C-PACE Financing
Stuck between a rock and a hard place, the challenging interest rate environment of the past several years has compelled commercial property owners and developers to seek novel and alternative sources of fixed-rate financing within their capital stack, giving rise to a measurable uptick in Commercial Property Assessed Clean Energy (C-PACE) financing. C-PACE takes the form of funding through a public-private partnership aimed at facilitating sustainability, renewable energy, resiliency, efficiency and water conservation improvements in commercial, industrial, and hospitality projects. Property owners can finance qualifying upgrades and new construction under C-PACE, even retroactively post completion, through special assessments added to their property tax bill. These assessments allow for repayment over extended periods of time without a looming balloon maturity. C-PACE is attractive to owners because it is non-recourse, fixed-rate, long-term, is typically not allocated as debt on a balance sheet and in certain cases the interest rate payment is tax-deductible. This long term investment in sustainability and efficiency creates an attractive source of upfront capital, results in a long-term solution to reducing energy costs and increasing operational efficiencies and helps commercial real estate owners fulfill their environmental, social and governance (ESG) mandates.
Each jurisdiction sets its own qualifying criteria and guidelines through legislation for C-PACE, which is now available through active programs in over 30 different states and the District of Columbia. As a general rule of thumb, the proposed project must enhance energy efficiency or allow for renewable energy generation to qualify for C-PACE financing. This can range from installing solar panels and energy efficient HVAC systems to upgrading existing doors and windows and installing LED lighting. The categories of qualifying improvements are very broad and may sometimes also extend to energy adjacent type measures such as building seismic retrofits and storm hardening procedures. The C-PACE loan amount is generally based on the total value of the project and can comprise anywhere from 20% to 30% (depending on the jurisdiction) of the value of the building being renovated or constructed. Certain C-PACE programs require that the anticipated energy and efficiency savings over the life of the upgrades (generally ranging from 20-30 years) must be greater than the amount of the C-PACE loan. The term of the C-PACE loan should not exceed the average expected useful life of the improvements being financed. If a project is determined eligible in the applicable jurisdiction, specialized private lenders step in and partner with governmental authorities to provide the necessary funds without any equity contributed by the owner. The breadth of private lenders offering C-PACE financing has grown exponentially over the past few years, ranging from traditional banks to specialized finance companies focusing solely on C-PACE.
Under a C-PACE regime, the local government levies a special assessment against a qualifying property and that special assessment is assigned as collateral for the loan made by a private lender providing financing for the project. After a property owner makes a payment under the assessment, the private lender receives the portion of the tax bill attributable to the special assessment assigned to it. The C-PACE assessment is a senior lien on the property and cannot easily be discharged in a bankruptcy proceeding making this an attractive, long-term investment for C-PACE lenders with repayment timelines often spanning several decades. Another interesting aspect of C-PACE is its inherent transferability, there is no due on sale provision and subsequent owners of a property will take ownership subject to the C-PACE lien unless an owner chooses to prepay the C-PACE loan. Most C-PACE loans are prepayable in full or in part together with a prepayment premium and associated fees depending on the timing of the prepayment.
Given that C-PACE is more akin to property taxes than a mortgage lien there is no acceleration of the entirety of the C-PACE debt in the case of non-payment. A default under C-PACE is only a default of any unpaid, past due amount. Upon repayment, any such default is cured. C-PACE is appealing to owners but many hesitate to move forward because their senior secured lenders are wary of becoming part of a capital stack involving a superior C-PACE lien and, in the multi-family context, Fannie Mae and Freddie Mac are generally prohibited from refinancing or purchasing properties with senior C-PACE liens. The hesitation is understandable, however, a right to foreclose or other exercise of remedies by a senior mortgage lender is not restricted or prohibited by the presence of C-PACE financing on a property. All foreclosures proceed as they otherwise would with or without the C-PACE assessment. Senior lenders have found ways to mitigate the inherent risk by underwriting the C-PACE assessments upfront, just as they underwrite property taxes and insurance, and requiring their borrowers to deposit a monthly escrow with the senior secured lender in the amount of expected C-PACE assessments. In allowing this flexibility with C-PACE financing, senior secured lenders may actually enhance the value of the properties they underwrite while aligning with their own sustainability goals and reducing inherent risk.
According to industry resources, as of the end of 2023, cumulative C-PACE financings on record exceeded $7 billion and are only continuing to grow.
Recent C-PACE Transactions
In June 2024, ownership of the Thompson and Tommie hotels in Los Angeles received a combined $90 million in C-PACE financing from C-PACE lender Nuveen Green Capital less than one year after acquiring the hotels through foreclosure. The proceeds will be used to refinance existing construction loans on the properties and to perform necessary property efficiency upgrades.
In June 2024, a $10 million C-PACE loan closed for the completion of a Class-A office development in Nashville with the funds being utilized for lighting and HVAC improvements.
In July 2024, the AC Hotel San Diego Downtown Gaslamp Quarter closed on a retroactive $40 million C-PACE loan for the recently opened hotel allowing ownership to pay down existing senior loans and dramatically improve cashflows.
In July 2024, a $10 million C-PACE loan closed as part of the construction capital stack for an energy efficient multi-family property development in Philadelphia.
In August 2024, the Virgin Hotel Las Vegas closed on the second largest C-PACE financing on record for $190 million, intending to use those funds to recapitalize a renovation completed at the hotel, including, among other things, for LED lighting upgrades, updated HVAC, water-saving upgrades and other improvements to energy efficiency within the property.
C-PACE financing has become a powerful tool for advancing sustainability and energy efficiency in commercial real estate by not only supporting individual development projects but also in contributing to larger and more systemic environmental goals. As more states adopt C-PACE programs, the potential for a reduced carbon footprint and energy savings continues to evolve and owners will increasingly turn to C-PACE as a viable alternative for meeting these objectives.
About the author: Diana Ovsepian is a Senior Managing Associate at Sidley Austin LLP, where she provides strategic legal counsel in commercial real estate, finance, and hospitality. With extensive experience advising private equity firms, REITs, hedge funds, and institutional investors, Diana specializes in complex transactions involving the acquisition, development, financing, and disposition of commercial real estate assets, particularly in the hospitality and multifamily sectors. She has a strong background in negotiating joint ventures, loan agreements, and hotel management contracts. Diana is actively involved in the legal community, serving on the board of the Survivor Justice Center and as a member of the Armenian Women’s Bar Association.
