C-PACE Financing: How to Qualify and Apply
Written for Leverage.com
As a commercial real estate investor, you want your investments to be as energy-efficient as possible. You may have even heard all the statistics about how clean and renewable energy can reduce operating costs and prevent property owners from losing money on electricity, heat and other utility bills in the long term. Maybe you read about how one San Francisco building saved $100,000 in energy costs, and multiple Milwaukee buildings saved a million a year collectively but nearly reaching net zero energy.
While investing in sustainability will cut down on energy costs in the future, you’ll still need capital to cover the upfront costs right now. Who is going to lend the money for your solar panels, your flood protection, your new HVAC system or other improvements? And for how long? C-PACE financing may be the answer.
The projects in San Francisco and Milwaukee weren’t created out of magic. Investors had access to long-term, inexpensive, low-interest financing for energy upgrades. Specifically, they built in jurisdictions with Commercial PACE financing.
What Is C-PACE Financing?
C-PACE stands for Commercial Property Assessed Clean Energy. It is a financing program that allows commercial property owners to borrow money to cover the costs of energy efficiency, renewable energy and related sustainability upgrades for multifamily homes, small and large commercial properties, office buildings, industrial buildings, agriculture projects and nonprofits. Owners of single family rentals or buildings with up to four residential units can take advantage of R-PACE, Residential Property Assessed Clean Energy.
Borrowers repay the loans through installments on their commercial property tax bills, at low interest rates. The government then remits the loan payments to the lenders. C-PACE financing is currently available in 37 states, and Washington, D.C., with more on the way.
While eligibility requirements vary by state, some examples might include:
Installing solar panels on a high-rise office building
Updating a hotel’s HVAC system
Building a new shopping mall with an efficient microgrid
Renovating a multi-family building with high-efficiency windows and water conserving systems
Retrofitting a hospital to protect against earthquakes
How Does C-PACE Financing Work?
First a state government has to approve legislation for a C-PACE program. Each program varies slightly in its structure and implementation, but here are the key stakeholders involved, their roles and how the program works:
An owner or investor, who confirms they live in a place where C-PACE financing is available. If they do, the government will have organized a body to manage the program
The managing body, which includes a PACE administrator who manages the project and ensures adherence to program requirements
The lender, who provides the capital and receives payments through a property tax
The local government, who collects the loan repayments as a property tax assessment and then remits payment to the capital provider(s)
The PACE Administrator, who connects the building owner to a contractor or energy services company (ESCO) that installs the equipment, and manages the relationship between all parties: the lender, the building owner, the ESCO, and the government to ensure everyone is staying on track
That building owner receives the energy and equipment upgrades from the ESCO, and repays the loan on an agreed-upon timeline back to the lender, as they would with a property tax. According to the C-PACE Alliance, an organization dedicated to the administration and expansion of C-PACE financing, C-PACE is usually limited to 20% of project value, and can replace other kinds of more expensive debt.
Benefits of C-PACE
C-PACE funding is just as good for your bottom line as it is for the environment.
C-PACE Makes Sustainability Cost-Effective
As Live Oak Bank wrote, “[C-PACE is] becoming an increasingly attractive option because the energy improvements can lead to lowered utility bills and may increase property value.” In addition,“since the financing does not reside on the business’ balance sheet it can be seen as ‘equity.’” The up to 20-year amortization also enables annual energy savings to exceed annual PACE payments.
Low Interest Rates
Interest rates for C-PACE loans are competitive, as the tax assessment repayment plan is considered secure and low-risk. The interest rates are fixed over the term of the loan, and cannot increase even in the event of default or bankruptcy.
Longer Term, More Secure Financing
Kellogg said, “From the point of view of property owners, it solves a problem because the financing may be transferred if the property is ever sold to the next owner.” This arrangement encourages long-term investments in building performance because both lenders and owners know that once the funding is in place, it won’t go away even if the building changes owners.
As the Department of Energy explained, “C-PACE strengthens the business case for investment in longer payback and deeper building retrofits beyond what is possible with traditional financing.”
Energy Upgrades Increase Your Property’s Value
Savings on utility bills is only the start. Energy saving upgrades can also increase your investment’s value.
