After struggling through the early portion of the COVID-19 pandemic, the commercial real estate market has been on an upward trajectory. Add in rapidly rising energy costs and a frustrating tangle of supply chain challenges, and developers are hungry to finance properties in ways that add flexibility and leverage resources strategically.
Nontraditional capital has never been more appealing. And this makes it a great time for commercial mortgage brokers and lenders to encourage their clients to take advantage of flexible and cost-effective funding opportunities for clean energy construction and renovation projects.
Commercial Property Assessed Clean Energy (C-PACE) loans are a rapidly growing source of capital for renovation and new-construction projects. The U.S. Department of Energy has endorsed C-PACE as a way to encourage business owners to embrace clean and efficient energy resources — including high-efficiency heating and cooling systems, solar energy and energy storage technologies — when developing or renovating properties. C-PACE presents a long-term, fixed-rate financing option to support clean energy elements and resiliency features across a wide variety of construction and renovation projects.
To date, 37 states and the District of Columbia have enabled the use of C-PACE through legislation. Mortgage brokers can utilize this opportunity to support developers and property owners in shaping a cleaner and financially savvy future.
Loan structure
Incorporating energy-efficient elements into initial project designs or retrofitting a building with modern clean energy technology can be a costly endeavor — and it has to make economic sense. In a nutshell, C-PACE is a way for borrowers to finance these energy-efficient and renewable energy improvements into new or existing structures in a manner that is cash flow friendly.
With C-PACE, commercial- and industrial-property developers and owners can make long-term, fixed-rate investments in clean energy, carbon reduction, energy efficiency, and improved environmental, social and governance performance. These programs provide financing for energy-efficient and renewable energy improvements on income-producing properties to improve infrastructure, replace aging equipment, reduce operating costs and increase collateral value.
The C-PACE loan structure is in many ways similar to traditional financing options as it specifically uses borrowed capital to pay for these energy-efficient and renewable energy elements within a project’s budget. Unlike traditional financing, however, repayment occurs through a property tax assessment. This creates long-term debt of up to 30 years with the flexibility to transfer remaining repayment obligations to a new owner if the property is sold.
As a result, borrowers are financially inclined to make more significant property improvements with longer repayment terms. The result is that C-PACE typically strengthens the business case for investing in deeper energy-efficient building retrofits beyond what is possible with traditional financing.
Nuances exist among the states that have approved C-PACE as a funding option, but the basic approval and lending process is similar and typically looks something like this: An owner or developer determines which energy-efficient elements to incorporate into a project. The sponsor works with a qualified financial institution to submit the project’s scope and budget to a C-PACE program administrator. If the administrator approves the plan, they place a special tax-lien assessment on the property. When the project is finished, the property owner begins repayment along with regular property taxes.
Funding purposes
The C-PACE program was created specifically for property owners and developers who wish to improve an asset’s infrastructure or make capital improvements with little to no capital outlay. C-PACE allows clean energy enhancements for both ground-up developments and renovations, such as retrofitting or repurposing a newly purchased office building, warehouse or apartment building.
The federal loan program requires endorsement at the state level. Depending on what the local legislation authorizes, C-PACE may be applicable to a wide variety of property types, including agricultural, office, retail, industrial, multifamily, and even nonprofit or religious properties.
From a borrower’s perspective, the cash-flow-friendly nature of the C-PACE product can maximize capital resources while elevating a project’s clean energy performance along with a reduction in its carbon footprint. It requires little to no upfront capital for eligible improvements that may include a large list of items such as heating and cooling systems; boilers and hot water systems; roof replacements; building envelopes and insulation; lighting systems and solar panels; and water conservation and seismic resiliency measures, to name a few.
As property owners and developers know, a renovation or construction project is a significant undertaking. It’s common to make use of many financing options to bring ideas to fruition. By funding clean energy initiatives through C-PACE, commercial mortgage brokers and lenders can seize a potential competitive advantage by helping clients structure attractive deals.
Moreover, by combining senior construction loans with C-PACE funding, commercial-property developers gain access to a more flexible financing option in the capital stack. Depending on a given project’s demands, C-PACE may offer an appealing alternative to more traditional options, such as mezzanine financing, preferred equity or a larger downpayment.
Lender choices
When a property owner or developer is looking to create or enhance a project via clean energy capital improvements, it is vital for their mortgage broker to help them choose a suitable lender. These commercial lenders must have the knowledge, speed, flexibility and balance sheet to deliver a capital stack with the borrower’s best interests in mind.
A proficient lender will tailor the C-PACE funding piece to an individual client’s needs. They also will support the broker in structuring the entire funding package through strong expertise in both public finance and commercial real estate lending.
With a lender that understands the borrower’s business goals and the broader marketplace, C-PACE is a tremendously useful tool for helping property owners improve their asset values and market appeal while addressing increasingly important environmental and sustainability goals. It’s also a significant value-add opportunity for mortgage brokers who want to differentiate their services for commercial and industrial clients. ●
