C-PACE Offers Rate Relief and Retroactive Financing

Commercial Property Assessed Clean Energy, or C-PACE, financing has gained growing interest as a way to get some rate relief, particularly for construction and construction take-out bridge financing.

However, there’s another application that isn’t so well known: retroactive financing.

“Most PACE programs will allow you to retroactively refinance costs incurred up to two and a half to three years ago,” says Andrew Zech, COO of Nuveen Green Capital, a C-PACE lender that Nuveen acquired in 2021. During the pandemic, the group refinanced between 50 and 60 hotels that needed more capital to restabilize the property. “It’s a potent type of solution. We’re doing some of that now.”

This retroactive aspect of C-PACE financing has particular relevance now, as higher interest rates have created financial frictions for new construction and refinancing.

“Many of the projects we’re financing now are construction loans,” says Zech, mostly in multifamily and hospitality. Rates have been SOFER plus an additional 300 to 350 basis points. “If you’re borrowing from a debt fund, it’s more like 65% and SOFER plus 450 to 600 basis points. “But with C-PACE, we’re lending to those same projects at rates that are basically SOFER plus 225.”

There is a hurdle — funds are limited to eligible property improvements, whether upgrades to an existing building or ground-up construction. “That usually tops out at 30% to 40%,” Zech says. The other 60% to 70% needs additional funding. “Usually that’s another 20% to 30% debt and then the remainder equity.” The Department of Energy says that a typical timeframe for a C-PACE mortgage is 10 to 20 years and done “through property assessments, which are secured by the property itself and paid as an addition to the owners’ property tax bills.”

Zech says that the debt is “very secure” for borrowers. “Unlike a mortgage, we do not have the ability to call a default and foreclose on a property or exercise on a pledge that could turn a project upside down in a hot second.” There can be a problem if a borrower doesn’t pay property taxes, but that generally be cured by bringing taxes up to date. “Any downside would unfold in very slow motion over time rather than all at once.”

He mentions that the biggest consideration is ensuring that a senior lender is comfortable with C-PACE financing. They do have additional risk. If there was a default on the senior mortgage, the primary lender would have to keep up with the annual C-PACE tax payments. “I think most of the banks have learned to underwrite it,” says Zech. “We’ve closed about 600 loans over 200 money lending institutions. There’s much more market awareness and adoption of the vehicle now than a few years ago.”