduces energy consumption. Oftentimes, related labor costs for sustainable features can be covered by the funds. In markets subject to natural disasters such as hurricanes, earthquakes, or floods, resiliency upgrades are also eligible for coverage.
Market Demand
Developers who opt for sustainable, carbon-neutral, or climate-friendly projects will have a competitive edge with both investors and tenants. Investors are increasingly looking to fund green projects to meet Environmental, Social, and Governance (ESG) goals because sustainable buildings often have lower operating costs due to more efficient resource and energy use. Sustainable properties may also have higher tenant demand occupancy rates. In a study conducted by AMLI Sustainable Living Index, 85% of respondents believed living in a sustainable home would be beneficial to their health and 64% of respondents reported being willing to pay more to live in a sustainable community.
C PACE Financing Challenges & Obstacles
Developers looking to pursue C PACE financing should be aware of the challenges and obstacles the programs can present. Here are a few of the common challenges you can expect to find in the process, as well as the strategies and tools you need to overcome them.
Complex Approval Process
Projects looking to gain approval for C PACE financing need to go through a complex approval process. Developers need to coordinate with stakeholders, including government agencies, lenders, and C PACE program administrators. In addition, you may need to secure consent from lenders, who may be hesitant to compromise their lien position to the C PACE assessment. Ensuring stakeholder buy-in is essential for your projects leveraging C PACE financing.
Legislative and Market Shifts
Limited availability can be an obstacle to C PACE financing – the program is not available in every state or municipality, and you’ll have to conduct research and do your due diligence to determine what funding opportunities are available. Legislators determine the terms of C PACE financing, which means your team will need to stay ahead of changes that impact the availability and terms of financing. In addition, C PACE assessment is paid through property tax bills, which may make your property more difficult to sell down the line as some buyers don’t want the tax liability.
Regulatory Compliance
Regulatory compliance is the biggest hurdle for developers looking to include C PACE financing as part of an advanced capital stack. However, modern real estate development software can help your team with complex capital management, enabling consistency and improving profit margins. Leveraging technology can help you decrease the risk of non-compliance, cost overruns, and funding delays, derailing outcomes with built-in frameworks and tracking regulatory source requirements. Fostering positive relationships with financial stakeholders and positioning yourselves as a reliable and strategic partner can help you win more deals and boost your portfolio’s overall profitability.
Learn More About Northspyre
Northspyre is a purpose-built, single software solution designed using automation to reduce manual data entry, increase productivity, and maximize your returns from pre-development to project completion. Our cloud-based platform enables you and your team to ensure every aspect of your project is readily at your fingertips for simple and effective project management. Northspyre is the only CRE development platform with a tailored solution for complex capital management that mitigates risk and enables a seamless end-to-end development lifecycle on projects with complicated source structures and requirements.
Whether you include C PACE financing as part of your advanced capital stack or another funding source, the platform will ensure all requirements are met and your project comes in on time and on budget.
Download our ebook “Guide to Low-Income Housing Tax Credits with Northspyre” to learn more about how technology can help you round out an advanced capital stack and deliver projects successfully.
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