Funding Commercial Real Estate Developments with C-PACEJune 8, 2020
A Construction Manager Can Get Your Project Back on Track!June 8, 2020
Financial Benefits of C-PACE
for Commercial Real Estate Developments
Building owners and developers are increasingly recognizing the financial and environmental benefits of clean energy though coming up with the upfront capital for these large-scale projects can be a big hurdle. Ethical financing vehicles such as Commercial Property Assessed Clean Energy (C-PACE) have been established to help property owners get the up-front capital they need for energy-related improvements. C-PACE helps building owners to change the world for the better by making low-cost sustainability and energy efficiency improvements to their properties.
C-PACE is a private, affordable, long-term financing vehicle funded nationwide by billions of dollars in ethical investments, and enabled through a public-private partnership enacted by state or local municipality law. The funding is earmarked solely for energy-related improvements and water conservation projects on commercial property developments. C-PACE is a smart and cost-efficient way to increase commercial property values and make buildings more energy-efficient and profitable in both the short and the long-term.
C-PACE makes it possible for commercial property owners to obtain low-cost, long-term financing for energy efficiency, water conservation, and renewable energy projects. C-PACE authorizes flexible, long-term and inexpensive capital; works well alongside most other financing tools; and can complement pre-existing financing and development strategies. Because C-PACE funds up to 100% of the hard and soft costs of commercial building upgrades and construction elements that improve energy performance, this financing is becoming increasingly sought-after. The projects financed with C-PACE are achieving strong increases in return on equity as well as dramatic decreases to their overall weighted average cost of capital given the unique attributes of this financing mechanism.
The competitive features of C-PACE financing include:
- The assessment can finance up to 100% of eligible energy-related improvements thereby limiting the up-front cash payment.
- The term and amortization of the financing is adjacent with the life of energy improvements enabling a longer, more affordable repayment term up to 30 years.
- The interest rate is fixed at the initial funding so that future interest rate increases that could impact the ability to pay the annual debt service are no longer a concern.
- The repayment terms are non-recourse, meaning that the owner does not have to repay the balance of the financing in the event of a default scenario. Instead, the assessment contract stays with the property and can NEVER be accelerated (called due) so it provides a secure structure that works well alongside most senior lenders.
- The C-PACE assessment contract is pre-payable at any time. Typically, the financing has a simple exit fee in the first 5 years, but it is not subject to a complicated and potentially expensive yield maintenance fee.
- There are no financing covenants and the financing is off balance sheet.
- C-PACE fills potential equity gaps in development capital stacks and reduces the cost of capital, as C-PACE financing is approximately 50% less expensive than mezzanine debt. This can dramatically improve the financial returns of the project.
- The financing has a transparent and rapid approval process that is a boon in high barrier-to-entry markets, which are regulation heavy and can typically face significant delays (i.e. in contrast to Community Facility District or other types of bond financing).
- As with mortgages, the interest is tax-deductible for owners, although the principal is not. The improvements may also qualify for first-year bonus and accelerated depreciation via cost segregation.
- PACE assessments are fully transferable with no qualifying or approval process, which leaves open the possibility for property owners to recoup their investment upon sale.
While facilitating sustainability efforts, energy/water efficiency and renewable energy are certainly important, C-PACE also reduces property owners’ annual costs and provides dramatically better-than-market financing for green new construction.
In essence, the program enhances the credit of your asset because C-PACE looks a lot like low-risk municipal debt. Through C-PACE, private capital providers like Greenworks Lending are then able to offer repayment terms that are not available anywhere else in the capital markets. This enables owners to benefit from lowering capital costs while at the same time reducing operating costs through the financed energy-efficient improvements.