Brian McCarter is CEO of Sustainable Real Estate Solutions (SRS). Founded in 2010, SRS partners with state and local governments to
administer C-PACE programs around the country. The company’s proprietary technology-enabled PACEworx Platform streamlines the
management of the data-intensive C-PACE technical and financial underwriting process. Its Investor Confidence Project-credentialed
quality-assurance methodology has facilitated more than $120 million in C-PACE financing nationwide,
a level unmatched in the industry. Reach McCarter at (203) 459-0567 or firstname.lastname@example.org.
As a mortgage broker accustomed to
dealing with commercial mortgages, you
may be tempted to incorporate typical
commercial lending clauses into a C-PACE
financing agreement. Here are four proposals that may not fit with a C-PACE deal:
<< Capitalize continued from Page 31
How does it work?
C-PACE is a voluntary program that enables commercial building owners to finance up to 100 percent of
eligible energy-efficiency, renewable-energy and
water-efficiency improvements. The nonrecourse,
fixed-rate financing is secured by an assessment,
or lien, that is recorded on the property, similar to a
sewer assessment, except that it’s voluntary program.
The loan is repaid through the local property-tax
collection process. Finance terms are driven by
the useful life of the equipment and extend up to
20 to 25 years.
Because the financing is tied to the property, it
is the building’s financial health, not the property
owner’s creditworthiness, that is the main consideration in underwriting these deals. To date, financing
has typically been provided by private specialty-capital companies.
Most C-PACE projects are designed so the energy-cost savings that result from the building improvements exceed the C-PACE payments, enabling a cash
flow-positive project. To building owners, this often
seems “too good to be true.” It’s not.
With 100 percent financing, no upfront costs and no
personal guarantees, C-PACE is ideal for funding capital-intensive improvements. Once a C-PACE project is
completed, the building owner has a lower utility bill
and, assuming the project has been designed to be
cash-flow positive, a healthier net operating income.
The building, which serves as collateral, also is more
efficient, more comfortable and more valuable. If and
when the building is sold, the buyer has the option
of retaining the assessment-repayment obligation or
negotiating with the seller for it to be paid off at closing.
Multiple property types are eligible for C-PACE
financing, including commercial, industrial and
multifamily buildings (the latter with five or more
units); churches; and schools. In many states and
counties, C-PACE is available to developers of new
construction projects, provided they design their
buildings to exceed the current energy code by a
certain percentage. This amount varies by program,
but is typically around 15 percent to 20 percent.
To date, more than 30 states have PACE-enabling
legislation and several, including Delaware, Montana,
Pennsylvania and South Carolina, are considering it.
Many utility companies also offer attractive rebate
programs, which make projects even more attractive. Eligible improvements for C-PACE financing
include almost anything that will lower utility
bills and is permanently affixed to the building,
such as high-efficiency lighting; boilers; heating,
ventilation and air conditioning (HVAC) units; low-flow faucets; solar systems; and even new roofs to
support solar panels.
How big is the market?
In the United States, an estimated 580,000 Class B
and C buildings with less than 100,000 square feet of
space contain outdated energy equipment. Building
owners know that aging boilers and leaky windows
drive up their utility bills and reduce their net operating income, a point their service contractors make
when they recommend equipment upgrades.
Nevertheless, deferred maintenance backlogs continue to swell because most owners want to preserve
surplus cash for core operations. The alternatives,
a traditional bank loan or self-funding, are seen as
expensive. As a result, a third option — do whatever
it takes to keep the equipment running — is often
viewed as the least costly choice.
In new construction, the C-PACE value proposition
may be even greater. It can reduce or replace the typical 20 percent owner-equity contribution required
by lenders or reduce other, more costly financing
sources in the capital stack.
What should lenders know?
In a C-PACE project, the assessment lien that secures
the financing, while junior to all general property-tax
liens, is senior to all commercial liens, including
mortgages and deeds of trust. And C-PACE has equal
footing, expressed as pari passu in legal terms, with
other special assessments on the property.
As such, C-PACE programs require that property
owners receive the written consent of mortgage
holders prior to securing financing. Some programs,
including those in Colorado, Connecticut, Rhode
Island, and Arlington County, Virginia, to name a few,
require an independently prepared review of the
project’s technical and financial projections so that
all stakeholders can determine whether cost-savings
projections are likely to materialize.
To date, more than 140 lenders — among them
national, regional, and local banks and credit unions —
have consented to C-PACE assessments. That’s because
well-designed C-PACE projects provide many benefits
for mortgage holders. They include the following:
■ ■ An increase in a borrower’s ability to repay
the mortgage, because the savings from reduced
energy costs will exceed the loan payments, driving
up their net operating income;
■ ■ A reduced risk of loan default because a
■ ■ Requiring a credit review. Because the property serves as collateral in a C-PACE project,
underwriting is largely based on the financial
health of the building, such as its loan-to-value and lien-to-value ratios. Requiring a credit
check is unnecessary and removes one of the
benefits of C-PACE — namely, that no personal
guarantee is required. Plus, you’ll be competing
for deals against lenders that don’t require one.
■ ■ Proposing adjustable interest rates. Fixed
interest rates are necessary to evaluate whether
the energy-cost savings will likely outweigh the
C-PACE payments, thereby generating a cash
flow-positive project and gaining the confidence of building owners. Introducing a variable rate means introducing greater uncertainty
into the forecasting of the financing payments.
Given the longer term, most building owners
prefer a fixed rate.
■ ■ Insisting on an escrow account. In a
C-PACE transaction, the specialty assessment
priority-lien status, as well as the billing and
collections process, are managed by the local
taxing and assessment jurisdiction. Cash from
collections are transferred to a trustee account
that, in turn, forwards the payment to the lender. An escrow account is unnecessary.
■ ■ Requiring the outstanding balance to be
paid if the property is sold. Requiring the
outstanding balance on a C-PACE loan to be
paid at the time of sale is at odds with the
standard C-PACE practice and would erode
its value proposition for stakeholders. Nevertheless, a building owner, if they decide to
sell later, may choose to pay off the C-PACE
assessment at the closing.
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At a Glance
Things to consider
with C-PACE financing