These Are the Benefits of C-PACE Financing


by Eric Lam - Published 1/16/2024


C-PACE financing, short for Commercial Property Assessed Clean Energy financing, is an innovative and increasingly popular way for commercial property owners to fund energy-efficient upgrades.

In this article, we will explore C-PACE financing, its benefits, eligibility requirements, how it works, potential concerns, and whether it's the right fit for you.

By the end of this article, you will have a comprehensive understanding of C-PACE financing and be equipped with the knowledge needed to make informed decisions about pursuing this financing option for energy-efficient upgrades in your commercial property.

Key Takeaways:

  • C-PACE financing offers low-cost, long-term financing for energy-efficient upgrades.
  • It allows for positive cash flow by spreading the cost of improvements over a longer period of time.
  • C-PACE financing is transferable and non-accelerating, providing flexibility for property owners.

What are the benefits of C-PACE Financing?

C-PACE (Commercial Property Assessed Clean Energy) Financing is a mechanism designed to encourage energy efficiency improvements, renewable energy projects, and water conservation measures in commercial buildings. This innovative financing structure offers several benefits:

  1. Long-term Financing: C-PACE financing can cover up to 100% of a project's hard and soft costs with repayment periods up to 20-30 years. This long-term payback schedule aligns with the useful life of the improvements, making large projects more financially feasible.
  2. Off-balance Sheet Financing: Since C-PACE payments can be treated as a tax assessment rather than a traditional loan, it may not appear on a company's balance sheet. This treatment can improve a company's financial metrics such as debt-to-equity ratios.
  3. Transferability: The repayment obligation is attached to the property, not the property owner. If the property is sold, the PACE assessment can stay with the property and transfer to the new owner, making it easier for property owners to invest in improvements without worrying about the payback period extending beyond their ownership.
  4. Positive Cash Flow: Projects financed through C-PACE can be designed so that the energy savings and/or generated income exceed the annual assessment payments, potentially leading to immediate positive cash flow for the business.
  5. Reduces Energy Costs: By financing energy-efficient upgrades, renewable energy installations, or water conservation measures, businesses can significantly reduce their utility costs.
  6. Increases Property Value: Improvements financed through C-PACE can increase a property's value due to higher efficiency, reduced operating costs, and potential income generation from renewable energy projects.
  7. No Upfront Costs: C-PACE financing covers 100% of project costs, meaning property owners don't need to provide upfront capital. This can remove a significant barrier to implementing energy efficiency and renewable energy measures.
  8. Local Economic Development: By stimulating property improvements, C-PACE financing can drive job creation and investment in local economies.
  9. Environmental Impact: C-PACE projects contribute to environmental sustainability by reducing greenhouse gas emissions, conserving water, and encouraging the use of clean energy.
  10. Flexible Payment Options: Repayment through property taxes allows for a fixed rate that can protect against rising energy costs.

What is PACE financing?

PACE financing, which stands for Property Assessed Clean Energy, is a funding mechanism that allows residential, commercial, or industrial property owners to finance energy efficiency upgrades, renewable energy projects, and water conservation measures through a voluntary property tax assessment.

The unique aspect of PACE financing is that it ties the repayment obligation to the property rather than the individual owner. This means that if the property is sold, the PACE lien remains with the property and becomes the responsibility of the new owner, aligning the investment horizon of energy-saving measures with their long-term payback. PACE programs are enabled by state legislation and must be adopted at the local level. They provide up to 100% financing for projects, covering both hard and soft costs, which can be repaid over a period of up to 20-30 years.

The long repayment terms and the possibility of achieving immediate positive cash flow from energy savings make PACE an attractive option for property owners looking to improve their buildings' efficiency, reduce energy costs, and contribute to environmental sustainability without the need for upfront capital investment.

What Exactly is C-PACE Financing and How Does it Work?

C-PACE financing, standing for Commercial Property Assessed Clean Energy, is a specialized funding mechanism designed for commercial, industrial, and multifamily residential properties to finance energy efficiency improvements, renewable energy projects, and water conservation measures. Unlike traditional financing methods, C-PACE allows property owners to borrow money for such projects through a public-private partnership typically established by state legislation and administered by local governments or designated entities. Here’s how it works:

  1. Legislative Framework: The foundation of C-PACE is laid down through state legislation that authorizes local governments to participate. This legislation outlines the types of improvements that can be financed, among other program details.
  2. Funding: Financing is provided by private capital sources to property owners for qualifying projects. The amount financed can cover 100% of a project's hard and soft costs.
  3. Repayment Through Property Taxes: The loan is repaid over a term of up to 20-30 years through an assessment added to the property’s annual tax bill. This assessment is tied to the property rather than the owner, which means it can transfer to new owners if the property is sold.
  4. Security Through Lien: A lien is placed on the property as security for the repayment, similar to a property tax lien. This gives lenders security and can result in competitive interest rates for borrowers.
  5. Project Approval: Projects typically undergo a vetting process to ensure they are cost-effective and contribute to energy savings or other environmental goals. This process varies by jurisdiction but often involves an energy audit or feasibility study.
  6. Energy Savings: One of the primary goals of C-PACE is to finance improvements that lead to energy savings. Ideally, the energy cost savings generated by the project will exceed the repayment amount, making it financially beneficial for property owners.
  7. Benefit to Property Owners: For property owners, C-PACE financing offers several advantages. It provides long-term, fixed-rate financing that covers the entire project cost, potentially turns energy savings into positive cash flow, improves property value, and allows for the transfer of repayment obligations to future property owners.

