Brokers putting C-PACE in their pitch book offer critical differentiator
JON SPELKE | MANAGING DIRECTOR, CLEANFUND
California Mortgage Finance News | Fall, 2018
Murmurs of another maturing cycle have the real estate industry looking seriously at new financial tools in preparation for a departure of cheaper capital. Commercial property owners and investors are already feeling the market tighten as institutional financing raises its requirements and mezzanine and private lenders stand ready to fill the gaps with rates ranging from 11% to 14%.
At the same time, commercial Property-Assessed Clean Energy (C-PACE) financing has become more mainstream with over $600 million in total financings and a recent closing by CleanFund of a first-ever triple-AAA rated public securitization of $103 million signaling Wall Street’s endorsement.
For California real estate owners, the growing popularity of C-PACE financing adds a solid alternative to finance key capital expenditures and building systems including solar power and energy systems, water management and conservation, seismic retrofits and other energy related improvements.
For mortgage brokers, including a C-PACE structure in the offering memorandum and showing its value proposition to the client can be a true differentiator in winning an engagement and obtaining the best deal for your client.
The creative broker building a client base, or strengthening an existing one, wants to show their clients that they are exploring alternative financing sources that can add value to their client’s interest.
With C-PACE pricing ranging between 6% and 7%, brokers should consider C-PACE in their offering memorandums as an attractive alternative to facilitating energy and environmental improvements in cost effective solution.
What is C-PACE financing? Commercial Property Assessed Clean Energy (C-PACE) was introduced in California in 2008 as a form of voluntary parcel tax assessment financing to fund qualifying improvements that reduce energy and water usage, and other resiliency benefits to the built environment. In California, C-PACE is also applicable for seismic retrofits. Now adopted in 35 states and the District of Columbia, C-PACE is fixed rate (6%-7%), long-term (20-30 years) financing for renovations, rehabs, re-positionings and new construction. Many C-PACE lenders will maximize the leverage up to 30% of costs which then makes it an attractive alternative to mezzanine and preferred equity. As interest rates rise the fixed-rate structure helps lock in today’s rates for the long-term without buying costly swaps and caps.
CleanFund is an experienced vertically integrated C-PACE originations platform with a proven track record in underwriting and closing C-PACE financings which enhances the client experience and assures a seamless execution. CleanFund has also developed an online deal processing platform, CleanQuote, to make it easy for brokers to obtain general pricing and terms to conceptually structure a client’s capital stack. A CleanFund representative is always available to work with the broker and client to price and structure a C-PACE facility to meet your client’s needs.
Example #1: The most common use is Class B and suburban retrofit of existing assets.
Electricity consumed by commercial office buildings represents 37 percent of California’s total electricity consumption, and energy efficiency improvements could cut that usage by 80 percent — which saves money and helps the environment, according the independent research group Next10. Building owners know that aging boilers and leaky windows drive up their utility bills and reduce their net operating income, a point their service contractors make when they recommend equipment upgrades.
C-PACE is available for all commercial product types, and the market is seeing continued diversity of adoption beyond hospitality, office, industrial, apartments and retail, to special purpose buildings, medical, non-profit centers and many more. And many property owners are seeing the value in the environmentally-friendly approach of C-PACE as an added attraction for tenants who seek out environmentally-friendly places in which to operate, because customers, employees and even investors are requiring it.
For a Southern California retail mixed-use property retrofit, C-PACE financing provided $721,000 for a new reflective roof, a 138-kilowatt solar array and a new HVAC system. The 25-year term and lower cost-of-operation helped the owners achieve a projected energy savings of 97 percent.
In Marin County, Seagate Properties utilized CleanFund’s 30-year C-PACE financing to install a 49.6 kW solar array and other improvements related to the building’s heating and cooling systems. Seagate, a prolific owner-developer active in the Western United States, maintains its headquarters in the San Rafael, CA building. In addition, Seagate upgraded another suburban office building in Sausalito, CA with a 76 kW solar array also utilizing CleanFund’s C-PACE financing.
Example #2: Optimizing the capital stack with C-PACE
C-PACE is a competitively priced alternative to other forms of financing and can reduce the Weighted Average Cost of Capital in a capital stack.
Alterra Worldwide, which in 2016 completed the transformation of a century-old office building and onetime warehouse into a 238-unit multifamily community and a 274-key, dual-branded Marriott hotel.
Alterra’s C-PACE financing enabled it to achieve a WACC of 7.46% compared to 9.49% using traditional mezzanine debt.
Originally constructed in 1910, the nine-story, 510,000 square foot Butler Brothers Building had long sat empty across from Dallas City Hall. The new Fairfield Inn/Town Home Suites by Marriott, and retail and office space is expected to spur additional revitalization in the area. CleanFund’s C-PACE financing replaced much higher cost mezzanine financing, significantly reducing the debt service requirements and increasing project returns. CleanFund also helped to optimize a complicated capital stack, which included EB-5 debt and historic tax credits. Lower utility costs with the project’s investment in efficiency make the luxury apartments appealing to tenants — with an annual projected savings of $2 million.
C-PACE, the growing, attractive alternative in commercial real estate finance
The bottom line is that a growing number of building owners and property developers are exploring C-PACE financing. Partnering on these deals lets commercial mortgage brokers expand their product lines, meet their borrowers’ needs, and fund attractive, finance-ready projects. The best way start using C-PACE is to obtain a quote from a CleanFund representative and put the pricing and terms in the underwriting model. If the project’s profitability increases with the lower capital costs, then it’s in your client’s best interest to take the time and explore C-PACE further and include it in the capital raise.
Lastly, pent-up demand to replace capital-intensive, outdated energy-consuming equipment in commercial and industrial buildings continues to grow. Each year, equipment failures drive about 20 percent of building owners to undertake improvement projects.
A meaningful solution is ideally more resource-efficient equipment and systems with longer payback periods. Since long-term financing of 15 to 25 years from traditional lenders is largely unavailable, C-PACE is a welcome and viable solution. The opportunity in new construction may be even bigger, affecting more than 60,000 buildings annually — accounting for $61.6 billion in construction costs that are eligible for C-PACE financing. As the birthplace of C-PACE financing and one of its largest market participants, California continues to be one of the best places to utilize this innovative, flexible solution.
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