What is C-PACE Financing in Commercial Real Estate?

WHAT IS COMMERCIAL PROPERTY ASSESSED CLEAN ENERGY?

Commercial property-assessed clean energy (CPACE) is a financing structure in which building owners borrow money for energy efficiency, renewable energy, or other projects and make repayments via an assessment on their property tax bill. The financing arrangement then remains with the property even if it is sold, facilitating long-term investments in building performance. CPACE may be funded by private investors or government programs, but it is only available in states with enabling legislation and active programs.

CPACE MAY BE A GOOD FIT IF YOUR ORGANIZATION...

• Owns or occupies facilities located in jurisdictions with CPACE programs
• Wants long-term financing (10+ years) with lower monthly payments
• Prefers to do pilot projects at a few locations before implementing more broadly
• Does not plan to own or occupy its facilities long-term and wants to transfer financing obligations at the time of sale
• Wants to invest in long-term improvements to building resiliency and reliability

To compare CPACE?to other financing options that might be a good fit,?answer a few questions ?about your organization.

HOW IT WORKS

To be eligible for CPACE financing, a project must be located in a county or municipality that has approved CPACE programs within a state that has passed PACE-enabling legislation. For more details on where CPACE is available, use the tools provided by PACENation . Note that residential PACE (RPACE) is also available in some jurisdictions, but only CPACE is covered in this fact sheet.

The parties involved in a CPACE deal usually include:

• A PACE administrator that manages the project and ensures adherence to program requirements;
• A local government that collects the property tax assessment and remits payment to the capital provider(s) if necessary;
• A contractor or energy services company (ESCO) that installs the equipment;
• The building owner (customer) receiving the upgrade or tenants working in concert with their landlord; and
• Private investors, bondholders, or a government to provide the capital.

The PACE administrator will typically conduct marketing and sales to originate potential customers. Before financing is disbursed, the project must be approved by the PACE administrator. For properties with a mortgage, consent from the mortgage lender is usually required. Depending on state statute, capital for CPACE projects may come from the government through reserve funds or bond issuances, from private investors, or a mix of the two.

Once the project is approved and financing is secured, the contractor installs the equipment and the customer begins to realize energy savings. The financing is then repaid in the form of an assessment on the building owner’s property tax bill over a period of typically 10-20 years. A PACE lien is also placed on the property. The lien is senior to most other debt on the property, which can encourage investors to provide capital over longer terms than with standard loans. If the building is sold during the PACE repayment period, the lien securing the assessments remains on the property and becomes an obligation of the new building owner (unless it is paid off in full by the original owner before sale). Nonpayment of a PACE assessment results in the same set of repercussions as the failure to pay any other portion of a property tax bill.? CPACE financing can be structured in a variety of ways depending on the jurisdictional laws, available providers, and project type. Building owners should be aware of the following details:

• Funding Source: A PACE jurisdiction may have an open market, in which private financiers compete to provide competitively priced capital, or a turnkey program, in which a single public or private financing source is pre-selected to simplify the funding process and reduce complexity for the building owner.
• Management: Some PACE programs are administered directly by the local government, whereas others are run by a third-party administrator. Many programs take a blended approach where responsibilities are split.
• Applicable Project Types: PACE policies and programs differ on the types of eligible technologies. Some narrowly define the technologies they allow, and others are more flexible. Some programs allow non-energy measures as well, such as water efficiency, seismic retrofits (i.e. earthquake-proofing), wind resistance, flood mitigation, and stormwater management. A variety of commercial building types, including multifamily facilities, are typically eligible for commercial PACE.
• Savings to Investment Ratio (SIR) and Loan to Value (LTV) Requirements: Some programs have a required level of energy savings that must be realized through the project relative to its cost in order to qualify, known as an SIR. However, even in programs with an SIR requirement, certain types of measures may be exempt, or SIR can be improved by bundling low-return measures with high-return measures. Some programs also have an LTV requirement, which specifies that the funds borrowed through CPACE must not exceed a certain ratio to the total value of the property.
• Underlying Financing and Balance Sheet Treatment: PACE is a repayment mechanism that can have several different types of financing backing it (e.g. loan vs. lease vs. other arrangements). CPACE is most commonly backed by debt or loan financing. Many organizations believe that because these loans are repaid via property tax bills that are often treated as off-balance sheet operating expenses, there may be some off-balance sheet benefit to PACE. This remains an open question subject to varying accounting opinions, as no consensus has been reached. In some cases, PACE can be backed by off-balance sheet financing such as an operating lease or energy services agreement (ESA), but these structures are not common.