It’s a Secure Option for Lenders
C-PACE, Kellogg said, “enables lenders to make longer term loans because the loan is secured with an assessment on the property.” C-PACE financing also fills a gap in the credit market, Kellogg added, “because [before C-PACE] when banks were able to provide this financing, it typically was short-term financing, say three, five years, maybe seven years at the most and the useful life of these property improvements.” By contrast, C-PACE loans are typically available for up to 20 years, which also encourages long-term investment.
It’s Good for the Environment
We’re focusing on the economic benefits in this article, but it’s critical to note that lowering carbon emissions and greenhouse gases is critical for protecting our planet.
Do You Qualify for C-PACE Finance?
Here are some factors that will determine how likely you are to qualify for C-PACE, and whether you should apply.
If You Live in a Jurisdiction With C-PACE Financing Legislation
Unfortunately, you can only apply for C-PACE funding if there’s legislation on the books in your area. PACE Nation has a tool you can use to check if there’s a program in your area. If you’d like more information on how to advocate for a C-PACE program in your area, the C-PACE alliance has a number of resources.
You Want to Invest in Long-Term Improvements to Building Resiliency
To qualify for C-PACE financing, you have to have specific energy upgrades and sustainability projects in mind.
Your Proposed Upgrades Meet the Energy Savings Requirements for Your Jurisdiction
Some C-PACE programs have a required level of energy savings the project must meet, relative to the project cost, also known as Savings to Investment Ratio (SIR). This rule does not apply to all programs, and even those with SIR requirements might have exemptions for certain measures. Some programs also have a loan-to-value (LTV) requirement, which stipulates that CPACE loans must not exceed a certain ratio to the total value of the property.
Your Planned Upgrades Meet the Requirements
The types of projects might include energy efficiency, energy storage and renewable energy. According to Kellogg, more states are adding non-energy resiliency updates such as protections against flooding, storms, earthquakes and other natural disasters.
Your Property Type Meets the Requirements for C-PACE in Your Area
Just like states have requirements for energy upgrade projects, they have criteria for the type of property that’s eligible for funding. Depending on the jurisdiction and the authorizing legislation, C-PACE financing may be used for industrial buildings, office buildings, multi-family residential buildings, agriculture properties, and non-profit and religious buildings, among others.
How to Apply for C-PACE Financing
First, you have to determine that you want to make energy improvements, and what kind of improvements they should be. This effort requires thinking about overall goals for building performance. Do you want to reduce your electricity bills? Install more efficient windows? Protect against storms? Answering these questions will help you decide which upgrades best fit your needs.
Provide Detailed Documentation of Your Desired Upgrades
Before your lender determines whether to fund your project and take on the effort of working with a C-PACE administrator, you must provide detailed documentation of the planned upgrades you’re applying for funding to implement, and how much each of them will cost. This proposal will be necessary for both your lender and the program administrator in determining feasibility and eligibility.
Reach Out to a Bank or Other Lender to Inquire About C-PACE Financing
Once you’ve completed documentation, it’s time to seek out potential lenders.
If your existing lenders have experience with C-PACE financing, you might start there, or reach out to a bank or other private lender. The Better Buildings Solution Center at the Department of Energy has an extensive directory of potential providers, or you might want to contact industry groups like C-PACE Alliance or PACE Nation.
Your Potential Lender Will Contact the C-PACE Administrator to Determine Eligibility
They’ll work together to review the rules in your individual jurisdiction.
Administrator Decides Whether to Approve the Project
If the administrator approves the project, the lender will provide capital, the administrator will place a tax assessment on the property, connect you with a contractor to perform the upgrades, and once completed, the owner will begin repaying the loan as an assessment.
The Future of C-PACE is Very Bright
According to Kellogg, “the future is very positive for C-PACE financing.” This optimism is borne out by the program’s growth across the country, even in the face of a global pandemic, and even when other types of financing weren’t available. As Nadja Sayej previously reported in Leverage.com, Maine, Tennessee, Montana, and New Jersey all approved C-PACE programs this year.
For commercial property owners, C-PACE can help bridge the gap between long-term sustainability goals for commercial buildings, and the realities and complications of seeking funding to cover upfront costs.