Harrowgate Project From Shift Capital Showcases Versatility Of C-PACE Financing
A new development and its use of a new financing tool have the potential to be a template for introducing more environmentally sustainable elements to nearly all forms of commercial real estate.
Shift Capital last year announced the beginning of its J-centrel project in the Harrowgate neighborhood, on the opposite side of Kensington from Fishtown. Like all of Shift’s projects to date, J-centrel is the redevelopment of a historic but rundown factory building into a mixed-use project with multiple features designed to proactively benefit local residents.
Shift realized upon gaining access to the building to begin work that it would require more time and money than initially estimated, Shift Vice President of Development Maria Sourbeer said at Bisnow’s Philadelphia C-PACE: How To Close A Deal webinar on Thursday. Meanwhile, Philadelphia City Council had recently passed legislation allowing the use of C-PACE, or commercial property-assessed clean energy, financing. Sourbeer sensed an opportunity.
“Coming from a nonprofit background, I’m used to having my ear to the ground for different financing [opportunities],” Sourbeer said.
C-PACE, the commercial-specific form of the more general PACE program, is a funding idea generated at the national level that requires statewide legislation to enact and local governments to execute. C-PACE passed Pennsylvania’s Legislature in 2018 and Philadelphia City Council last year, and J-centrel is the first project in the city to take advantage of it.
C-PACE loans are available to banks and other private lenders, which would pay all of the hard and soft costs associated with improving a commercial building’s environmental sustainability. The borrower pays back the cost through an additional assessment similar to what determines a property tax, which is passed back to the lender. The sum that a project can be loaned through C-PACE is determined by an auditor hired by the borrower, which panelists agreed is a relatively painless process.
“We worked hard with our general contractor to see what would qualify in the energy audit, and we worked through that before we even brought in the auditor,” Sourbeer said. “So when we hired the auditor, we were able to hand them our analysis.”
The term of a C-PACE loan is as long as the improvements remain in place and operational for up to 30 years, in accordance with Philadelphia’s iteration of the program.
Twain Financial Partners had already purchased historic preservation tax credits to help finance J-centrel and agreed to add C-PACE to its agreement with Shift. Since the assessment portion of C-PACE loans occupy the same part of the capital stack as property taxes and do not accelerate in the case of non-payment, senior lender Fulton Financial was comfortable including the new loan despite its technical position in front of the senior mortgage lender in the capital stack, Twain Business Development Officer Paul Thompson said. Functionally, C-PACE repayments occupy a similar place to a mezzanine loan in the repayment order.
“[J-centrel had] some cost overruns, understandably so because it’s an adaptive project,” Thompson said. “So how do you cover that gap while still keeping your senior lender happy? C-PACE makes a lot of sense in that situation because it’s used in qualifying costs that help improve the efficiency of the building.”
J-centrel is the redevelopment of a two-warehouse complex with connecting walkways on J Street, a block away from the Tioga station on the Market-Frankford Line. Three floors of apartments totaling 116 units will sit atop 30K SF of ground-floor commercial space, including retail and a local business accelerator. Two of the apartments will be reserved for those making 40% of the area median income, and 31 will be priced for 70% AMI.
The residential portion doesn’t qualify for C-PACE under Pennsylvania’s version of the program, which meant Shift was forced to split J-centrel into a commercial condo and a residential one. The Philadelphia Energy Authority, the local agency administering the program, is lobbying the state government to add multifamily to the list of qualified projects, PEA Program Manager Lisa Shulock said.
Shift pursued C-PACE financing to shore up a capital shortfall when costs on J-centrel went up, but a building owner can apply at any phase of a project’s life, from design to two years after completion of construction. Even a long-completed building renovating any qualifying building systems can qualify within two years of the process.
Fulton’s traditional senior loan to Shift for J-centrel was for $14.5M, and Twain purchased $2.5M in historic preservation tax credits. By incorporating the $1.5M C-PACE loan into the operating expenses portion of its balance sheet, Shift was able to take on the loan with a 25-year repayment period and not stress its loan-to-value ratio, Fulton Vice President of Commercial Community Development Jeanne Fields said.
“It’s an easy way to bring some additional capital into the project,” Fields said. “We knew the project that needed to be completed, and we were happy that it was able to cover the cost of completion without requiring more money from us.”
Because repayment is based on a tax assessment rather than something more prone to fluctuation, the funds are held in escrow, which takes away from the building’s cash flow, Fields mentioned as a caution to prospective users of the program. Otherwise, C-PACE provided a means to avoid the type of pitfalls common with social impact-focused projects that operate with thin margins.
C-PACE is structured similarly to tax increment financing packages, only with the beneficiary of repayment being a private lender rather than the state or local tax rolls, Thompson said. He believes the familiarity much of the development community has with TIF will help accelerate the adoption of this program.
“[It’s] a TIF structure with a fancy new name, but it will quickly become ubiquitous, not just in Philadelphia but across the country,” Thompson said.
CORRECTION, NOV. 5, 3:45 P.M.: A previous version of this article misstated C-PACE loans' place in the capital stack. This article has been updated.