What will it take for C-PACE to gain prominence? 

Opportunities in multifamily, healthcare and new development create more potential in capital stack.

C-PACE, or Commercial Property-Assessed Clean Energy Financing, has evolved beyond its roots of financing small-scale solar power, resiliency and other energy-efficient related projects. Market players are telling Real Estate Capital USA that the state-specific legislation will present one of the more compelling means of tapping into new green lending opportunities. 

A case in point could be the New York City market, where property owners are racing to implement Local Law 97, legislation passed in 2019 that aims to put into place carbon caps on buildings of more than 25,000 square feet. The legislation, which will affect about 50,000 commercial and residential properties in the city, goes into effect in 2024. New York adopted a C-PACE framework last year, joining California, Washington and more than 30 other states that use the program. 

Additionally, a proposal last week from the Securities and Exchange Commission to require public companies to report any climate risks associated with their businesses will also have a significant impact. The overall result is a market where C-PACE is primed to gain more momentum and usage among debt players across the stack, including senior lenders typically averse or avoidant of the financing option. 

“It’s such a massive market opportunity and we haven’t even scratched open the door yet,” Chris Robbins, managing principal and co-founder of GreenRock Capital, tells Real Estate Capital USA. “We are seeing a huge uptick in the number of building owners, investors and developers who are exploring C-PACE as part of their capital strategy for new construction, adaptive reuse and recapitalization of projects mid-post construction, all while meeting their ESG goals – a true win-win.” 

The Big (Green) Apple 

According to data from JLL, 90 percent of the roughly 150 million square feet of Class B office space in New York City is more than 50 years old. Sandeep Srinath, a member of the structured solutions group at ING Real Estate, told Real Estate Capital USA that the huge stock of slightly older, large buildings in the city would fit the bill for larger C-PACE revitalization projects under the new mobilization act. 

“The value of real estate in New York is obviously one of the highest anywhere, so the LTV numbers work pretty well,” Srinath says. “We think there will be a growing demand for very large C-PACE deals in markets like New York.” San Francisco is another market where the same thesis could apply, he adds. 

Srinath notes agencies, lenders and investors need to buy more into larger, single asset financing – in the same manner as SASB deals – to further fuel the C-PACE revolution. Part of the challenge with picking up momentum is the overall volume of C-PACE originations. Still, there are more opportunities now to bring the financing in on larger ground-up projects, especially in New York City.  

“It could very easily be possible there’s a $1 billion building in New York with a very large PACE project on it and financing that large asset will be different than pooling assets into a warehouse and doing a securitization,” Srinath says. “It will have to be done differently.” 

Tom O’Connor, co-chair of the real estate finance group and a member of the real estate practice group at Duval & Stachenfeld, tells Real Estate Capital USA the New York City C-PACE rollout has been bumpy but that he thinks the city’s Climate Mobilization Act will spur more action. 

O’Connor notes C-PACE financing presents an avenue to make building improvements for a better value compared to rescue capital or other financing options available for becoming compliant with New York City codes. He cited co-ops and condominiums in the multifamily realm as being prime for C-PACE opportunities in particular, with the next two years set to be fruitful for lenders deciding to work with the worst climate non-compliant offenders in the niche. 

Climate risk = investment risk 

According to Nuveen’s second annual EQuilibrium Global Institutional Investor Study released in March, select institutional players have started to turn focus and money toward everything related to innovation, for instance reducing energy consumption or transforming old industries and assets – both areas C-PACE financing can typically play a role in facilitating. 

In the New York-based manager’s study, 71 percent of institutional investors surveyed said climate risk is investment risk and 79 percent said the transition toward a low-carbon economy is inevitable. Across all institutional respondents, 86 percent said the transition to a low-carbon economy will present new investing opportunities. 

Nuveen, Apollo and ING all command some bandwidth in the arena, with ING having established itself in the C-PACE realm in 2018 with an internal build-out supported by partnerships with Greenworks before its rebranding to Nuveen Green Capital. 

C-PACE financing plays a unique role in the push for environmentally minded real estate assets. The funding can be used to retrofit or develop new assets intending to benefit the public good, and remain with the property even upon sale, setting up long-term investments based on the building’s performance. Funding can be pulled from government programs or private investors, but is limited in its geographic availability on a state-by-state basis. 

There are nuances in C-PACE enactment and enforcement on a state-by-state basis. According to the US Department of Energy, there are currently 38 states plus Washington DC with C-PACE legislation in place. Twenty-nine of those locales are active with launched and operational programs. No two programs look exactly alike, with some states allowing long-term interest only or restricting interest to a two- to three-year period. 

Opportunities in the space span multiple segments, including existing healthcare, multifamily, office and hospitality assets as well as new development on the aforementioned cluster, according to Robbins. The financing can often back an environmental push linked to an ESG initiative because C-PACE can be deployed on projects focused on energy efficiency, renewable energy, water conservation and resiliency, among other eco-minded building capabilities. 

ING’s Srinath says the C-PACE market is prime for garnering market share for new and existing players, especially with few prominent C-PACE originators operating in the space. 

Stacking capital 

The untapped potential of C-PACE is linked by some to educational obstacles imposed by senior lenders that may not want to be superseded in the capital stack. David Eyzenberg, president of Eyzenberg & Company, tells Real Estate Capital USA that there is an erroneous view of C-PACE as senior financing merely designed to be paid out in advance of an actual senior loan on a given property. 

To fuel more adoption, Eyzenberg says C-PACE pricing needs to come down and likely will do so as financiers start to better understand how the program functions more as a long duration call on net operating income as opposed to a circumvention of the senior loan. 

Eyzenberg says C-PACE presents a better avenue for filling out the capital stack in markets where there is not enough cash flow, or when financing is not replacing cheap money in a core market. He posits that if banks allow C-PACE and are encouraged to do so via ESG credits, the program could fare even better in states pushing for more environmentally minded development and retrofits.