ESG and Other Tailwinds for C-PACE Financing
Mansoor Ghori of Petros PACE Finance on the trends driving the growth of this critical financing vehicle.
Some commercial real estate professionals see the rising discussion about green finance, sustainable real estate and environmental, social & governance issues as just buzzwords that don’t affect them—yet.
But 2022 may well be an inflection point for owners, operators and developers to ascertain the climate risk associated with their properties and respond or risk losing tenants, investors and property value. Growing awareness of climate change and climate responsibility is one of a number of trends that indicate wider use of Commercial Property-Assessed Clean Energy financing this year, and beyond.
C-PACE has grown relatively quickly for being barely 10 years old. The innovative financing tool hit a cumulative $3 billion in U.S. commercial real estate financings according to PACENation. C-PACE is a valuable tool for boosting building performance, project returns, and sustainability by providing low-cost capital to cover all costs associated with energy and water-saving building measures and, in some states, resiliency improvements. Eligibility varies by location and can be determined by an audit to determine the scope of C-PACE-eligible upgrades. Like many public finance mechanisms, C-PACE financing is repaid via a special tax assessment on the property’s tax bill. C-PACE assessments are 100 percent privately funded and use no public or taxpayer money.
Here are key drivers providing tailwinds for C-PACE financing in 2022:
Large institutional investors are pressing developers for ESG-ready real estate. In its January 2022 “Return on Sustainability” report, JLL pointed out a sales premium of 11.5 percent—a material difference—for properties that demonstrate climate-resilient features in energy and environmental improvements. The JLL report concluded, “From capital raising to buy/sell decisions, underwriting, financing and resilience planning, climate change will impact every part of an asset’s life cycle; it is entering the mainstream investor dialogue more and more.”
C-PACE is a direct tool for enhancing property sustainability.
The use of C-Pace is broadening to include new construction, retrofits and three-year look-backs. Though state-by-state adoption limits C-PACE’s ubiquity, many markets have expanded its applicability to include new construction and enabled use of C-PACE for retrofit projects, with some allowing use with projects up to three years old.
The pandemic also created tailwinds for C-PACE. When financial markets froze up out of concern for the economic impact of COVID-19 in 2020-21, many property owners turned to C-PACE as a much-needed capital source to withstand the effects of the pandemic or to complete unfinished projects.
C-PACE transaction size is increasing. According to a December 2020 announcement from Morningstar, the average size of C-PACE transactions is increasing exponentially thanks to the larger price tags of new construction projects. For Petros PACE, a $500,000 loan transaction was considered large in C-PACE’s infancy, but today’s average is between $15 million and $17 million, evidenced by our completion of the largest C-PACE to date, an $89 million financing in June 2021 for Manhattan’s 111 Wall Street, which included a full upgrade to the building’s façade, state-of-the-art air conditioning and mechanical-electrical-plumping systems, plus fully redundant power systems. As the first-ever C-PACE transaction in New York City, it also opened the door for the City’s multi-trillion-dollar commercial real estate market which is facing deadlines under Local Law 97 for properties to effect energy efficiency improvements.
C-PACE is expanding geographically to most of the U.S. The list of states and large metros that enable C-PACE funding continues to grow and now stands at 27 states plus the District of Columbia. According to Morningstar, North Carolina and Kansas each introduced new C-PACE enabling legislation, and New Jersey, Maine, and Montana enacted C-PACE enabling legislation. Other jurisdictions with notable advancements included Anchorage, Alaska; Chicago/Cook County, Illinois; Boston, Mass. and New York City, which saw its first C-PACE transaction. On the horizon, Pennsylvania, Tennessee and Washington state are advancing adoption and regulatory improvements which should accelerate C-PACE as well.
The C-PACE industry is maturity and advancements. Innovative financing vehicles can take time for market adoption and acceptance, and C-PACE is demonstrating its efficacy in significant ways. C-PACE transactions require sign-off by the property’s current mortgage lien holder, and the early hesitance by many traditional financial institutions is turning a corner as hundreds of them now consent, per the industry group C-PACE Alliance. Wall Street’s confidence in C-PACE is also evidenced by the increasing number of private securitizations of C-PACE for a source of underlying capital. Another milestone late last year was Apollo Global Management’s investment in and acquisition of Petros PACE.
For commercial property owners and developers, C-PACE financing is gaining acceptance as a long-term financing option to lower energy costs, reduce carbon footprints, increase property values and meet ESG goals.
Mansoor Ghori is the co-founder & CEO of Austin, Texas-based Petros PACE Finance LLC.