Beau Engman, president and founder of Milwaukee, Wisconsin-based PACE Equity, says substantial discussion is ongoing about what the Inflation Reduction Act – which earmarks about $27 billion for energy- and carbon-reducing development projects – means for the commercial real estate market.
“There is a general consensus [the legislation] will accelerate C-PACE – to the extent it creates additional sweeteners for environmentally-friendly development – but the implementation details remain to be hammered out,” Engman says. “Our clients don’t seem to be waiting to act, but raising the awareness of climate change incentives is a positive indicator for growth.”
Laura Dietzel, an audit partner within the real estate practice at Chicago-based advisory RSM US, says with the built environment for real estate responsible for nearly 40 percent of annual carbon emissions in the US per the US Energy Information Administration monthly energy review, the focus is increasingly on the industry to combat climate change. “One easy way to decrease climate impact for real estate is to address energy efficiency,” she says.
Engman says his firm has seen C-PACE grow in the past few years to a conventional tool used to fill capital stack gaps for deals of all sizes, shapes and sectors – and in a growing list of states. “The reasons aren’t complicated. Developers are learning about how to lower their overall cost of capital when they use C-PACE with transferable-on-sale low-cost fixed rate capital.”
CPACE Nation data shows total C-PACE financing increased from $54 million to $2.1 billion between 2013 and 2020. In 2021, the total amount of C-PACE financing during the calendar year reached $3.4 billion, marking a 62 percent year-on-year increase from 2020’s total. California, Ohio, Minnesota and Connecticut each recorded more than $200 million of C-PACE financing during 2021, with the first of these seeing $974 million of the 2021 total.
Engman says many projects being financed now are experiencing construction cost overruns right out of the gate. “C-PACE solves for this,” he says. “It can provide the gap financing to make a new project viable and it can be layered onto an ongoing or recently completed project to cover higher costs.”
The layering is exemplified in such deals as Concord Summit Capital’s assembly of a $232.5 million financing package to facilitate construction of the Kindred Resort in Keystone, Colorado. In addition to a $140 million senior construction loan, $30 million preferred equity commitment and $7 million co-general partner investment from Pure Development, the deal notably features a $55.47 million C-PACE component to bolster green efficiency of the asset and its ongoing development.
Municipality momentum
Thirty states offer C-PACE financing, and a good deal of momentum is coming from municipalities focused on achieving their net-zero targets, Dietzel says. Atlanta, for example, has benefited from its launch of a rare $500 million fund to provide loans to real estate owners to make energy efficient upgrades.
Adoption of C-PACE and programming itself is still evolving on the regulatory front. There is no shortage of nationwide initiatives making progress between the Securities and Exchange Commission’s proposed rule amendments to include climate-related information on reports such as Form 10-Ks.
The regulatory updates are just a sampling of proposed requirements to bring the US closer to alignment with market leaders such as the UK, EU and Japan. “Sustainable investing goals have increased in popularity with institutional investors and pension funds including additional diligence in underwriting around sustainability and climate risk,” Dietzel says.
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