Though property assessed clean-energy financing has been around for more than a decade, it didn't really gain traction until recently. In fact, according to Ethan Elser, EVP of PACE Equity, there had not been “material volume and awareness” until the past two to four years.
Mansoor Ghori, co-founder and CEO of another PACE lender, Petros PACE Finance, said demand has exploded over the past two years, specifically. “I’ll tell you it exploded on new construction projects in particular, but when you dig down and say, ‘OK, well, what part of new construction? Is it office, is it hospitality, is it something else?’ The hospitality segment of that is the fastest growing part of that.”
What is C-PACE
Simply put, C-PACE financing (there are two types of PACE programs, one for commercial properties—C-PACE—and another for residential properties) is a low-cost, long-term financing tool designed to fund environmentally friendly features for renovation and development projects. According to Woolsey McKernon, formerly SVP/chief revenue officer at CleanFund Commercial PACE Capital, C-PACE financing generally covers 15 to 25 percent of a project’s total costs.
“What PACE does is it piggybacks off of the assessment law and we in essence are providing funding to a private owner who will then utilize those funds for investment in public good and public good in this instance is making their building more energy efficient with insulation or new window glazing, putting in a more efficient chiller or boiler, putting solar up on the roof, low-flow fixtures, shower heads, urinals, toilets and in the state of California, seismic [elements],” explained McKernon.
Differences Between C-PACE and Traditional Financing
One of the most fundamental differences between C-PACE and traditional financing is length of term. While the typical construction loan may have a term of three, five or possibly seven years, said McKernon, C-PACE financing can go up to 30 years.
Ghori noted another difference: C-PACE is nonrecourse to the developer. “So what that means is that if there’s a delinquency on the PACE portion of the assessment, we as PACE lenders can’t just go in there like a mortgage lender and say ‘Hey, we’re foreclosing on this property, we’re going to take it back, sell it and get our money out and then, you know, we’ll give you whatever’s left over.’”
Instead, Ghori explained, the PACE lender would have to go to the taxing authority and ensure that they have it marked as a delinquent property tax assessment. From there, that taxing authority would go about collecting on that assessment as it would a normal delinquent property tax. “That could take six months, it could take two years, it could take three years,” said Ghori. “So, we’re just at the mercy of the taxing authority.”
Both Ghori and McKernon highlighted one other key difference: C-PACE financing travels with the property. “A traditional debt has to be repaid when one person sells the property to another person,” said McKernon. “Very rarely do people assume the existing loan that’s in place because it has to be completely re-underwritten. But in the case of PACE, what’s unique about it is it just travels with a property.
Challenge
One of the key things to keep in mind with commercial property assessed clean-energy financing, according to Elser, is the developer must let the senior lender know of the C-PACE lender’s participation. Though he noted that lenders are becoming more knowledgeable and comfortable with C-PACE financing, he said “there’s four times as many, 10 times as many who are not familiar, or maybe have some misunderstandings about how it works.”
Ghori also emphasized this point, but described it as more of an evolutionary challenge. “We’ve seen, in the earlier days of PACE in particular, there was a lot more reticence on allowing PACE and getting the consent to allow PACE on projects because bankers didn’t really understand what PACE is, how it fits, what its lien position is, how it works, etc.”
Solution
Elser suggested educating the senior lender. Using a C-PACE loan is “something that a developer would want to qualify early and really ensure that they’re working together with their C-PACE capital provider on educating the lender, getting them comfortable with how PACE works so that they’re ultimately going to approve that in the end.”
Both Elser and Ghori had a similarly optimistic view of the issue. “At some point everyone will be aware of PACE and how it works, but this is kind of an early product still,” said Elser.
Challenge
Today, less than half of U.S. states have active PACE programs in place. Ambrish Baisiwala, CEO/chairman of Portman Holdings, a development company that recently received $54.7 million in C-PACE financing for one hotel project, said this limited availability is the key thing that would keep it from using C-PACE in the future.
“From our point of view, it’s a question of whether it’s possible and available in the location that we are taking the project,” said Baisiwala. “So, whether that location has the regulation in place or not and whether we can find a C-PACE vendor who would be interested in the project and the opportunity.”
Solution
The simplest solution to this issue is to wait. While not even half of U.S. states have C-PACE programs launched and operating, nearly three-quarters have active PACE-enabling legislation in place.