C-PACE financing has gained momentum in the last decade, with cumulative investment exceeding $1.5 billion through 2019, according to PACENation.
The program, enabled by state legislation and city council adaptation, allows commercial property owners to obtain long-term, low-cost financing for energy efficiency, water conservation and renewable energy projects. The borrowed capital is then repaid as an assessment on the property tax bill for current and future owners.
Eric Alini, the managing director at CounterpointeSRE, a firm that specializes in financing energy retrofits, spoke to Multi-Housing News about the specifics and benefits of C-PACE financing. He also discussed how this alternative finance tool focused on sustainability can fill in the gap and strengthen the capital stack.
Why is C-PACE a good financing option for multifamily projects?
Alini: C-PACE complements a traditional capital stack for multifamily. It’s not a total alternative because you will only see C-PACE in the 20 percent to 30 percent loan-to-value range. It can replace expensive mezzanine financing to complete the capital stack in new construction, for example, and the flexible prepayment terms allow for recapitalization after the property is stabilized.
The financial tool supports renewable and energy-efficient investments in building infrastructure, but it does more than that for today’s developers and building owners. They can carve out pieces of their projects to preserve working capital or equity and they can fill gaps in their capital stack. From a community or resident perspective, a project using C-PACE financing will benefit financially from redesigns or improvements that reduce its carbon emissions and its energy use. Additionally, developers and owners would avoid the value engineering decisions required to cut costs in tough economic times.
What are the core requirements for a multifamily project to be eligible for C-PACE funding?
Alini: The three primary factors are: location, number of units and the nature of the improvements being made to the property. There are more than 20 states and some individual cities and districts, such as Chicago, that have C-PACE programs. Many more are in development, with legislation passed at the state level and local municipalities undergoing the opt-in process. Next, a multifamily property simply must be greater than five units and be private, nonpublic housing. In other words, the property must qualify for taxes.
Finally, the program, regardless of state, has a long list of eligible measures that can be part of either new construction or a retrofit/rehabilitation project. These measures generally save energy or water, so they can include HVAC, building envelope, and lighting, etc., as well as solar and renewable energy sources. Then, depending upon the municipality or state, there are a number of resiliency measures that qualify, such as seismic hardening in California and wind hardening in Florida.
Bottom-line on the measures that qualify: If an owner or developer is doing significant work, we’re going to be able to find qualifying improvements to conserve capital and/or enable them to make additional investments using our capital. In this manner, C-PACE delivers a lower average cost of capital while avoiding value engineering decisions that might result in the deployment of less-efficient infrastructure.
How does C-PACE funding strengthen the capital stack?
Alini: It preserves owner equity, fills funding gaps and/or lowers the weighted average cost of capital. It also offers the flexibility of prepayment and works with the U.S. Department of Housing and Urban Development, all types of senior debt—with consent from the primary lender—and construction loans. In fact, C-PACE is term financing available during the construction or the unstabilized period. Recently, HUD regional managers have been working with us and PACENation, our industry organization, to inform the multifamily market about the parameters for applying C-PACE financing to a HUD-financed property.
To what extent has demand for C-PACE financing changed in the multifamily sector since the onset of the pandemic?
Alini: Demand is up. Rescue financing was the first wave, and we’re ready to do that when the numbers make sense, but traditional C-PACE financing didn’t go away, particularly for new construction projects and those that are midstream.
Since March, we’ve closed more than $20 million in multifamily and more than $60 million overall. Multifamily is a sector of focus for us. Not just because it is a strong asset class but because it helps us deliver on the concept of “energy justice.” We’re able to reduce energy costs for multifamily residents. The more we do that, the more we’ll help a wider range of households benefit from the broad spectrum of energy-efficient and renewable energy options out there. Looking ahead, we have a robust pipeline of over $250 million of multifamily C-PACE transactions.
What are your thoughts on C-PACE as an effective financing option for the affordable housing sector?
Alini: HUD is very positive on C-PACE as a financing tool. We are currently working with HUD to get the program more widely available for affordable properties, and we recently moderated a panel to increase awareness. HUD properties represent a significant piece of the multifamily market. Widespread application of C-PACE financing for HUD properties, in particular, will effectively reduce energy and utility burdens—in other words, provide “energy justice”—for millions of tenants in multifamily housing who are more likely to spend a disproportionate share of their household income on energy costs, compared to non-low-income households. The difference is 7 percent vs. <2 percent.
The C-PACE program requires lender consent, and, for non-HUD properties that has proven quite routine. Banks understand the mechanism, and the improvement it makes to an asset, but HUD requires a state attorney general to sign off on the program—in addition to the legislation that is already in place. So we are circling back and securing that sign-off as an industry, while educating owners and developers on the program’s availability.
Going forward, how do you expect C-PACE to evolve?
Alini: The beauty of C-PACE financing is that it addresses the public good at its core. Green and clean energy is a public good and that’s going to be a big part of the future and the nation’s economic recovery. That also makes the program itself resilient—and that’s a key word, resiliency. When forest fires emerged as a huge risk in California, the program flexed to include resiliency measures, such as fire-resistant roofs and siding, in eligible improvements. In other cases, we’ve seen seismic hardening, wind strengthening and water conservation added to programs. As these measures add a public-health component, we expect them to be added to our buildings, as well.