This article is sponsored by Nuveen Green Capital.
Nuveen Green Capital started as Greenworks Lending before being acquired by TIAA subsidiary, Nuveen, in 2021.
Founded by Jessica Bailey and Alexandra Cooley in 2015, the company’s mission is to accelerate and expand the positive impact of C-PACE (Commercial Property-Assessed Clean Energy), a state policy-enabled financing mechanism that classifies clean energy upgrades as a public benefit, allowing building owners and developers to access flexible, long-dated, fixed-rate construction capital.
President and chief executive, Jessica Bailey, explains how C-PACE works, the surge in demand, and why the use of this type of financing in the commercial real estate sector will continue to expand.
What is C-PACE and how is it used?
C-PACE is a public-private partnership which provides financing secured by the tax parcel on a commercial property. That security allows C-PACE lenders to offer fixed-rate, long-term, non-recourse financing, usually with 20-30-year terms, which is paid back as an assessment charge on the property tax bill. Borrowers can use the capital provided by C-PACE for new construction projects, provided the measures exceed the building code in a particular market, or to renovate or reposition existing buildings with clean energy upgrades.
“We have seen a dramatic increase in the CRE market’s awareness of the benefits of C-PACE”
C-PACE can provide 20-30 percent of the capital stack and can often replace more expensive sources of capital. It can also increase a sponsor’s leverage in a capital constrained lending market. While the C-PACE repayment is collected on the property tax bill, it is an important nuance that C-PACE financing cannot be accelerated and that only the amount currently due on the tax bill at any given time is senior to the mortgage lender’s debt.
C-PACE loans automatically transfer with the sale of the property, and, while C-PACE can be prepaid at any time, the new owner usually opts to take on the repayment obligation.
C-PACE has been around for a while, so why has it gained more mainstream adoption within the CRE market in recent years?
In the last few years, we have seen a dramatic increase in the CRE market’s awareness of the benefits of C-PACE. Once the benefits are realized, there is generally little reason for an owner or developer to not want to use it.
Firstly, the C-PACE assessment is attached to the parcel of real estate rather than to the sponsor of the real estate, so the sponsor is not required to put up any personal or corporate guarantees to secure financing. Secondly, because the debt is collected on the property tax bill, this allows for some owners to pass on the cost of financing to the tenants that are enjoying the benefit of the improvements through [common area maintenance] charges.
Next, the loans are pre-payable at any time, with a declining prepayment penalty. If interest rates move, building owners can choose to prepay their C-PACE loans and release the assessment charge from the property tax bill.
Finally, C-PACE financing transfers automatically upon the sale of the property, so if the owner’s business plan is to make improvements, reposition the building, stabilize the cashflow, and then sell, the C-PACE financing stays with the property, allowing for a smooth exit.
There has also been a substantial easing of the limitations associated with C-PACE in recent years. We attribute this to a few different factors – the first of which is that C-PACE is a financing mechanism enabled by state-level policy, and most of the policy limitations have been removed.
“The realization that C-PACE is a financing solution that CRE owners want to consider has pushed most senior lenders to get educated about what this means for them”
The number of states that have adopted the policy has expanded to over three dozen, including nearly all the states that have large commercial real estate markets. Because of its near nationwide availability, large institutional owners of commercial real estate have started to pay attention.
The realization that C-PACE is a financing solution that CRE owners want to consider has pushed most senior lenders to get educated about what this means for them, and for the credit underlying their mortgages. Every C-PACE transaction requires the consent of the senior lender. Nuveen Green Capital has partnered with hundreds of other providers of CRE debt, and we have seen an increase in willingness for senior lenders to understand how C-PACE can be an attractive source of financing for their borrowers.
In addition, the use of C-PACE proceeds has expanded significantly over the years to be much more versatile. At Nuveen Green Capital, we think of C-PACE as having three main use cases – financing new construction projects, renovating or repositioning existing properties and recapitalizing construction projects that have been recently completed in the past few years.
C-PACE’s flexibility allows it to be used toward any measure that impacts the energy or water performance of a property. This includes hard, soft and any associated costs connected to mechanical, electrical, plumbing, building envelope improvements and renewable energy sources.
In several states, it has been expanded to include seismic and resiliency measures. C-PACE capital can also complement a mix of historic tax credits, state abatements and other funding methods that sponsors are putting together to fund their projects.
CRE lending was down in 2023, was that also the case for C-PACE lending?
Actually, not at all. We saw a large increase in our origination volume in 2023, and we also saw our average loan size jump nearly threefold. One of the most attractive features of C-PACE is its ability to transform its use cases based on the needs of the borrower and the current lending environment.
In a year of extreme capital market dislocation and lender pullback, C-PACE became the most attractive form of construction debt in the market – and increasingly the cornerstone of the capital stack – bringing the weighted average cost of capital for a project down significantly, bridging projects to completion, and providing leverage that may have otherwise been unattainable.
We saw this during covid as well, where C-PACE was used predominantly as a tool for recapitalization to provide liquidity for ongoing and recently completed CRE projects. The malleability of C-PACE as a financing tool really allows it to adapt to – and help alleviate – whatever challenges the commercial real estate lending market is facing.
When mainstream lenders come back, will C-PACE be sidelined?
We don’t expect that C-PACE will be sidelined. In fact, we believe the market volatility in 2023 actually helped propel C-PACE into the mainstream.
We work alongside all sorts of lenders and, when conditions change for regional banks and other CRE lenders, we expect to continue working alongside them to create more accretive financing options for CRE owners and developers. We have gotten over the awareness hurdle, and the proof of concept has been established many times over.
Sometimes necessity is the mother of innovation, and we saw a lot of sponsors who previously dismissed C-PACE needing to consider it last year. Once they did, they realized the power of adding it to their capital stacks.
We are providing over $1 billion a year of this kind of financing and the market is growing year on year. We expect that trajectory to continue in 2024 and beyond.