The Stars Were Aligned For A Green Loan Program To Take Off In NYC. Instead, It Fizzled

When lender PACE Equity provided a $5M Commercial Property Assessed Clean Energy loan to a Brooklyn nursing home in December, it was the first C-PACE loan in New York City in two years and only the third ever.

C-PACE loans are billed as a low-cost way for building owners to fund sustainability upgrades at their properties, with low interest rates and no requirement for deposits or down payments.

These types of loans have gained popularity across the country — except in New York, which has strict emissions standards that would appear to make the program an obvious slam dunk for landlords.

New York City's Local Law 97, which requires landlords to reduce their emissions or face penalties, went into effect this year, with the first penalties set to be levied in 2025. The law was expected to push building owners toward C-PACE loans, but experts in the field say that despite the industry's desire to take advantage of the green loan program, virtually no one has done so. 

“The demand in New York City is significant. We have quite a few building owners and sponsors within the city that are looking for C-PACE financing,” Nuveen Green Capital CEO Jessica Bailey said. “The law and the program that govern the C-PACE program in New York City has not been really workable, and so the program all but shut down for the last couple of years.”

Nuveen Green Capital is one of the leaders in the space, having originated more than $2B in C-PACE loans nationwide, almost half of which came in 2023. But it has only originated one in New York City, a $28M loan in 2021 to upgrade 730 Third Ave., owned by its fellow Teachers Insurance and Annuity Association of America subsidiary Nuveen Real Estate.

Last year, $6.9B of C-PACE loans were originated nationwide, a nearly 33% jump from 2022, according to data from advocacy group PACE Nation, which tracks PACE lending nationally. 

That jump stands in stark contrast to the overall commercial real estate landscape. Mortgage originations for commercial properties fell by 47% year-over-year in 2023, according to data from the Mortgage Bankers Association.

But New York has been left behind. Only $209M of C-PACE loans have been originated in the five years the state's program has been in place, according to PACE Nation. That is not only trailing California, where nearly $2B in C-PACE loans have been doled out, but also smaller states like Utah, Michigan, Colorado and Connecticut.

C-PACE began as a residential financing option called PACE. It started in 2008 in Berkeley, California, as a way to help homeowners install solar panels on residential buildings.

PACE’s commercial counterpart, C-PACE, works in a similar way. It provides long-term, fixed-rate loans for different measures related to building sustainability and climate resiliency. Its adoption picked up in 2010 after the Federal Housing Finance Authority changed its guidance regarding PACE loans.

“I have yet to meet a borrower who doesn't want to use C-PACE,” said Robbie Pinkas, senior vice president and originator at lender PACE Loan Group. “I think it's an extremely attractive financing tool.”

As the Federal Reserve has pushed interest rates to their highest levels since 2001 over the last two years, New York City property owners have been staring down the barrel of new regulations that require many of them to invest in reducing their buildings' emissions.

Since January, landlords of city buildings larger than 25K SF have been required to track and report their greenhouse gas emissions. 

Starting next year, owners of buildings that haven't brought their emissions down by 25% from the 2006 benchmark could face financial penalties. By 2030, they must reach a 40% reduction, or face fines of $268 for every ton emitted over the threshold.

While most owners are on track to hit the near-term target, the city estimates that as much as 80% of commercial properties will be out of compliance by the time 2030 rolls around.

With that deadline looming as the cost of capital rose, a low-interest lending option should have been popular.

But PACE Equity's $5M C-PACE deal at the Brooklyn United Methodist Church Home, a 65K SF skilled nursing facility on the border between Brooklyn and a frequently flooded Queens neighborhood known as The Hole, is the only deal in the five boroughs that has closed since 2021.

Other than that deal and 730 Third, the only other C-PACE loan to close in New York has been at 111 Wall St.

That $89M deal was both the first and the largest in city history when owners Nightingale Properties and Wafra Capital Partners, now called InterVest Capital Partners, secured the funding from Petros PACE Finance to refurbish the 1.2M SF tower and make it more energy-efficient. 

But the owners have struggled to attract tenants with the updates — and Nightingale has been consumed by scandal — and another lender at the building, Oaktree Capital Management, started foreclosure proceedings in July.

The biggest reason C-PACE hasn't gotten off the ground in New York is because of a vestige of C-PACE’s residential origins. The funding comes with a mandated savings-to-investment ratio, which requires that every dollar of a C-PACE loan must generate at least a dollar of energy savings.

That ratio is difficult to achieve in New York due to the high cost of construction, said YuhTyng Patka, chair of Adler & Stachenfeld’s NYC Climate Mobilization Act task force and PACE financing practice. New York has the highest cost of construction in the world, according to Turner & Townsend's International Construction Market Survey for 2023.

“That concept of an SIR got baked into a variety of PACE programs, including New York's, including Massachusetts, including Connecticut, including Washington, D.C., including Texas,” Pinkas said. “The problem is, it's not as relevant for commercial projects, especially not commercial projects in major metropolitan areas where the cost of construction is so high. So what we've seen are various loopholes that have been created.”

Those loopholes are the reason that C-PACE lending has been able to take off elsewhere, he said. In Washington, D.C., interest rate savings are allowed to count as savings. In Texas, “cost” is defined as “cost above code.” Connecticut, meanwhile, is in the process of removing the savings-to-investment ratio from the equation, he said.

“New York has just not been able to create a loophole,” he said. “Frankly, what they should do is just either take the words ‘cost-effective’ out of the statute [or] just allow the program authorities to determine whether or not the project is acceptable.”

The SIR ratio is the top reason deals have been few and far between, putting New York at a competitive disadvantage for green investment, Patka said.

“The paucity of loans can partially be blamed on the SIR requirement,” she said. “I have heard from C-PACE lenders of deals that have died as a result of being unable to make the SIR.”

But that isn’t the only factor killing C-PACE deals in the Empire State.

The states that have seen a lot of deals close have a few things in common, PACE Equity founder and President Beau Engman said. The majority of other C-PACE programs are written in ways that allow them to be used for new construction, not just retrofitting or improving existing buildings. He said the more active states' legislation makes eligibility requirements more straightforward.

“I think New York is not easy to understand,” he said. “So a layperson can't know intuitively like, ‘OK, am I eligible? Am I not eligible? How much is eligible?’”

The city has an additional requirement that is off-putting to owners, Nuveen Green Capital's Bailey said. Its legislation contains language mandating that a property must be fully electric to avail itself of PACE financing, creating an additional cost that may not be in owners' business plans.

“In New York City, the way the program is written requires owners to do things to their building that are far beyond what they're interested in doing,” she said. “So it requires energy savings in these buildings far beyond what is, in many cases, the economic way to build or renovate a building.”

But solutions could be on the horizon. There is some movement to modify or remove the mandatory savings-to-investment ratio, as well as efforts to open up C-PACE as an option for new construction.

The New York State Energy Research and Development Authority administers the program and its guidelines, and a spokesperson for the agency said it is engaging with C-PACE stakeholders via a third party to update the lending program. But the process of updating guidelines doesn't have a clear date when changes might be announced.

Until some of those changes are in effect, owners hoping to take advantage of the financing likely won't utilize it. Lenders like Nuveen Green Capital will continue the “rinse and repeat” of hearing from owners eager to secure a C-PACE loan, only to do the math and realize they can't make it work, Bailey said.

“The requirements in the city reduce the amount of C-PACE they're able to access to a dollar amount that no longer makes it worth their while,” she said.

That means lost opportunities for a city that has prioritized reducing its built environment's carbon footprint.