Sustainability and energy efficiency has been a growing topic as of late — especially with the new Biden Administrations infrastructure plan. While sustainability traditionally has been a luxury many can’t afford, a government financial product has made it not only financially feasible but potentially profitable.

What is C-PACE? How does it work?

This blog is a collaboration between StackSource teammates, Huber Bongolan and Dylan Vaccaro, to offer you some insight on how to benefit from this relatively new financing.

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• PACE has been around since 2001, gained more legislative footing in 2008, and has started growing in popularity in 2015
• What makes the PACE program so compelling is its payback structure and it lowers the required equity needed at closing
• StackSource has been proactive in having individual discussions with lenders around C-PACE financing and has built relationships with over 50 lenders nationwide that are either comfortable with this structure or are open to the idea.

The property assessed clean energy (PACE) model is an innovative mechanism for financing energy efficient and renewable improvements for private property. PACE programs exist for both residential and commercial properties each being referred to as: Commercial PACE or C-PACE), Residential PACE or R-PACE).

History of PACE Financing

While PACE financing has grown in popularity recently, the idea and general structure for this type of program has been around since early 2001.

It wasn’t until 2008, after funding from the US Environmental Protection Agency along with more favorable legislation, did the program gain its footing. This program was also designed to help lower the pollution rate to help overall climate goals.

Impetus for this legislation began in Northern California; and to date, 36 states have passed legislation to allow PACE program funding. To find if your state is eligible click here.

How Does PACE Financing Work?

PACE is a voluntary financial program to increase a property’s energy efficiency and renewability while simultaneously increasing its value. These improvements can include disaster resiliency improvements, water conservation measures, or renewable energy installations of residential, commercial, and industrial property owners.

• PACE can potentially cover 100% of energy-related improvements
• Long financing terms up to 30 years
• Can be combined with utility, local, and federal incentive programs
• Energy projects are permanently affixed to a property.
• The PACE assessment is filed with the local municipality as a lien on the property

What are the advantages?

What makes the PACE program so compelling is its payback structure and that it lowers the required equity needed at closing. An example commercial real estate deal may have 70% senior construction debt, 20% CPACE financing, and 10% additional Sponsor equity.

Note: The usage of C-PACE financing, in terms of a capital stack, accomplishes the same goal as mezzanine debt or preferred equity (lowering Sponsor’s equity needed in the deal); BUT, it is structured differently.

The payment on this type of loan is uniquely tailored for this government program. Instead of being structured as typical junior debt that is paid monthly, this financing is added to the property tax bill, gets paid when the respective tax bills are due, and is amortized at between 10–30 years and at a relatively low rate (4.5% — 6.0%).

Since the financing structure is tied directly to the property tax bill as opposed to the borrower. There are additional benefits:

• Property owners can pass through these charges to their tenants (increasing NOI)
• In the event that the property is sold, the new owner will then be responsible for continuing to pay the C-PACE alongside the property tax bill. It doesn’t need to be paid off, so that increases cash received from a sale.

What are the downsides?

Many senior lenders will not allow C-PACE as part of the capital stack because property tax bills and anything related to the tax bill (C-PACE in this case), technically primes the mortgage in the event of a default.

That means that if the project goes sideways, C-PACE will get paid back before the senior lender. This can be a problem for senior lenders.

Some lenders also look down on a project with PACE financing because that means the Sponsor has less “skin in the game.” Most lenders want to see their borrowers have between 25–35% of cash equity in the deal.

What is the solution?

The above were only general rules of thumb.

Luckily, StackSource has been proactive in having individual discussions with lenders around C-PACE financing and has built relationships with over 50 lenders nationwide that are either already comfortable with this structure or are open to the idea.

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