C-PACE's innovative approach aligns the financing term with the useful life of the improvements, facilitates energy and cost savings, enhances the value of the property, and promotes environmental sustainability. By reducing the financial barriers to making energy-efficient upgrades, C-PACE plays a crucial role in accelerating the adoption of sustainable practices in the commercial real estate sector.

How does a C-PACE loan work?

A C-PACE loan, integral to the Commercial Property Assessed Clean Energy program, offers a unique approach for financing energy efficiency, renewable energy, and water conservation improvements in commercial buildings.

This innovative financing mechanism allows property owners to obtain 100% upfront funding for qualifying projects. The loan is repaid over a period that can extend up to 20-30 years, directly through an addition to the property's annual tax bill. This aspect is particularly noteworthy as the repayment obligation is attached to the property itself, rather than the individual owner, enabling the loan to transfer with property ownership. The funding for these projects comes from private capital sources but is facilitated through a public-private partnership, usually sanctioned by state legislation and managed at the local level.

The process begins with the property owner applying for C-PACE financing through their local program. Once approved, the project is financed, and a special assessment is placed on the property. This assessment serves as the mechanism for repaying the loan.

The repayment schedule is designed to be in alignment with the life span of the improvements made, potentially allowing the energy savings generated by the project to offset the repayment costs.

Moreover, because the repayment obligation can transfer with property ownership, it offers a flexible and secure financing solution that encourages property owners to invest in long-term energy efficiency projects without the traditional barriers of upfront costs and the uncertainty of future benefits alignment.

Benefits of C-PACE Financing

C-PACE (Commercial Property Assessed Clean Energy) Financing offers several compelling benefits for commercial property owners looking to make energy efficiency upgrades, renewable energy installations, or water conservation improvements. These benefits include:

  1. 100% Upfront Financing: C-PACE covers all project costs, eliminating the need for property owners to provide upfront capital. This can significantly lower the barrier to entry for undertaking large-scale energy improvements.
  2. Long-term Repayment: Financing terms can extend up to 20-30 years, matching the useful life of the improvements. This long-term perspective can make the annual payments more manageable and often lower than the savings generated from the improvements.
  3. Transferable Obligation: The repayment obligation is attached to the property tax bill, not the individual property owner. If the property is sold, the new owner assumes the repayment obligation along with the property tax bill, making C-PACE a less risky investment for current property owners.
  4. Positive Cash Flow: Projects can be designed so that the energy savings exceed the annual assessment payment, potentially resulting in immediate positive cash flow for businesses.
  5. Improved Property Value: Upgrades financed through C-PACE can increase a property's value by reducing operating costs and increasing efficiency. This can make the property more attractive to potential buyers and tenants.
  6. Off-Balance Sheet Financing: Depending on how businesses account for C-PACE financing, it may be possible to treat the assessment as a tax liability rather than debt, potentially improving a company's balance sheet.
  7. Energy Savings: By facilitating improvements in energy efficiency and the adoption of renewable energy, C-PACE financing helps reduce overall energy costs for commercial properties.
  8. Environmental Benefits: Projects supported by C-PACE financing contribute to reducing greenhouse gas emissions, promoting sustainability, and conserving water, aligning with broader environmental goals.
  9. Stimulates Local Economies: C-PACE projects can drive job creation in the clean energy sector and stimulate local economies by investing in building improvements and infrastructure.
  10. No Acceleration of Payment: Unlike traditional loans, if a default occurs, the entire unpaid balance does not become due immediately. Only the overdue amounts are subject to collection, reducing the risk for property owners.

C-PACE financing provides a powerful tool for commercial property owners to improve their buildings' efficiency and sustainability without the typical financial hurdles of large upfront investments.

