The Basics of C-PACE Loans and How to Qualify

Jonathan:

Jeffrey, thank you very much for having me. I'm happy to be here.

Jeffrey:

So let's dive right in. What is a C-PACE loan and how is it different from a traditional loan that you would get from other lenders?

Jonathan:

C-PACE stands for Commercial Property Assessed Clean Energy, and it's a state-by-state legislated program currently available in 38 states that enables lenders like Nuveen Green Capital to provide inexpensive bridge and construction loans. Fundamentally, we exist to finance energy-efficient improvements to commercial real estate and multifamily properties. Our loans are low cost, fixed rate, and long-term, generally 20 to 30 years in term. Whereas a mortgage is secured by a first lien, C-PACE is secured by an assessment and you can think of it like real estate taxes. Payments are made on these loans once or twice a year, specifically at the same time that real estate tax payments are made. An example would be if you happen to have for every million dollars that you borrow of C-PACE, the interest expense might, let's just make up a number, say it'd be $5,000 a year, you would make that payment once or twice in the same timing and manner in which you make your real estate tax payments. Because we're secured by an assessment, our C-PACE loan runs with the property and not the borrower. And in addition, our C-PACE loan is freely transferable at zero cost. One of the particular nuances of C-PACE that one should keep in mind is that we cannot accelerate our capital and we're passive in a UCC or a foreclosure.

Jeffrey:

Jon, these sound like great loans, but one of the best things you didn't even catch on yet, the interest rates. You're able to do very good interest rates at fixed rates compared to other traditional loans. Is that accurate?

Jonathan:

Yes, that is accurate. I did mention that our loans are low cost, but I didn't quantify it. We're a fixed rate lender. We lend off the 10-year Treasury generally in the range of 350 to 400 basis points over, which if you were to look at it on SOFR, equivalent basis is in the range of SOFR 250, which is quite inexpensive in today's market.

Jeffrey:

Yeah, especially fixed rates where if it goes up, you're locked in at these lower rates. That sounds like a great option compared to other traditional loans in the marketplace.So you mentioned that C-PACE is related to clean energy assessments. What is the clean energy assessment that you need to meet in order to have a C- PACE loan versus any traditional loans?

Jonathan:

Yes, fundamentally we are financing energy-efficient improvements to commercial real estate. Those can take varying forms, which differ slightly from state to state. But generally speaking, we're financing measures that decrease power and energy consumption, decrease water consumption. When you look at specific states, say California, we can also incorporate seismic resiliency into our loan and its proceeds. Similarly, with respect to Florida, we can incorporate hurricane resiliency when we size and price our loans.

Jeffrey:

Wow. So these sound like very good options and it sounds like a lot of things would actually be included in modern-day building. If you have an HVAC that meets generally modern standards, LED lights when you're building and developing a property from scratch. What is the hurdle like generally in order to get a C-PACE qualified project versus a C-PACE non-qualified project? And about what percent of the capital stack, if you were developing a new property do you normally see?

Jonathan:

Sure. So the distinction is not whether a project itself is C-PACE eligible or not, but what components of what you're building or in some cases acquiring meet the eligible measures threshold. So when we go and we look to size our loans, we look through the hard cost budget, whether it's money that's been recently spent or will be spent going forward in the case of value-add or construction, and alongside our engineers assess which of these line items qualify. Some of them are 100%, some of them are 0% ,and some of them are 50%. And when we look at the total budget and the specific eligible measures that we qualify alongside our engineers, we're then able to size the C-PACE loan size specifically.

Jeffrey:

Okay. So it sounds like a lot of things qualify, a lot of things probably don't qualify as well, but in pretty much every ground-up construction, something would qualify for C-PACE is how it sounds to me. Is that accurate?

Jonathan:

That is accurate. To give you an estimate of, say the order of magnitude in... And let's talk about multifamily, ground-up multifamily projects. Multifamily always the darling of the industry. No different in C-PACE land. And when we're talking about the better C-PACE states that are a little bit more flexible as far as enabling us to size our proceeds, just to give you an idea of where we come in, in Florida as an example, or California as an example, we would be at 40% loan-to-cost with our C-PACE financing.

Jeffrey:

So Jon, when do you normally get involved with a project?

Jonathan:

It varies. There's several different use cases for C-PACE. Let's consider acquisitions as the first. One thing that a lot of people don't know about C-PACE is that we are able to retroactively finance improvements that were previously made to properties. In most states we have a two to three-year lookback period, which is based on from when we close on the one hand to when the final certificate of occupancy was achieved on the other hand.And we can look back to all the specific CapEx that has been spent on the property in that last two to three years and provide proceeds to cover the portion of eligible measures that were expended during that time period. So that's kind of in the context of an acquisition.On the other end of the spectrum, we work with plenty of borrowers who are building ground-up projects. Similarly, we look at the hard costs and figure out how we're going to size C-PACE, but sometimes there's an advantage to getting involved in working with borrowers earlier rather than later. The programs are drafted differently state to state, and certain state programs have certain nuances. Because we're experts in the field, we understand how to navigate those nuances and what that usually manifests itself is into greater proceeds. When you combine our comparatively inexpensive capital with greater proceeds at the margin, we have an even larger ability to make an impact on a project.

Jeffrey:

Jon, that was great. Thank you so much. And thank you for listening to today's episode. Please stay tuned to the next installment of Breaking Ground and have a great day.

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