N.New York City landlords are running around the clock. Most buildings in three years mWe need to start adhering to strict emission caps to comply with a city law that aims to cap greenhouse gas emissions by 40 percent by 2030. Otherwise, landlords could impose fines running into the millions each year.
The real estate industry has a potential lifeline to cover at least some of these costs in the form of an obscure financing tool known as C-PACE (Commercial Property Assessment Clean Energy) and energy efficiency improvements at a cheaper rate than traditional financed loans.
For C-PACE providers, New York City is a perfect storm: aging buildings in need of massive energy improvements, a law that requires those improvements, and the real estate industry’s constant search for cheaper finance.
But there is one caveat: the C-PACE program has yet to be implemented.
Despite being incorporated into law in 2019, Mayor Bill de Blasio and the city council have yet to finalize its rules, so C-PACE vendors, lawyers and developers are well on their way to penetrating the country’s largest property market. Proponents of the funding tool believe developers across the country will follow suit once the program goes live in New York.
“The floodgates for the industry will be wide open,” said Mansoor Ghori, CEO of Petros PACE in Austin, Texas, a PACE funding company.
Since the invention of the skyscraper, real estate developers in New York have looked for creative ways to finance their construction costs. In the early 2000s, commercial mortgage backed securities (CMBS), or pooled mortgage pools, became the trend. In the mid-2010s, developers turned to the EB-5 cash-for-green card program to fill gaps in their funding – it became so widespread that some referred to it as “real estate finance crack cocaine.”
C-PACE is very different from these other forms of funding. It offers a developer or landlord the upfront cost of energy efficiency or renewable energy improvements, e.g. B. adding LED lights, improving insulation or installing solar panels on a new or existing building. And while C-PACE sounds like a loan, it isn’t. The financing is repaid over time in the form of a special wealth tax assessment.
Because it is a tax assessment, laws must be enacted by state and local governments. To date, 37 states, including New York and Washington, DC, have passed laws that make C-PACE possible.
By the end of 2020, C-PACE’s total investments in the US were over $ 2 billion, according to the industry trading group PACE Nation. About half of this investment funded energy efficiency projects, while about a fifth funded renewable energy projects and the remainder for projects involving both projects and resilience projects.
So far, California has made the bulk of the investment with C-PACE funding of $ 625 million, followed by Ohio with $ 376 million.
In one of its most notable deals to date, The Prime Group secured $ 21.3 million in C-PACE financing from PACE provider CounterPointe Energy Partners to convert a historic downtown Chicago building into a luxury hotel finance.
“It’s innovative, inexpensive, and we believe it will reduce the risk for anyone in a capital stack,” said Jeff Breaden, who oversees capital markets for The Prime Group.
C-PACE has important advantages for developers. Not only can it be used to finance the necessary energy efficiency projects, but it can also be an alternative to more costly types of finance.
With interest rates of around 5 percent, it is significantly cheaper than mezzanine financing with around 10 percent. It is also offered at a fixed price with a term of up to 30 years.
In addition, C-PACE can fund 100 percent of a project’s energy improvements. And perhaps most useful to New York developers, as long as the C-PACE-funded improvements are made, the money can be used to pay off a project’s existing debt.
“You can think of PACE funding as a replacement for mezzanine funding,” said Thomas O’Connor, attorney for the Manhattan-based law firm Duval & Stachenfeld.
Another advantage of C-PACE is that payments are not accelerated in the event of late payment. Instead of dealing with a lender who comfortably owns the property after foreclosure, he is the local tax collector.
“Most tax collection systems are very forgiving compared to some of the mezz lenders,” said Eric Alini, CEO of Counterpointe. “You have a loan to a big bad mezz lender that you are in a fight with.”
There are some complications, however. Because C-PACE payments are enforced through a tax lien, funding takes precedence over the senior lender. This means that the senior lender must often give their blessings before a homeowner can take advantage of C-PACE.
Older lenders were initially cautious about allowing C-PACE. According to industry participants, however, the banks are increasingly buying into the program.
“There’s definitely a FOMO going on,” said Alini. “We don’t see the lender’s approval as a stumbling block two or three years ago.”
For the past few years, PACE has consisted of four letters.
The residential side of the program was fraudulent and has been scrutinized by regulators. In many cases, unsuspecting homeowners were often fooled into “no-money-down” financing for energy improvements or solar systems, only to be hit by massive property taxes later.
Lawsuits grew and Los Angeles County eventually banned the residential program, claiming that R-PACE had no consumer protection. It is currently only available in three states: California, Missouri, and Florida.
Proponents of R-PACE argued that homeowners with PACE funding are no more likely to default on payments than others in their local housing market, and that problem cases have been exaggerated.
C-PACE providers are trying to distance themselves from the residential controversy. They claim that the biggest difference is that C-PACE providers require a senior lender to agree to the loan – which R-PACE did not require – and that this is another level of scrutiny.
With C-PACE, vendors are dealing with landlords and developers who are more likely than individual homeowners to understand the risks they are taking, industry officials said.
“It’s a very different product,” said Ghori from Petros PACE. “We don’t have these problems because nobody can say we don’t know what it’s about.”
In New York, Local Law 97 will be the real catalyst for the success of C-PACE – the key element in a broader set of laws passed in 2019 known as the Climate Mobilization Act, which aims to reduce the city’s greenhouse gas emissions by 40 percent by 2030 to lower 80 percent by 2050.
The new laws require landlords to drastically reduce carbon emissions on most buildings larger than 25,000 square feet.
Governor Andrew Cuomo’s executive budget would allow builders to buy renewable energy loans from outside the city to offset emissions, but the measure is being pushed back by lawmakers.
Overall, builders in the city will have to spend up to $ 24 billion to meet the CO2 targets, according to the Urban Green Council, an environmental group.
However, before landlords can use the C-PACE funds to cover these costs, the city must work out the rules for managing the program, which it has not yet implemented.
Cliff Kellogg, executive director of the C-PACE Alliance, said while glad that the city approved the program, he was disappointed with the lack of progress in getting it up and running. For more than a year now, the city has told his group that the guidelines are imminent – but the program remains pending.
“There is still a lot to do,” said Kellogg, “that is up to the bureaucrats and the city.”