Evening Gents I was wondering if anyone within our real estate world knows anything about C-Pace. I know it’s relatively new and that it is suppose to boost NOI in the long term, but other than that I’m not sure. any one have experience or done a deal involving these?
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Property Assessed Clean Energy Financing? Heard of it but have no direct experience. In today's high construction cost environment, my gut tells me that the additional cost to trick out your building would outweigh the benefits...
One of our developers used a pace loan. The requirements are actually pretty easy to meet especially when its new construction. Using the loan did juice our return projects by a good amount. Its worth looking into. Not sure how effective it would be for a value-add play though. The requirements are more than what would be needed for an agency green loan or something like that.
Bump, anyone else have experience with this product?
From my understanding they're great for developers. The loan is typically has a low interest rate and attached to the property, not the individual(really it's in first position). It gives devs the ability to get more LTV ultimately with the understanding they would add something to the building to reduce the utility bill. This loan works for those building suburban office or a leed building. I'm guessing this loan is just for <20% of the capital stack. I have only ever seen it come into our firm once. The Dev grab one with in addition to our interest only loan.
securitized lenders have a hard time wrapping their arms around this product. If you are to use PACE financing, make sure to work with a lender that has worked with the PACE Loan provider before
It’s basically a lower rate Mezz loan that the senior lender can’t wipe out.
Pace lenders are backed with investor capital but legally contracted through the county municipality and paid back through property taxes. Senior lenders will account for it either above the line or below the line since it can be broken out from the actual tax payment.
I look at them as equal to the senior loan, not subordinate. the pace lender technically can’t wipe out the senior because if the borrower misses a pace payment they technically miss a tax payment which is a default under the senior loan docs and the senior lender has cure rights. Therefore the pace loan can’t wipe out the senior but if the senior lender takes the property back through foreclosure they can’t wipe out the pace. The pace loan will always encumber the property until it’s paid back.
Terms of pace loans are ideal for developers with a build-hold strategy. Pace can go up to 90% of the capital stack and rates are 5-8%, way better than Mezz. Amortization and term is longer, 15/15, 15/30, 30/30 etc. but the pre pay penalties are less than a typical mezz loan. Pace loan sizes are tied to the construction budget items that relate to energy savings.
Some senior lenders won’t allow pace in the capital stack.
Also. Most pace lenders will lend retroactively. So if your project was competed 3 years ago you can still get a pace loan based on your budget.
It’s not at all like a lower rate mezz loan. That’s what the CPACE lenders pitch, but that’s just not the case.
It’s repaid through a special assessment on the tax roll and primes the senior lender. In a foreclosure the past assessment is a super-priority claim, just like taxes.
A few smart lenders use CPACE as a lower cost a-note in a stretch senior deal.
It also funds 100% at close, and, if construction, pre-pays 3 years of fully funded interest. Tack on a few fees, and prepayment penalties. and it’s not much different than a s+5-600 stretch senior.
It very, very rarely, can actually go to 90% LTC. The senior lender underwrites the payment as taxes and constrains it to a 1.15x Dscr. That means 70% LTC and a WACC of S+450 —- factor in the interest rate arbitrage above and you’re back at the stretch senior economics.
That said - with the right lender and CPACE provider, it’s virtually unregulated and you can really put together a great stack. I routinely place 90% CPACE on condos and have a lender that is willing to structure around the interest rate arbitrage. But if those two lenders say no, I am back at a stretch senior execution because all other lenders that allow cpace tap out at 70% all in LTC.
90% on condos!!! How can I short your CPACE deals?
Thanks for the insights, that's helpful. Eyzenberg put together a pretty thoughtful summary here (https://www.eyzenberg.com/eyzenberg-green-capital/) seems like a no brainer for new development / redevelopment to me. Loan improves your capital stack and gives you a fully funded clean energy improvement with no recourse.
Curious why this hasn't gotten more traction especially as they've gotten securitized...(https://www.prnewswire.com/news-releases/greenworks-lending-completes-its-second-rated-securitization-of-commercial-pace-c-pace-assets-300760874.html). My guess is the local policy hurdles / environmental nuances lead developers to just do it themselves to avoid the increased complexity, or perhaps they care more about returns than the environment (understandable, but it seems this would enhance returns).
Does anyone have a model showing how / when C-Pace is taken out or paid? Working on building out a model now and struggling to wrap my head around this portion of it (being a tax).
Any screenshots or excel docs would be super helpful!
Ideally you’re taking out the pace at refi of the construction loan - otherwise, you risk the perm lender underwriting the special assessment above-the-line & crippling your proceeds.
IMO, PACE feels like a death wish if carried high up the stack in multi today.
It’s not more prevalent because you have to pay it off to refinance and many lenders won’t touch a project with CPACE.
It seems like a lifeline for office owners with bridge debt. We have tried to use it on some of our loans however, if not already in place, lenders are pretty reluctant to give on that if you're working on a mod.
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