Commercial property assessed clean energy (C-PACE) allows commercial real estate owners to finance the costs of property improvements intended to improve energy efficiency or other notable public benefits, such as property resiliency to natural disaster. Despite the fact that most C-PACE investments are funded by private capital, C-PACE is rooted in government policy. To make C-PACE financing available, state and the local government must establish C-PACE through enabling legislation. The local government intending to establish C-PACE must then create a C-PACE program for administrative oversight of the financing or join an existing C-PACE program. While enabling C-PACE results in a clear victory for property owners and capital providers, as both are able to accomplish financing goals, governments also value C-PACE as an economic development and clean energy tool.
Governments recognize that C-PACE is a form of economic development that drives private investment in communities. By permitting and promoting C-PACE transactions in local jurisdictions, government officials enable an entirely new financial offering for energy efficiency projects. In the twelve years since C-PACE financing was launched, over 2,500 projects achieved nearly $2.0 Bn in cumulative financing. This is all the more impressive when considering that the average age of state-specific C-PACE enabling legislation is six and a half years. Many governments continue to expand their C-PACE programs beyond simply allowing C-PACE to finance energy efficiency projects in existing buildings; C-PACE is now often used to finance new construction and to refinance energy efficiency-related projects post-completion. Recently, states have begun to authorize C-PACE financing to fund not only energy efficiency improvements, but also water conservation measures and resiliency measures such as storm hardening measures and measures related to sea level rise. These new property and project types lend even greater flexibility to C-PACE, allowing more property owners to access financing and facilitating greater economic development.
Another benefit of C-PACE is that it improves the profitability of properties through increasing net operating income. By improving the efficiency of a property’s energy use, the property owner decreases energy costs, thereby improving the value of the underlying real estate asset. This results in an increase in the underlying taxable property base for local governments. In some cases, the utility savings resulting from C-PACE financed improvements entirely offset the annual C-PACE payment, but even when this is not the case, the property owner is able to fully finance expensive property improvements, freeing up cash to invest in revenue accruing opportunities.
Local governments additionally value C-PACE financing as a way to improve or modernize the local property stock. The age of a property is a major factor in its efficiency, as it may have been built without the benefit of modern technology or fallen into disrepair. Less than one in five commercial properties is twenty years old or newer; this constitutes roughly twenty-two percent of total commercial floorspace. With a sizable majority of the commercial real estate market using more energy, being less safe, occupying more space, and frequently falling short of minimum contemporary standards for efficiency, local governments should do what they can to address an aging property stock. Through C-PACE, more property owners are able to access 100% upfront financing for projects to improve existing properties, eliminating the need to rely on their own cash reserves for the requisite capital. The savings resulting from C-PACE can be extensive when the improvements installed replace particularly outdated technology or inefficient building envelopes; furthermore, retrofit projects where the property will undergo a change in use frequently benefit from the immediate financing C-PACE provides. Local governments and communities often value historical buildings, which C-PACE can help to modernize and repair.
C-PACE also appeals to local governments as an economic development tool for creating clean energy and energy efficiency jobs. PACENation estimates that commercial PACE is responsible for creating 22,400 jobs nationwide since 2008. Many of the jobs relate to small businesses such as energy efficiency contractors. Nationally, over 22 million people work in the energy efficiency industry. In supporting C-PACE, local governments help to sustain this job sector.
One of the reasons why C-PACE is popular with local governments, particularly those with small operating budgets, is that it requires no public funds and does not necessarily require extensive government resources. Many C-PACE programs choose to outsource administration to expert third parties that do all of the heavy lifting involved in reviewing applications, marketing the program, and liaising with project stakeholders. Depending on the enabling C-PACE legislation, the role of government may only comprise servicing the C-PACE assessment and enforcing delinquencies. In this way, even small local governments can use C-PACE to benefit the community without stretching their budgets.
This year, the economic downturn uncovered additional benefits of C-PACE as an economic development tool and financing product. Some property owners used C-PACE to bridge financing gaps when traditional lending forms receded. Other property owners used C-PACE to start new projects that generate savings, either entirely financing a project or swapping in C-PACE for more expensive debt to achieve a lower blended cost of capital. In turbulent economic times, C-PACE financing appeals to project managers for a variety of reasons. First, payments are typically paid on an annual basis commencing twelve to twenty-four months after financing; this allows time to complete building construction or renovation and stabilization before payments are due. Second, C-PACE offers an avenue for immediate financing of cost-saving improvements. Third, C-PACE loan terms are underwritten against the value of the underlying property rather than company credit, which is valuable for sub-investment grade borrowers. In the past year, C-PACE carved a niche for itself in project financing and demonstrated its usefulness in the face of unforeseen economic shocks.
C-PACE helps local governments attract energy efficiency-minded businesses to their communities. C-PACE also helps local governments achieve local and state emission reduction targets. This is especially true in cities that have ambitious targets that specifically highlight commercial buildings as an area to seek reductions. In Baltimore, Maryland, promoting C-PACE is a core component of the city’s 2019 Sustainability Plan for decreasing urban emissions. Through the support of the Baltimore City government, in the last three years more than $9.0M of C-PACE financing increased the energy efficiency of the city property stock thanks to its participation in the MD-PACE program. New York City also sees the value of C-PACE: in 2019 the city passed the Climate Mobilization Act, a sweeping set of legislation that the city intends to use to reduce urban emissions with C-PACE as a cornerstone.
The future for C-PACE finance is bright. In the past decade, C-PACE has established itself in the national lending landscape. The widespread adoption of C-PACE indicates its utility in jurisdictions of all sizes, from small municipalities of several thousand to massive cities home to millions. Thanks to the governments, property owners, developers, contractors, program administrators, and lenders that support C-PACE projects, the improvement of our nation’s built environment is easier and more affordable than ever before.
Marcus Glomset is the Communications and Research Associate for Pace Financial Servicing.
For more information on the MD-PACE program, please visit: www.md-pace.com