ADVANTAGES AND DISADVANTAGES

Advantages and Downsides

POSITIVE CASH FLOWS

CPACE financing can cover 100% of project cost with long 10-20 year terms, not to exceed the useful life of the installed equipment. This results in lower annual payments that are typically less than project savings.

FAVORABLE TERMS

CPACE provides strong security for investors because the financing is repaid on the property tax bill. This allows lenders the ability to offer better interest rates and longer repayment terms than are otherwise available.

TRANSFERABILITY

CPACE assessments are linked to the property and automatically transfer to a new owner upon the sale of the property.

FLEXIBLE BALANCE SHEET TREATMENT

CPACE may be structured to be off-balance sheet or on-balance sheet. However, appropriate accounting treatment for CPACE remains inconclusive, as clear consensus has not been reached by the accounting community.

OVERCOMES THE TENANT/LANDLORD SPLIT-INCENTIVE

CPACE can align incentives for landlords and tenants, as both the tax assessment and cost-savings from the project can be shared with tenants under most lease structures.

LIMITED AVAILABILITY

CPACE is limited to jurisdictions with PACE-enabling legislation, which has currently been passed in 32 states and the District of Columbia.

MORTGAGE LENDER APPROVAL

For properties with a mortgage, mortgage lender consent is usually required before CPACE can move forward. This can be difficult and time-consuming to obtain.

LIMITED TO INDIVIDUAL PROPERTIES

CPACE financing must be structured differently for specific properties, making it challenging to use for portfolio-wide initiatives.

STATE OF THE MARKET

Commercial PACE is a fast-growing financing structure that has attracted much industry and legislative attention due to its potential to overcome common financing barriers. CPACE financing can work for buildings in any sector, including non-profits that would not normally pay property taxes. However, it is extremely uncommon for tax-exempt government buildings.

Following the introduction of residential PACE in 2007, commercial PACE programs began to appear in 2009. Commercial PACE has grown quickly in popularity, with incumbent banks and financiers as well as new companies entering the market to meet demand. According to PACENation market data , 36?states and the District of Columbia have passed laws enabling CPACE programs as of 2017. However, only 22?states plus D.C. have active CPACE programs in operation. Over $2 billion in CPACE financing has been provided to over 2400?commercial buildings.?The majority of completed projects fell in the $75,000 - $750,000 size range, though smaller or larger projects are not uncommon.

LEARN MORE ABOUT CPACE

• Better Buildings Initiative ?— CPACE Financing For New Construction?Toolkit
• Better Buildings Initiative ?— CPACE Financing For Resiliency Toolkit
• U.S. Department of Energy — Commercial Property Assessed Clean Energy (CPACE): A Fact Sheet for State and Local Governments
• U.S. Department of Energy — Lessons in Commercial PACE Leadership: The Path from Legislation to Launch
• PACENation — https://www.pacenation.us/
• ACEEE — PACE Toolkit for Policymakers
• PACENow and Johnson Controls — Setting the PACE 2.0: Financing Commercial Retrofits
• Wilson Sonsini Goodrich & Rosati — Innovations and Opportunities in Energy Efficiency Finance
• Deutsche Bank Climate Change Advisors and The Rockefeller Foundation — United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models

CPACE AT-A-GLANCE

The following table will give you an at-a-glance summary of a typical CPACE structure, including a basic description, contract structure, tax and balance sheet implications, contract terms, and market information. Mouse over the ‘?’ next to each attribute for more information.