Concerns about C-PACE Financing

While C-PACE (Commercial Property Assessed Clean Energy) financing offers numerous benefits, there are also concerns and considerations that stakeholders should be aware of:

  1. Senior Lien Status: C-PACE loans typically have a senior lien status over existing mortgages, meaning they are paid first in the event of default. This can create concerns for mortgage lenders, as it may affect their security position and willingness to consent to C-PACE financing.
  2. Consumer Protection: There have been instances, especially in the residential PACE programs, where concerns about consumer protection and the potential for predatory lending practices have been raised. Ensuring that property owners fully understand the terms and obligations of C-PACE financing is critical.
  3. Complexity and Variability: The C-PACE program can vary significantly from one jurisdiction to another, creating complexity and potential confusion for property owners and developers. Understanding the specific terms, eligibility requirements, and repayment obligations can be challenging.
  4. Potential Impact on Property Sale: While the transferable nature of the C-PACE lien is often seen as a benefit, it can also complicate the sale of the property. Some buyers may be hesitant to take on the existing C-PACE assessment, potentially affecting the sale process or property value.
  5. Limited Awareness and Acceptance: Despite its advantages, there is still limited awareness about C-PACE financing among property owners and developers. Additionally, some lenders and financial institutions may be hesitant to engage with C-PACE due to concerns about lien priority and repayment risk.
  6. Project Eligibility and Feasibility: Not all energy efficiency or renewable energy projects may qualify for C-PACE financing, and the process of getting a project approved can be rigorous. Property owners must ensure their projects meet local program guidelines and can generate sufficient savings to justify the investment.
  7. Upfront Costs: Although C-PACE financing covers project costs, there may be upfront costs related to application fees, project assessment, and legal fees that property owners need to consider.
  8. Risk of Overinvestment: There's a potential risk of investing in improvements that may not yield the expected return in terms of energy savings or property value increase, especially if the project is not carefully evaluated.
  9. Impact on Cash Flow: While designed to be cash flow positive, the additional annual assessment could impact a property's cash flow, especially if the anticipated energy savings do not materialize as expected.
  10. Regulatory Changes: Changes in local or state regulations can impact C-PACE programs, potentially affecting terms, eligibility, or the viability of ongoing and future projects.

Understanding these concerns is essential for stakeholders considering C-PACE financing as part of their energy efficiency or renewable energy projects. Careful evaluation and planning can mitigate some of these risks, ensuring that the benefits of C-PACE financing are realized while minimizing potential drawbacks.

Differences between PACE and C-PACE Financing

PACE (Property Assessed Clean Energy) financing is a broad term that encompasses two main categories: Residential PACE (R-PACE) for residential properties and Commercial PACE (C-PACE) for commercial, industrial, and multi-family residential properties with five or more units. The core concept of both PACE and C-PACE is to provide upfront financing for energy efficiency improvements, renewable energy projects, and water conservation measures, with repayment made through an assessment on the property's tax bill. However, there are notable differences between the two.

Firstly, the scope and scale of projects differ significantly. R-PACE programs are designed for individual homeowners and typically focus on smaller-scale projects like solar panel installations, HVAC upgrades, or window replacements. In contrast, C-PACE targets larger commercial, industrial, and multi-family residential properties, funding more extensive and expensive projects that can include comprehensive building retrofits, large-scale renewable energy installations, and complex water conservation systems.

Secondly, the regulatory and consumer protection landscapes vary between R-PACE and C-PACE. R-PACE financing has faced scrutiny and regulatory challenges due to concerns over consumer protection, leading to stricter regulations and, in some cases, the suspension of R-PACE programs in certain jurisdictions. C-PACE, on the other hand, primarily involves commercial entities that are presumed to have a greater capacity to understand and manage financial risk, resulting in generally fewer consumer protection concerns but more emphasis on protecting existing mortgage lenders' interests.

Lastly, the approval process and market acceptance also differ. R-PACE projects, due to their residential nature, often require less rigorous approval processes than C-PACE projects. Commercial projects may need to demonstrate detailed financial and energy savings analyses to gain approval and financing. Moreover, while both forms of PACE financing have grown in acceptance, C-PACE has seen broader market penetration in the commercial real estate sector, partly due to its focus on large-scale energy and environmental impact.

While R-PACE and C-PACE share the foundational goal of promoting energy efficiency and sustainability through property-assessed financing, they cater to different property types, face distinct regulatory environments, and involve different scales and complexities of projects.

Frequently Asked Questions

How does c-pace financing help property owners?

C-pace financing allows property owners to invest in energy-efficient and renewable energy upgrades without any upfront costs. This can help them save money on utility bills and increase the value of their property.

What types of upgrades can be financed through c-pace?

Through c-pace financing, property owners can finance a variety of energy-efficient and renewable energy upgrades, such as solar panels, LED lighting, energy-efficient HVAC systems, and more.

Does c-pace financing have any tax benefits?

Yes, c-pace financing offers tax benefits for property owners, as the interest paid on c-pace assessments may be tax-deductible. This can provide additional cost savings for property owners.

How does c-pace financing benefit the environment?

C-pace financing supports the adoption of clean energy and helps reduce carbon emissions. By financing energy-efficient and renewable energy upgrades, c-pace contributes to a more sustainable future.

Are there any eligibility requirements for c-pace financing?

Yes, property owners must meet certain eligibility requirements to qualify for c-pace financing, such as having a good credit score and being up-to-date on property taxes. However, these requirements may vary depending on the specific c-pace program.