Cliff Kellogg (left), executive director of the C-PACE Alliance, moderated a panel titled “Climate Change, ESG Goals, CRE Retrofits: The Expanding Use of C-PACE Finance, Tips, Tactics, and Pitfalls.” Panelists included (from second left) Mansoor Ghori, cofounder and CEO of Petros PACE Finance; Ryan Hoff, project manager for Bernhard TME; and Kunal Mody, CEO of Blueprint Hospitality. (ULI/Altimira)

In the age of global warming, practically every builder and developer is being pushed to put up structures that are environmentally responsible. But can you do that and still make money? And how about the building owner who is seeking to invest in remodeling and upgrading?

With the right kind of financing, the answer has recently come to be ”yes,” for both builders and owners of existing facilities. In a concurrent session titled “Climate Change, ESG Goals, CRE Retrofits: The Expanding Use of C-PACE Finance,” a panel of four experts explained how C-PACE, an acronym for commercial property-assessed clean energy, has come to be viewed as a critical instrument in filling gaps in the traditional financing market.

For those unfamiliar with C-PACE, there are at least a couple of reasons for its new high profile. C-PACE has been around since about 2010. And it has only been approved so far in about half the states, with new programs recently launched in Chicago, New York City, Philadelphia, and Pittsburgh. Municipalities in much of the Sun Belt, from Florida and Texas to California, have the most mature programs going. As Cliff Kellogg, executive director of the C-PACE Alliance, which provides technical assistance to emerging programs from its headquarters in Austin, told the audience at the ULI event, “About the only government role is in approving this kind of financing. There are no public dollars involved.”

Members can access sessions from the 2021 Fall Meeting on ULI’s Knowledge Finder.

The financing is aimed at covering the costs for either new construction or retrofit projects related to reducing energy or water consumption or generating renewable energy, Kellogg added. In almost every case, the program is devoted to erecting or rehabbing structures far beyond basic municipal codes. Even experienced, savvy developers in many states still are not knowledgeable about the program.

What is the C-PACE advantage? The principle is that any investment in energy savings will reduce the cost of ownership (utilities, etc.) beyond extra investment in construction over a period of 10 years and longer. The financing is repaid in the form of an assessment on the building owner’s tax bill that also involves a lien that is senior to most other debt. Financed by investors such as pension funds, C-PACE at 5 to 6 percent is typically priced at about half the cost of traditional mezzanine debt in any capital stack and thus can significantly improve cash flow for the building owner.

Monsoor Ghori, chief executive officer of Petros PACE Finance in Austin, noted that C-PACE is coming on fast. “It had grown slowly until the last three years,” he observed. “Each municipality has had to opt into these programs, and that’s taken a long time.” Now those same municipalities are asking developers to detail their steps to reduce their carbon footprints, setting off demand for more construction and financing. Ghori said his business has tripled since the start of the pandemic. “With C-PACE we were once the last piece in a capital stack. Now developers are coming to us first,” he said.

And the deals are getting bigger. PACE loans once ran between $1 million and $50 million, but Petros recently closed a deal for a $90 million loan on a building in Manhattan. “It’s a seminal moment for the C-PACE industry,” Ghori said.

That loan was for an office structure, but C-PACE can be used for all manner of commercial buildings, ranging from industrial space and warehouses to hospitality, health care, and retail space. It can be fit into new construction, rehabs, and even refinancing.

In most places, however, it is not designed for residential buildings.

The Manhattan loan went to a proposed makeover of 111 Wall Street, a 1960s-era structure of 990,000 square feet (92,000 sq m) with aged infrastructure and occupancy rates running below 50 percent. The loan was aimed at underwriting everything from asbestos removal and new air-conditioning systems to replacement plumbing and elevators. Double-pane windows replaced single-pane. LED lights were installed. The result was a 42 percent reduction in carbon emissions and an annual savings of $3.5 million in energy costs.

As is the case for all C-PACE projects, engineers modeled the energy savings for 111 Wall Street before the loan was approved. In charge was Ryan Hoff, a manager at Bernhard TME in Little Rock, Arkansas, a mechanical, engineering, and plumbing design firm specializing in energy efficiency. He has overseen other projects, including a 190,000-square-foot (17,700 sq m) hotel in Florida that qualified for a $26.5 million C-PACE loan and a 205,000-square-foot (19,000 sq m) recreational facility in Missouri that got $12.7 million.

Hoff advises clients seeking financing not to reach for the stars. “Focus on easy things first, like lighting and heating and plumbing fixtures,” he said. “Work up to something like solar later.”

Kunal Mody, president and chief executive officer of Blueprint Hospitality in Chicago, said his interest rates on C-PACE loans have run between 4.5 and 6.5 percent while his deals have been getting bigger for the hotels he owns. He admits that his financing is typically “complicated,” involving equity, senior debt, bridge loans, tax increment financing, C-PACE, and more.

Construction financing, priced as high as 9 percent, has been difficult for Blueprint and others to access lately. But Mody has taken to using C-PACE in construction. “It’s clearly cheaper than other debt,” he said. In refinancing, he added, C-PACE is “a way to move out some of your more expensive debt and equity.”

Members can access sessions from the 2021 Fall Meeting on ULI’s Knowledge Finder.

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