Adding To The Capital Stack: Why Owners Have C-PACE Financing On Their Radars

Many commercial real estate owners have recently begun adding a popular option to their capital stack: commercial property assessed clean energy financing, or C-PACE.

With C-PACE, owners can finance energy improvement initiatives for their buildings, including upgrades to HVAC systems, windows and roofing. The cost appears as an assessment on the property tax bill and can be repaid over time for up to three decades. Should the owner sell the building, the repayment obligation would remain tied to the property rather than the owner. 

Petros PACE Finance delivers C-PACE financing solutions using its own capital. The company has completed more than $2B in transactions in 18 states and Washington, D.C., across all commercial real estate asset classes. 

Petros PACE founder and CEO Mansoor Ghori walked Bisnow through the ins and outs of C-PACE, including benefits and considerations, as well as Petros PACE’s unique approach to financing.

Bisnow: How does C-PACE financing contribute to the capital stack? Why is it attractive for building owners?

Ghori: In times of economic uncertainty, like the last five years, C-PACE provides a more affordable and long-term form of capital than traditional financing. As banks have pulled back, it has become much more difficult to raise equity and find mezzanine financing. The PACE finance market, however, is willing and able to fund the right projects. 

PACE financing is attractive because it lowers your overall cost of capital. It's cheaper than what you get from equity or mezzanine financing and, for the last year and a half, than the construction financing that comes from banks or debt funds. It’s able to fill in the gaps in the capital stack left by the banks and equity and mezzanine players.

You can use it for refinancing more expensive capital out of the capital stack, cashing out some equity that you have in the property or paying for cost overages, which has been a significant issue since the beginning of the pandemic. 

Bisnow: How can C-PACE financing help future-proof investments?

Ghori: Investing in upgrades designed to reduce operating costs and increase resiliency protects against rising energy prices and climate risks. Using C-PACE can also attract tenants who are searching for a more energy-efficient building. It can also help owners meet net-zero carbon emissions goals and access additional forms of capital, such as tax credits or other government incentives.

These upgrades can increase the value of that property, so if you're looking to resell at some point in the future, you have an asset that's worth more. 

Bisnow: What considerations do owners need to be aware of with C-PACE financing?

Ghori: C-PACE has seniority over bank loans, so it theoretically sits at the top of the capital stack. It is also considered a part of the property tax, so the loan will never go away until it's paid in full. You can't just default on it and walk away. It is there for the duration.  

Even with C-PACE, properties still need the cash flow to cover the payments for PACE loans, and if the energy savings from improvements aren't enough to do that, the payments may have to come out of pocket.

Not all projects qualify for C-PACE. There are a lot of nuances in the different municipalities that are out there, and each one may have some different verbiage on what's eligible or not.

Bisnow: Can you explain more about Petros PACE’s process of working with clients to provide C-PACE financing and help them mitigate risk?

Ghori: We walk clients through the C-PACE program — how it works in general and how it works in the particular state or jurisdiction they're in. We do a needs assessment to determine what upgrades they’re trying to do and how they might fit into PACE financing. We give them our view on the eligibility of their desired upgrades and provide a term sheet with a financing solution tailored to them. 

We also work with the municipalities on behalf of the client as well as energy auditors and any other vendors to make sure that we have what we need to get the deal approved. We provide a white-glove service throughout the funding process.

Bisnow: How does Petros PACE differ from its competitors?

Ghori: We have our own capital and we close deals on our balance sheet, which is not necessarily the case with some of our competitors. When we underwrite, we're looking at an asset first from a real estate perspective and then the sustainability aspect. If these deals are structured from a sustainability perspective first, they may not be structured correctly. 

From a sustainability perspective, you're looking at what the cost savings are and if the building is functioning the way it’s supposed to in order to achieve zero energy consumption rather than if an asset is in a very difficult economic environment that could have negative implications on the credit. 

From a real estate perspective, we think about how to not lose money as a result of the economic environment. We understand all the risks that are in the portfolio at the very beginning instead of down the line.

This article was produced in collaboration between Studio B and Petros PACE Finance. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.