How C-PACE Financing Can Help Fill In The Gaps For CRE Projects In A Troublesome Market

With traditional lenders reluctant to fund new real estate projects, developers are seeking other financing sources. 

An increasingly popular option is Commercial Property Assessed Clean Energy, or C-PACE, financing. C-PACE helps reduce a developer’s upfront costs by providing the bulk of financing for projects through a long-term fixed repayment plan. 

PACE Loan Group, a national direct lender based in Minnesota, helps developers and owners secure C-PACE financing for both new-construction projects and existing buildings. 

“We’ve been in the C-PACE lending business for six years and are well-versed in every aspect of this lending tool,” PLG CEO Rafi Golberstein said. “We take a two-step approach to C-PACE: educate and execute. We educate each of our clients on how C-PACE financing can improve their capital stack, like by reducing expensive mortgage debt, and then move to a quick and efficient closing.”

Golberstein said that PLG helps clients understand and take advantage of the benefits of C-PACE financing.

“When I founded PLG in 2017, no one really knew what C-PACE was,” he said. “And although it's become more commonplace now, there's still a lack of education about how to most effectively use C-PACE, which is a great resource to have when traditional funding methods may be scarce and expensive.” 

Golberstein warns that clients who choose this option need to be diligent in choosing the right C-PACE lender. Each of the more than 30 states that allow C-PACE has its own set of regulations, and a borrower needs to be sure that a lender has the right experience in that jurisdiction. 

“It's important to not only distinguish who the real C-PACE lenders are in terms of committed capital and ability to execute without major retrades but also to make sure they've done multiple transactions and have the requisite experience,” he said.

One trend in the market that PLG sees is that along with traditional bank pricing increasing, their leverage is also dropping as banks try to preserve capital, with leverage dipping into the 50% and 60% range, Golberstein said. 

“The state of the market has become very challenging with banks starved for deposits and more of a need for money to come in instead of going out the door,” Golberstein said. 

He added that this phenomenon isn't unique to banks, with debt funds also increasing rates and lowering leverage.

“The debt fund market has significantly slowed as well,” he said. “With repo lines being renegotiated and a general risk-off approach, that increased cost of capital gets passed along to developers, resulting in coupons often hovering around 10%.”

Golberstein said C-PACE can help fill in financing gaps because it has a “decent amount of liquidity,” and PLG can maneuver quickly to provide its clients with the maximum loan amount needed in difficult market conditions.

“Although we can’t lend 60% to 65% of the cost of a project, we can use C-PACE to trade out dollars and beat mortgage rate,” he said. “C-PACE provides a cheaper cost of capital, which would be more beneficial to our clients at a time when interest rates have risen.” 

In a recent project, PLG provided a $22.5M loan to Hotel Blossom Houston near the Texas Medical Center, which was the largest PACE loan in Houston at the time, Golberstein said.

“The property was recently constructed and was in the market for takeout financing, which was becoming prohibitively expensive due to rising interest rates,” he said. 

The refinancing effort was being led by CBRE, and Golberstein said C-PACE wasn't its expected outcome.

China-based Blossom Holding Group utilized retroactive C-PACE financing to achieve the refinancing.

“We were able to educate about C-PACE as an alternative financing option that actually offered the cheapest funding alternative while also affording the owner the benefit of long-term, fixed-rate debt,” he said. “Through the course of this 25-year loan, we’re able to provide a significant portion of the capital stack and at cheaper rates.” 

PLG also used C-PACE in collaboration with Minnesota-based developer United Properties to develop the Four Seasons Hotel Minneapolis at RBC Gateway, a 220K SF hotel. 

PLG was able to provide a long-term, fixed-rate $20M loan to help refinance an energy-efficient building envelope, HVAC systems, and high-efficiency water and lighting systems for the property.

“In this collaboration with United Properties, we were able to take a sustainability approach and use a retroactive C-PACE option to create more liquidity for the developer, allowing them to recapture funds spent on cost overruns at the height of the pandemic,” Golberstein said. 

Golberstein said he believes C-PACE will work in any market type, whether it is booming or showing signs of illiquidity. 

“I believe C-PACE is only scratching the surface of its potential, and we’re continuing to see its evolution throughout the years,” he said. “With larger, institutional deals getting done and continued year-over-year volume growth in originations, I believe its potential is untold.” 

This article was produced in collaboration between Studio B and PACE Loan Group. Bisnow news staff was not involved in the production of this content.

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