Banks looking to stay abreast of emerging commercial real estate trends should consider an innovative way to fund certain energy improvements.
Developers increasingly seek non-traditional sources to finance construction projects, making it crucial that banks understand and embrace emerging trends in the commercial real estate space. Commercial Property Assessed Clean Energy (C-PACE) financing is one of the fastest-growing source of capital for new construction and historic rehabilitation developments throughout the country, and banks are jumping on board to consent to the use of this program.
C-PACE financing programs allow for private funders, like Twain Financial Partners, to provide long-term, fixed-rate financing for 100% of the cost of energy efficiency, renewable energy and water conservation components of real estate development projects. This financing often replaces more expensive pieces of the construction capital stack, like mezzanine debt or preferred equity. Currently, over 35 states have passed legislation enabling C-PACE; new programs are currently in development in Illinois, Pennsylvania, New York, among others.
C-PACE financing can typically fund up to 25% of the total construction budget, is repaid as a special assessment levied against the property and is collected in the same manner as property taxes. Like other special assessments, a lien for delinquent C-PACE assessments is on par with property taxes. Due to the lien priority, nearly all C-PACE programs require the consent of mortgage holders prior to a C-PACE assessment being levied against the property.
C-PACE industry groups report that over 200 national, regional and local mortgage lenders have consented to the use of this type of financing to date. While there are many reasons mortgage holders consent to C-PACE, below are the top six reasons banks should consider consenting:
C-PACE Financing Cannot be Accelerated. In the event of a default in the payment of an annual or semi-annual C-PACE assessment obligation, only the past due portion of the C-PACE financing is senior to a mortgage lender’s claim. For example, assume Twain Financial provided $1 million of C-PACE financing to a project, with a $100,000 annual assessment obligation due each year over a 20-year term. In the event of non-payment of the C-PACE assessment in year 1, Twain could not accelerate the entire $1 million of C-PACE. Rather, Twain’s lien against the property is limited to $100,000.
C-PACE Financing Does Not Restrict a Senior Lender’s Foreclosure Rights. Unlike other forms of mezzanine financing, C-PACE funders do not require an intercreditor agreement with a senior lender. Rather, the senior lender can foreclose on its mortgage interest in the property in the event of a default on the senior lender’s debt, in the same manner as if it was the sole lienholder on the property. The C-PACE lender does not have any right to prevent, restrict, or otherwise impact the senior lender’s foreclosure.
Senior Lenders May Escrow the C-PACE Assessment. In many cases, senior lenders will require a monthly escrow of the annual C-PACE assessment obligation, in the same manner as property tax and insurance escrow requirements. The C-PACE escrow serve to further mitigate risks associated with the failure to pay the C-PACE assessment when due.
C-PACE Funds Fully Available as of Date of Closing. C-PACE financing typically closes simultaneous with the senior lender. At the closing date, all C-PACE funds are deposited into an escrow account, to be withdrawn as eligible costs are incurred. Senior lenders have the reassurance of knowing the funds are available to be drawn as of the date of closing.
C-PACE Financing May Increase the Value of the Senior Lender’s Collateral. In most states, a threshold requirement for C-PACE financing is that an engineer establish the savings-to-investment ratio is greater than one. In other words, the savings achieved by the financed improvements over the term must outweigh the cost of the improvements. PACE projects directly reduce a building’s operating costs, increasing its net operating income and valuation.
Relationships matter. Nearly every C-PACE project involves a lender’s customer who wants or needs to complete a project. C-PACE funded projects make good business sense for the building owner and the building’s mortgage lender.