How C-PACE Provides Developers With Flexible Capital

Today’s commercial real estate is having a difficult time getting deals to pencil due to a tight lending environment and higher-for-longer interest rates. This has led many developers to get creative and consider alternative methods of financing to get their deals over the finish line. 

Commercial property assessed clean energy, or C-PACE, gives developers the certainty and reliability they need to feel confident in today’s market by offering long-term, fixed-rate financing that runs with the property. 

Developers use C-PACE to fund costs in the construction budget that impact energy, resiliency and renewables. This state-legislated public/private partnership provides long-term, fixed-rate financing for commercial real estate development or renovation projects. Repayments are made through a special property tax assessment. 

Nearly 40 states and the District of Columbia have implemented C-PACE programs, with lending terms evolving to be more inclusive of eligible improvement options. 

Since the program’s start nearly 20 years ago, it has seen almost $10B in originations across nearly 2,500 projects — with $2.5B just in 2024 alone. Developers are increasingly incorporating C-PACE as part of their capital stack, cementing it as a major financing solution. 

PACE Equity, one of the original lenders in the space, has pioneered many industry-firsts, said Ethan Elser, executive vice president at PACE Equity.

“In the early 2010s when it first started, C-PACE was really for building upgrades, renovations and improvements,” he said. “The thesis of PACE Equity was that the tool could be better used for development projects and as a capital stack tool. We funded the first-ever new construction C-PACE project, the first to incorporate historic tax credits and more.” 

Bisnow spoke with Elser to learn about how PACE Equity approaches C-PACE financing, what trends he’s seeing in this particular market, what projects the firm has recently worked on and his future predictions for C-PACE lending. 

How PACE Equity Fits In The Modern Capital Stack

Even as U.S. banks continue to sit warily on the sidelines, with commercial real estate lending sinking to an 11-year low at the end of 2024, lending momentum has slightly rebounded as of the second quarter, with alternative lending sources increasingly making up a bigger piece of the pie, Elser said. 

These lenders made up 34% of the market share in Q2, a 2% increase year-over-year. Traditional banks only made up about 24% during the same period. 

“With traditional lenders these days, their leverage is low — and challenged,” Elser said. “That’s where we can come in and add back some of that missing leverage at a much more attractive cost of capital than mezzanine debt or additional equity. We can also support lenders to maintain relationships with key clients by providing additional financing they are unable to with the current market.”

Last year, Elser said, the majority of PACE Equity’s funding was for projects that were not with the original construction, coming in to recapitalize two to three years after its completion. 

“Up to three years post-construction, we can leverage the C-PACE structure for construction loan paydowns or payoffs, debt service reserves and avoiding capital calls in light of higher rates and longer lease-up periods.,” he said. “It’s a key trend we’ve identified, especially with the amount of CRE debt that’s maturing in 2025.”

Large C-PACE Projects Are Gaining Momentum

Elser said another industry trend is using C-PACE for larger transactions than it has traditionally been used for. This is primarily because traditional sources of capital can’t meet a project’s needs in today’s stricter lending environment. 

To meet the growing demand for creative capital structures, PACE Equity has launched a new large-asset financing solution tailored for large C-PACE projects. Its large-asset solution acts as a lower-cost alternative to traditional bridge or mezzanine loans. Included with this solution are prepayment flexibility, fixed interest rates and payment deferral for up to four years.

This timely solution to addresses a critical market need by offering low-cost, short-term capital that can be refinanced without exit costs, Elser said.

 “With our new solution, sponsors have the ability to prepay at par on a short-duration basis, and we feel this is a highly attractive option in today’s market,” Elser said. “We're in a tight capital market, so as with any challenging market, people are forced to be more creative. We’re thinking outside the box and addressing the needs of our clients.” 

The firm’s new product has already been implemented, recently funding $63M in fixed-rate C-PACE financing for a luxury resort in Utah. PACE Equity’s financing funded 42% loan-to-cost ratio. The project is a great example of how C-PACE can cover a larger portion of the capital stack for projects of this magnitude, Elser said. 

PACE Equity In Action

PACE Equity works across a variety of commercial sectors, including industrial, multifamily, retail, office and hospitality. One recent project in particular, a senior housing development, perfectly illustrates the struggles of today’s market conditions, he said.

For its senior housing project, the client had completed construction and was experiencing a difficult lease-up — all while anticipating the impending maturity of their construction loan. 

PACE Equity funds allowed the client to do a paydown of the senior lender, establish a reserve for debt service payments, defer their own payments to reduce financial pressure and position the property for refinancing, Elser said. 

“This project speaks to a lot of transactions we're seeing right now that need some additional capital and to extend the runway to stabilization,” he said.

Future Growth And Market Evolution

Elser said that even though today’s lending market harbors feelings of uncertainty, the future of C-PACE is bright. 

“We're funding all the major food groups,” he said. “With the almost $1T of commercial loans coming due this year, C-PACE is a great solution for those that need a paydown.”

With that being said, there’s still a measurable gap in the awareness of how to best implement C-PACE, Elser said. That’s why PACE Equity has completely streamlined the C-PACE process for its clients, offering the market’s only turnkey C-PACE experience.

The team completes an upfront analysis to establish proceeds and develop a customized funding solution. PACE Equity’s experts have deep experience with local programs across the nation and can correctly size projects to meet their unique requirements. 

“C-PACE financing requires extensive structuring and state/local compliance work before funding,” he said. “A lot of this is through a detailed energy audit, and that audit determines your amortization and level of C-PACE proceeds. We handle all of this in-house with our team of experienced engineers. It’s a unique offering and gives our clients surety of execution by reviewing and tailoring proposals upfront for these requirements.”

Looking forward, PACE Equity is working to evolve with the market and structure its funds creatively and flexibly, such as putting in place different mechanisms like delayed draws, Elser said. 

“You're going to see some positive structural evolution and PACE Equity, as we have throughout our entire history, is going to continue to be a market-leading solution to provide more attractive structures to sponsors of all sizes and experience levels,” he said. 

This article was produced in collaboration between Studio B and PACE Equity. 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.