The market for Commercial Property Assessed Clean Energy (C-PACE) financing has seen several milestones this year – a record number of transactions, the first-ever dedicated fund and several deals that topped $100 million. A key driver of this growth is the ability to access a significantly lower cost of capital for a part of a commercial real estate capital stack at a time of extreme capital markets dislocation.
“In this environment, it is being used to bring down the weighted average cost of capital,” says Jillian Mariutti, senior director on the debt and equity financing team at New York-based advisory JLL.
C-PACE is attractive on deals where the senior pricing is 500-800 basis points over SOFR, Mariutti says.
“Right now, that is 10 percent to 13 percent money. C-PACE is roughly 7.5 percent fixed non-recourse [financing] and would bring the blended rate down in those instances,” she adds. “When SOFR was a 25-50bps, a sponsor could get a multifamily construction loan with a 3 [percent] handle. It didn’t make sense to slot in [what was] 5 or 6 percent [C-PACE] money. But now, C-PACE is bringing the weighted average cost of capital down.”
Rising rates, rising interest
Nuveen Green Capital, the Darien, Connecticut-based green lending arm of Nuveen, saw a direct increase in enquiries when rates started to rise, says Andrew Zech, chief operating officer of the C-PACE specialist.
“When the market turned, our capital, became the most attractive form of construction or bridge debt in the market ” Zech says. “And our mission of providing better-than-market financing for efficient buildings came to fruition.”
Nuveen Green Capital, which in July launched the first ever C-PACE fund, believes growth will continue as banks pull back from the lending markets. “Our capital, on average, was about five to 10 percent of the capital stack, and we were viewed as a cheaper form of gap financing,” Zech adds. “The economic climate plus the pullback in bank lending has shifted the market towards private capital and has increased interest in C-PACE.”
Traditionally, sponsors have used C-PACE to modestly increase their use of leverage, perhaps increasing it from 70-75 percent, according to Nuveen Green Capital. But now the firm is working with sponsors to provide fixed-rate, non-recourse financing for up to 40 percent of the development or redevelopment costs of a project.
C-PACE provides commercial property owners and developers access to low-cost, long-term financing for sustainability measures that impact the energy and water performance and resiliency of a commercial property. In the past, it was mainly used for existing building retrofits and then as a form of gap financing for commercial real estate developments, Zech says.
“Our checks at that time were 5-10 percent of the capital stack and we were viewed as a lower cost of debt,” Zech adds.
“But we are now seeing a marked shift away from bank lenders to private capital, which led to more interest in C-PACE programs.”
Not all sponsors know that C-PACE financing is available for both new and retroactive projects, Mariutti adds: “Even if you didn’t develop the property, you can retroactively get access to the proceeds within a few years of the development.”
Part of spreading the word about C-PACE has been taking the time to explain the way it works to sponsors, Zech says, noting Nuveen Green Lending has seen a notable uptick in enquiries.
“It is hard to quantify the number of interested calls and emails we get but they are flooding in,” Zech says. “We are able to help a significant number of those borrowers, as there are many who have been adversely affected by the slowdown in the lending market and cap rate expansion.”
But it is not just the sponsors who are getting educated – the senior lenders and rating agencies are also learning about C-PACE, Mariutti says.
“If you’re a lender that got comfortable lending a loan where there’s a ground lease involved, then you should, in theory, be comfortable with making a loan with C-PACE involved. Lenders are learning that it doesn’t have much teeth, and they’re accepting it and allowing it in the capital stack.”
Additionally, C-PACE lenders are seeing solid returns of about 7.5 percent or so, and are in a senior position in the capital stack. “C-PACE lenders are expected to be paid first, at the same time as taxes. So that’s why they like it,” Mariutti says. “That’s a really good position to be in.”
C-PACE specialist Counterpointe Sustainable Real Estate in July funded a roughly $256 million condominium inventory loan for the conversion of San Francisco’s Aronson Building into a Four Seasons Residences on behalf of sponsor Westbrook Partners.
The transaction is one of many sizable C-PACE deals completed this year and was used to refinance maturing construction debt. Michele Pitale, a managing director at Counterpointe, says she believes that as liquidity continues to tighten, C-PACE will remain a tool for sponsors.
Though growth is expected in the volume of C-PACE loans, there might not be the same number of firms seeking to launch platforms. Because there is no federal C-PACE program, it can be difficult for lenders to put a platform into place, Zech says.
“Just from a legal perspective, we have worked for more than a decade to build this engine. A lot of the national lenders see our program and then look at what it would take to do it nationally and think, ‘That doesn’t look very easy to do. We don’t want to do that.’ From a human perspective, we have always been a great lender because we think that gets our customers the best product at the end of the day.”