Commercial Property-Assessed Clean Energy financing, or C-PACE, is a program that funds improvements that increase the energy efficiency and resiliency of commercial buildings.
Currently approved in more than thirty states, C-PACE is intended to encourage building upgrades that enhance energy efficiency, water conservation, renewable energy, seismic and other safety measures. In practice, C-PACE projects reduce an owner's operating expenses and their carbon footprint, while the development of C-PACE financing allows the owner to amortize the costs over a long term at fixed rates.
C-PACE funds are provided by private capital sources, however, the debt instrument takes the form of an assessment, which requires state legislation and county-level approval and implementation. Although steps have been undertaken to standardize C-PACE financing nationwide, state and even county programs can vary in their approvals, implementation and management. For example, Pennsylvania is the only state that excludes multifamily and mixed-use properties from program eligibility. Florida has approved C-PACE except for Jacksonville County. In Ohio, there are unique documentation requirements when seeking return of equity.
Since its introduction in California around 2007, C-PACE has been approved in nearly 75% of the states in the country. Pennsylvania approved the program in 2018, with Philadelphia adopting its program in 2019 and twelve of the Commonwealth's other sixty-seven counties obtaining approvals in the interim. Other counties are expected to adopt the program as awareness spreads and projects emerge. Locally, Delaware and New York have active programs, while New Jersey's legislation is expected to be signed during the second half of 2021, with program implementation expected in early 2022.
As of 2019, industry association PACENation reported $1.5 billion of C-PACE funding in more than 2,000 buildings, with 18,000 job-years added, an economic output of $2.8 billion, and most importantly, 2.8 million metric tons of carbon abated. As C-PACE programs are approved and implemented, these programs are expected to continue to provide economic growth and reduced carbon usage.
Although relatively new in the Philadelphia area, there have already been some notable examples of developers incorporating C-PACE in the capital stack. In July 2020, Shift Capital obtained $1.5 million in C-PACE financing for energy and water efficiency upgrades for a new mixed-use development in the Kensington-Harrowgate neighborhood. The project, J-centrel, provides 30,000 square feet of ground floor commercial space, including retail storefronts, spaces for entrepreneurs and artists, and an accelerator for local businesses.
In December 2020, Keystone Property Group obtained $10 million in C-PACE Financing , the first in Montgomery County, to fund energy improvements for the development of a 127-room hotel integrated with a to-be-redeveloped historic fire station. This was the largest project funded so far through the Pennsylvania C-PACE program as well as the first project funded outside Philadelphia. The timing of this financing is important as the economic development activity has the ability give a boost to tourism and economic activity in the county.
Despite its complex nature and the potential complications in lender consent and administration, C-PACE is gaining acceptance, as it provides owners with a source of long-term, low-cost, high-leverage, non-recourse financing that can significantly improve cash flow by reducing a building's debt service burden and even replacing a portion of mezzanine or equity in the capital stack. As such, we expect many building owners will explore C-PACE as an increasingly popular component of the capital stack for renovation and new construction projects.
The overall benefits are reduced energy costs and carbon usage, while stimulating job growth in the sustainability and energy efficiency sectors as well as additional jobs created through the new or adaptive use of commercial buildings. An additional benefit includes allowing for more inclusive economic development activities, especially in diverse socio-economic and geographic areas that are often overlooked. C-PACE can help stimulate the economy, it is a good financial tool taking off at the right time and could play a critical role in economic recovery of neighborhoods.
Frank Robinson, Director, robinson@econsultsolutions.com
Frank Robinson is a director with Econsult Solutions. Mr. Robinson has been a leader in the economic development and sustainable development industries for over 18 years, working with corporate, government and nonprofit clients, banks and credit unions, as well as community development financial institutions (CDFI) and small businesses. With a knack for creatively engaging clients and re-envisioning possibilities, he enjoys hammering out logistics and bringing forth new realities.
Stephen Arrivello, President-Axcel Capital Group, sa@axcelcap.com
Stephen Arrivello is a capital markets expert, arranging debt and equity financing for commercial real estate clients nationwide. He has an expertise in C-PACE financing and assists clients in structuring the optimal capital stack for each project.
