C-PACE provider Petros details a financing stampede toward green 

Petros PACE Finance, an Austin-based Commercial Property Assessed Clean Energy provider, is seeing a dramatic uptick in requests from institutional investors which want to upgrade the sustainability or resiliency of their assets.

Mansoor Ghori, co-founder and CEO, cited a trio of factors behind the increase in inquiries.

More municipalities are mandating owners hit metrics to reduce the carbon footprints of both mainstream and niche assets. Additionally, as interest rates have risen, owners are increasingly looking at ways to increase the value of their assets, Ghori said.

And the firm is also fielding more inquiries from borrowers and lenders after its acquisition in January by Apollo’s Athene Holdings.

“We were purchased as a stand-alone platform to generate assets and augment their ESG initiatives for Apollo’s insurance company vis-a-vi green real estate financing opportunities using C-PACE. We are now part of a much bigger organization, and we now have access to different pockets of money, different relationships with owners and their own mortgage lending units,” Ghori said. “That will allow us to go deeper into the capital stack and to be able to create new opportunities and new products.”

In addition to strong interest from Apollo and Athene, which want to do more in the space, commercial property owners are also responding to a series of mandates going into effect in major metro areas in New York, Florida and California.

Ghori cited New York City’s Climate Mobilization Act of 2019, which mandates large buildings to cut carbon emissions by 40 percent by 2030 and 80 percent by 2050. Estimates from the Urban Green Council project this retrofitting will cost building owners as much as $20 billion over the next eight years.

“The implementation of these laws will require a tremendous amount of capital to do the upgrades in the timeframe that are required and the avenues for capital are not significant,” Ghori said.

In mid-2021, Petros closed the largest-ever C-PACE transaction in New York, an $89 million financing on 111 Wall Street to help the property reduce its carbon footprint. The 1.2 million-square-foot property is owned by Wafra Capital Partners and Nightingale Properties.

“When that deal happened, the light bulb went off – commercial property owners realized that C-PACE was institutional and could be used for larger properties and larger dollar amounts,” Ghori said. “All of the sudden, the phones were ringing off the hook and there is now a large amount of deals we are working on in New York.”

C-PACE financing is available in 38 states and Washington, DC, per PACENation, and comes in a variety of jurisdiction-specific formats. Commercial real estate owners can obtain debt and equity to upgrade their properties in both mainstream and more niche sectors, Ghori said. The average deal size when the firm opened its doors in 2015 was roughly $500,000. It’s now closer to $15 million.

“There are now many markets with climate mandates and that is driving owners to use PACE,” Ghori said. “It is a solution that can be used to green buildings and minimize a carbon footprint and the way PACE is structured helps to make those transaction pencil and are an important tool for sponsors and building owners to reduce carbon footprint.”

Lots of turmoil

In addition to climate-related mandates, building owners are responding to the turmoil created by both the covid-19 pandemic as well as the current rising rate environment.

“The pandemic led to lots of turmoil in the market, with the capital markets essentially freezing up. Building owners and developers were wondering how to finish projects or get money out of existing properties because they needed the capital and weren’t sure when the pandemic would end,” Ghori said. “PACE became a big part of that transition and our business tripled during covid. I see today’s environment as similar, with rates shooting up faster than anyone imagined and deals that were going to pencil two months ago don’t pencil anymore.”

Even if a building owner wants to hold onto a property and wait out the current volatility, they will need to make upgrades. “You still have to do capital expenditures and if you can bundle that all into one project and finance it over an extended period of time, it makes a lot of sense to do it,” Ghori said.

Despite the growing popularity of the structure, Ghori believes it is unlikely there will ever be a national C-PACE program.

“Every municipality is different and has different needs and each one wants to put their twist on it. The general idea of PACE is the same across the US but the specifics are just a bit different, such as the use of C-PACE for seismic upgrades in California and Washington,” Ghori said.