C-PACE Works — Try It, You’ll Like It.

by Jeff Shaw

By Jason Schwartzberg

In 1971, Alka-Seltzer, the two-white-tablet packet that helps relieve heartburn, launched a commercial set in a neighborhood bistro where a waiter persuaded a man to sample a new dish. The actor explains: “Came to this little place. Waiter says, ‘Try this, you’ll like it.’ What’s this? ‘Try it, you’ll like it.’ But what is it? ‘Try it, you’ll like it.’ So, I tried it. Thought I was going to die. Took two Alka-Seltzer.” The actor concludes the spot by declaring: “Alka-Seltzer works. Try it. You’ll like it.”

In 2001, the idea and general structure for Commercial Property-Assessed Clean Energy (C-PACE) was born. C-PACE is an innovative financing tool that makes it possible for property owners to obtain low-cost, long-term financing for energy efficiency, water conservation and renewable energy projects. With funding from the Environmental Protection Agency, the program began to gain footing and started to grow in popularity in 2015.

When C-PACE first came onto the scene, many bankers experienced heartburn like the main character in the Alka-Seltzer commercial, as “waiters” were promoting an unknown “dish” without providing a proper explanation. At that time, many deals were cost constrained because of the low-interest-rate environment, and not debt constrained. C-PACE was viewed as an opportunity to add additional leverage to a real estate transaction, reducing the sponsor’s equity requirement and improving project returns. As you can imagine, this application was like cilantro to bankers — they loved it, or they hated it.

Given today’s higher interest rates and, in turn, a reduction in project cash flow, the proverbial tables have turned, and more projects are debt constrained rather than cost constrained. In the dynamic world that we live in, options are a plus. C-PACE fits in the capital stack regardless of market conditions — debt constraints or not — the only change is the output to sponsors/investors. Even with debt constraints, projects in all asset classes are closing because of C-PACE.

Just as Alka-Seltzer can be used to relieve many symptoms, C-PACE is a versatile product. Applications include ground-up construction, repositions/value-adds, energy-related capital projects and retroactivity for eligible completed projects. C-PACE loans have fixed rates and maturities of up to 30 years, and they are repaid through an incremental property-tax assessment that remains with the asset even after a sale. 

This incremental property-tax assessment has caused some heartburn in the banking community since delinquent property taxes are given a priority under foreclosure laws. However, in the case of C-PACE, the priority only attaches to any current and/or delinquent amount due. In other words, the only portion of the C-PACE that can “prime the mortgage” is the annual payment of the C-PACE and not the full C-PACE loan amount. The balance of the C-PACE assessment will always be completely subordinate to any senior debt, as it cannot be called and/or accelerated.

Furthermore, the annual payment is typically capitalized in the C-PACE loan until the project reaches stabilization and the project cash flow can support the C-PACE payment. Historically, C-PACE minimizes a sponsor’s need for costly preferred equity and/or mezzanine financing by providing additional project leverage and reducing the sponsor’s equity requirement for cost-constrained, ground-up construction and value-add projects. 

This application of C-PACE reduces the sponsor’s weighted-average cost of capital and increases project returns. But, as interest rates have increased and debt-service coverage has decreased, this application has proved more difficult. Rest assured, C-PACE is dynamic, and its varied utilization is driven by market conditions. 

In 2006, Alka-Seltzer updated the “Try it, you’ll like it” commercial to make it relevant for the current times, broaden the audience and increase sales. The new version was faithful to its predecessor, featuring small tweaks like replacing the setting from a neighborhood bistro to a chic restaurant; changing the messenger from a journeyman actor to a contemporary comedian (Kathy Griffin); and updating the message as to why consumers use Alka-Seltzer as a remedy for ailments like acid indigestion and headache relief for overindulgence.

As is customary for seniors housing projects, communities are slow to stabilize, and developers often must wait to gain access to the agency financing markets to refinance the construction loan, mezzanine financing and partner equity. Many senior living communities are reaping the benefits of C-PACE and retroactively utilizing energy measures to provide a paydown for the senior lender. Borrowers can then recap equity while paying off the mezzanine financing, boosting project returns and improving cash flow.

It’s important to note that, while many are using C-PACE retroactively, there are many use cases applicable to the seniors housing industry and beyond: 

Participation (new deals): Bankers still need to close deals in the current environment. C-PACE lenders are actively lending in the current market, oftentimes at rates on par with senior lenders. If a bank is constrained by a loan to one borrower or the size of the loan, or is looking to lay off a piece of the deal, C-PACE can remove the need for participation and its associated risks for a ground-up or conversion project by allowing a one-bank close.

Paydown (troubled deals): Recently completed projects have been slower to stabilize and delinquencies are expected to increase. C-PACE can provide principal curtailment to a senior lender for a project completed in the last 36 months, thereby freeing up space on the balance sheet and replenishing interest and operating reserves.

Project financing (capital expenditure, operating expense reduction and energy compliance): Energy-related equipment eventually breaks down and needs to be modernized. More efficient equipment will help reduce energy-related operating expenses. Additionally, many jurisdictions are adopting building energy performance standards (BEPs) like New York’s Local Law 97; Washington, D.C.’s BEPs program; or Maryland’s Climate Solutions Now Act. With terms as long as 30 years, C-PACE loans are cash-flow positive and can be utilized to fund energy-related projects such as HVAC replacement or elevator upgrades without the need to refinance a first mortgage or pay out cash.

In the early 2000s, Alka-Seltzer had a nice flat business. After updating the “Try it, you’ll like it” commercial to make it relevant for the current times and broadening the audience, Alka-Seltzer increased sales by 12 percent. 

In the early 2020s, banks still need to maintain and grow their businesses. If the C-PACE participation, paydown and project financing applications are properly leveraged, C-PACE can help achieve similar results to Alka-Seltzer’s and can help you and your fellow bankers retain clients, decrease delinquencies, and close more transactions. Now that you know the ingredients, we are confident that you will agree: C-PACE works. Try it. You’ll like it.

Jason Schwartzberg is an energy entrepreneur and a pioneer in energy-cost reduction and financial solutions for commercial property owners. He serves as president and co-founder of MD Energy Advisors, where he oversees strategic initiatives and the vision of the organization with a focus on Commercial Property-Assessed Clean Energy (C-PACE) financing. To date, Schwartzberg and his team have secured more than $350 million in financing across 20 transactions in five states.

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