ABOUT C-PACE FINANCING: PROS AND CONS OF ENERGY EFFICIENCY LOAN PROGRAMS

July 28, 2023 / Article Authors: Nick Gurica / Plante Moran Realpoint / Sarah Kelly / Plante Moran Realpoint
Should you consider C-PACE financing? With the cost of capital rising, business owners and investors are considering alternative funding options for their capital improvements and real estate developments.
More than 35 state and Washington, D.C. have enacted PACE legislation, giving property owners the opportunity to finance up to 100% of qualified capital improvement costs. What's more, the annual savings generated from the improvements may be greater than the annual debt service requirement. This can be a win-win for property owners, as these programs can provide the potential to commit no funds upfront while simultaneously increasing annual cash flow.
C-PACE CAN PROVIDE THE POTENTIAL TO COMMIT NO FUNDS UPFRONT WHLE SIMULTANEOUSLY INCREASING ANNUAL CASH FLOW.
What is PACE financing?
C-PACE is a financing tool property owners can use to make carious improvements focused on energy efficiency, renewable energy, energy storage, and other environmental - or safety conscience measures. C-PACE progjrams allow a property owner to finance up to 100% of the improvements costs via a long term loan. Funds financed through C-PACT programs are placed on the property's tax bill and are assessed over a long term period (typically 20 - 30 years). The C-PACE assessment attaches to the property rater than the individual, allowing for a subsequent sale to a new owner.
Eligibility requirements for financing energy-efficient upgrades
While the specific requirements vary from state to state, or program to program, PACE programs are generally geared toward the following:
  • Energy Efficiency - HVAC and mechanical upgrades, energy-efficient lighting systems, insultation, etc.
  • Renewable Energy - Solar panels, fuel cells, EV stations, etc.
  • Resiliency - Stormwater management; fire, seismic, and hurricane measures; etc.
These improvement options are broad in scope, aiming to promote a variety of avenues to gain energy saving, reduce operating costs, or reduce the carbon footprint. Many states and programs require a demonstration of savings above the upfront cost of improvemments in the application and review process, known as the Savings to Investment Ratio (SIR). To qualify for C-PACE financing, a specific SIR may be required by that state or program.
C-PACE is available for virtually all commercial property types, multifamily residences, and certain public buildings. It is also available for many states of development, including retrofitting of existing buildings and facilitating new construction. In certain circumstances, C-PACE finacing can also be used to reimburse capital from prior investments already made.
  • Environmental Benefits: C-PACE financing can provide cost savings to property owners while allowing their companieds and local municipalities to further their environmental, social and corporate governance (ESG) initiatives.
  • Limited Approval / Pushback: Because unpaid C-PACE assessments can create a senior lien on the property, C-PACE financing often rquires lender consent for any property with a mortgage. This can add time and cost to the financing process. C-PACE assessments can also limit refinancing options due to these senior liens. The Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac not to purchase or refinance mortgages with C-PACE liens.
  • Limits Sale Options: Properties that have C-PACE assessments attached to them can be more difficult to sell, as the new owner has to agree to pay the additional assessments.
  • Property Specific Financing: C-PACE loans are structured uniquely for individual properties and require cost / savings analysis specific to that property, making it difficult to utilize for a portfolio strategy.
BENEFITS OF C-PACE FINANCING
CONCERNS OF C-PACE FINANCING
Environmental Benefits Limited Capital Requirement Improved Cash Flow Long Term, Non-Recourse Financing Lower Risk / Lower Cost to Finance Transferability Landlord / Tenant Benefits
Lender Approval / Pushback Limits Sale Options Property Specific Financing Limited Availability