New Texas C-PACE Standards Could Boost Underutilized Financing Mechanism

Texas borrowers can now use Commercial Property Assessed Clean Energy financing to make up a bigger portion of their capital stacks, with up to five years to start paying it back.

C-PACE administrators hope it's enough to entice more property owners to make use of the program while filling a gap created by constrained capital markets and increasing construction costs.

Keeping PACE in Texas altered its loan underwriting standards in February to increase the allowed loan-to-value ratio from 25% to 35% and make interest-only payback periods more flexible.

The change has sparked a new wave of interest in the finance program that could be the difference between thriving and loan default for some property owners, insiders say.

New standards make Texas’ program more attractive to capital providers, leveling the playing field between Texas and other states, Ryan McCormick said. McCormick is a program administrator at Lone Star PACE, a C-PACE facilitator that is part of the Keeping PACE in Texas stakeholder group that determines best practices for the Texas program.

“Texas was not as attractive as other states, so it was losing the attention of the originators,” McCormick said. “What this did was bring Texas effectively back in line with the rest of the market.” 

C-PACE helps property owners fund energy efficiency, renewable energy and water conservation projects using private dollars. The financing can be applied before, during or after construction. 

“PACE is one of, if not the cheapest, forms of capital in the stack,” said Laura Rapaport, founder and CEO of C-PACE lender North Bridge. “It can really bring down the overall cost of capital for the borrower or the lender, meaning that the project will now be much more accretive.” 

Expanding the LTV cap from 25% to 35% means C-PACE can be used as a larger percentage of the overall deal, Rapaport said. That financing can be used as a form of recapitalization or a loan workout, sometimes preventing a loan from going into default.

“We’re seeing that in real time,” Rapaport said. “An asset that had cost overruns and delays was likely also started at a time when [the secured overnight financing rate] was below one. The markets have changed substantially. Things have taken longer to build.”

The new underwriting standards allow up to five years after closing for principal payments to begin, which includes up to three years for construction and two years for stabilization if needed. For refinancings, stabilization periods may extend up to three years. 

Texas has issued about $840M worth of financing since its 2013 creation, making it the third-largest state for C-PACE, Rapoport said.

But while it has a strong program, C-PACE financing is underutilized in the state as well as nationally. As of late last year, almost 3,600 C-PACE projects had been completed nationwide, totaling nearly $9.8B in financing.

While the number reflects growth, it represents just a fraction of the potential market for energy efficiency and renewable energy improvements in commercial properties.

One reason for that is the many preconceived notions about C-PACE, including property owners thinking they need to be net-zero or LEED Platinum lest C-PACE invite the government into their capital stack. That is untrue, those working in the space said. 

The new standards, which also exclude interest costs from the savings-to-investment ratio calculation, make Texas more attractive to capital providers, McCormick said. The hope is that as property owners see that C-PACE can fill more of their capital stack, the financing becomes more attractive to them as well. 

So far, Rapaport has seen an influx of inquiries about C-PACE financing opportunities, offering a chance to educate the market about the underused program. 

“The deals that we are working on, the amount of PACE that can qualify has meaningfully changed for the better, enabling projects to be much more attractive for the borrower to consider PACE,” she said.

The changes make Texas easier to work with and appeal to national PACE lenders, she said.

Lone Star PACE is banking on the revamped program helping more sustainability projects move forward, McCormick said. 

“It relaxes it, it makes it more applicable to more players,” he said. “At the end of the day, the goal is to further the state's energy and water conservation, and we're able to do that when it becomes more available to these developers.”