What is C-PACE property improvement financing?

Commercial PACE (C-PACE) programs are state-enabled mechanisms designed to attract private capital into commercial property efficiency upgrades required to meet Environmental/Social/Governance (ESG) objectives. The term “C-PACE” is a generic acronym, like the term “mortgage”, and it stands for Commercial Property-Assessed Clean Energy [..Financing].

Cities and/or counties opt-into PACE programs to encourage private infrastructure upgrades. They then facilitate the re-imbursement of the improvement costs through property tax assessment over the course of the financing term (selected by the property owner), which mitigates the significant risk of long term debt. Having local governments secure the financing via a property tax assessment (which sits on the tax bill for duration of the loan term) gives private funders the security they need to provide terms of 30 years or more. In turn, this enables and encourages property owners. to make significant improvements with long term benefits to commercial buildings, such as renewable energy power plants or sea walls, or significant building envelope work and air-quality systems.

C-PACE programs vary from state to state depending on the guiding legislation that will have been put in place. Among those difference are the rules of how individual communities and/or counties participate, what sort of improvements are eligible, and how the program

How does C-PACE financing work?

C-PACE funding leverages the free equity in a property by unlocking equivalent capital for power, water and/or structural upgrades. The maximum fundable amount ranges between 15 and 30% of the property’s market or assessed value, depending on program guidelines and /or a particular funder’s guidelines. The maximum term of the financing is determined by the maximum useful life of the improvement. Once a project is funded, a property tax lien is then placed on the property for the amount financed, for the financing term selected by the property owner.

What are the advantages and disadvantages for a property owner about CPACE?

Good

👍🏼 A new source of capital that leverages the dormant value of real estate equity
👍🏼 Off-balance sheet (considered an expense) on the liability side but sits on the asset side.
👍🏼 100% Financing: No money down, no upfront payment; interest is deductible.
👍🏼 Offers up-to 30-year loans at rates often about 2 pts or so over bank rates
👍🏼 Does not impede or impact existing traditional credit facilities
👍🏼 Provides contractors with progress payments
👍🏼 Most programs allow refinancing of past/complete expenditures, some up to 5 years

Maybe not so good?

👎🏼 If there is a mortgage on the property, lender approval is required for a loan
👎🏼 Most loans cannot be accelerated with increased annual payments though most can be pre-paid, usually with penalty fees
👎🏼 Underwriting can be complex, demanding and long, given that both the funder and the C-PACE program are involved with different guidelines
👎🏼 Many funders require a large underwriting deposit because of its cost and complexity

Does C-PACE offer progress payments on a construction project?

C-PACE financing covers all the soft and hard costs of approved property improvements. While funders generally attempt to work with the contractor progress payment schedule to which the property owner has agreed, all segments of the project’s progress must be demonstrated, and liens released, before the funder will forward the incremental funding.

What is Capitalized Interest in a C-PACE loan?

In C-PACE, as in any loan mechanism, the Capitalized Interest (cap-i) is the accumulated interest between the time the funds have been disbursed and the first payment in the amortization schedule. In C-PACE, cap-i can be significant because the debt financing schedule often matches the local property tax schedule, which is often annual or bi-annual. So the borrower enjoys a significant time to leverage the fruits of the improvement(s), but that accumulated interest is added to principal financing amount. So, the longer the cap-i period, the more of an adder will be included in the principal, for the term of the loan.

What is required to apply successfully for C-PACE financing?

The underwriting process qualifies the property, not the individual or entity applying for the financing. While underwriting requirements will vary from applicant to applicant, a successful application will principally demonstrate that:

➢ the subject improvement qualifies on the basis of resource efficiency and savings
➢ the property has free and clear equity equal to the amount requested
➢ the property taxes and any mortgage obligations are current
➢ the contact person listed on the application is either the owner or specifically named by
the owning entity as being empowered to encumber the property
➢ Individual owners and trustees are not in bankruptcy (requires release of SS#)
➢ Need to demonstrate the viability of the building’s operations via business financials
➢ The property cannot have or be near anything that could spell environmental liability

How long is the process before funding?

CleanFi