C-PACE Makes Splash with Debut New York Deal

(111 Wall illustration credit: Newmark)

Commercial Property Assessed Clean Energy (C-PACE) is an innovative commercial real estate financing option that remains not very well known nor understood by many commercial/multifamily market participants.

Currently, the public/private program has been authorized by 39 states and the District of Columbia (although once a state enables, it remains up to local jurisdictions such as cities or counties to opt into the program). Since inception, when California became the first state to approve the program, there has been approximately $2 billion in volume. Notably, New York City opted into the program earlier this year, making way for the owner of a large trophy asset, 111 Wall Street, to leverage the program to gut-renovate a downtown Manhattan office building. 

What’s a C-PACE?

The basic purpose of C-PACE is to fund energy efficiency, renewable energy and resiliency improvements made to commercial and multifamily buildings (There are also PACE loans for single-family properties, which are not discussed in this article. MBA has expressed concern about residential PACE loans, noting they lack vital consumer protections and present lien priority risks to lenders, investors and guarantors).

A commercial property owner may apply funds (upfront or retroactively) from C-PACE when retrofitting an existing building with eligible components or for ground-up construction projects. Qualified hard and soft project costs that can be financed with C-PACE include efficiency measures (HVAC, LEDs, windows, insulation, controls, etc.), renewable energy (solar), resiliency measures (seismic, flood, storm strengthening) and the related costs (up to approximately 20 to 25 percent of total development budget). At a high level, the public good is more energy-efficient and safer real estate while an owner realizes benefits of lower utility costs and lower capital costs of a C-PACE loan relative to more expensive debt or equity.  

2021:  A PACE Odyssey

Though the program was established well over a decade ago, its acceptance within the industry remains muted relative to the opportunity set presented by aging building stock across the country with retrofit options. Certain uses of C-PACE program, such as for an office building owner to swap out an aging boiler, are relatively easy to get approved by all stakeholders. On the other hand, when attempting to utilize C-PACE to replace equity for large construction projects with fresh debt, many traditional lenders have pushed back. “Private lenders have been more willing to step up and win deals by allowing C-PACE for large construction projects to deleverage and reduce the amount of more expensive capital needed,” said Adam Lipkin, Vice President with Greystone.

Re-Occupy Wall Street: C-PACE in Creative Capital Stack

The program had its largest case study to date in June 2021 when Nightingale utilized the program to secure approximately $90 million for their office rehab of 111 Wall Street, which they acquired with plans to convert to Class A office. “We had considered the program for a project in Philadelphia but decided it wasn’t the right fit,” said Will Hutton, Director of Acquisitions and Capital Markets with Nightingale. Fast forward a few years and the firm found itself in an unfavorable capital markets environment for the New York office. The sponsor decided to give C-PACE a go with a lender consortium open to it and found a more favorable overall cost of capital which helped them achieve their business plan. 

What made the deal click? Aside from New York recently adopting C-PACE, the owner showed a commitment to this project by contributing significant cash equity to the deal. “Our track record and willingness to bring a substantial amount of equity was definitely a contributing factor to our ability to execute the transaction,” Hutton said. 

Back to the Future: Growing Pains and Tailwinds 

One challenge that remains is establishing more credibility for the program across a broader swath of the CRE finance market.To date, non-banks have been the most willing to consider a sponsor request to utilize C-PACE for construction projects. Capital sources often less likely to approve certain projects include government agencies such as HUD as well as bank balance sheet lenders. Further, Fannie Mae and Freddie Mac–the ideal take-out financing for an apartment renovation project–have not purchased a loan with C-PACE attached. Likewise, getting approval to use C-PACE with a seasoned CMBS securitized loan has remained daunting. However, some CMBS lenders are becoming increasingly willing to write into loan documents an acceptable level of C-PACE for anticipated energy-efficiency upgrades.

Even while C-PACE awareness has substantial room to grow, there are tailwinds that point toward its larger role going forward. For one, the CRE and broader investment community are laser-focused on environmental, social and governance (ESG) and climate change. ESG refers to criteria that some investors consider when making investment decisions that focus on making the world a better place. It is a form of socially conscious investing that plays a role in how companies manage their operations and conduct their governance strategies.

Accordingly, a program prefaced on improving energy efficiency is instantly an attractive selling point. “What really surprised us about 111 Wall Street was the reaction from leasing community after our C-PACE transaction closed,” Hutton said. 

Suddenly, more prospective tenants were interested in the building. “It really put the building on the map for a lot of tenants,” one of the leasing brokers said.

Office landlords and tenants are not the only ones paying more attention to ESG or energy efficiency. “We’ve seen the interest and investment in green lending, ESG, and climate change skyrocket for commercial/multifamily members as well as policymakers in 2021,” said Adrian Ballinger, Policy Advisor with the Mortgage Bankers Association. Ballinger, a former congressional staffer, covers climate and ESG policy for MBA’s commercial/multifamily members.

The other trend that points toward a growth environment for this relatively new financing tool is the increasing number of states passing legislation to allow the program. “It’s clearly been gaining steam the last few years and represents a unique strategic position in a highly competitive finance environment,” Lipkin said. “For owners and lenders willing to do their homework, there is a promise of greater success.”