It’s hard to go a day in the commercial real estate world lately without hearing about Commercial Property Assessed Clean Energy (C-PACE) lending. Roughly $6.9 billion of C-PACE loans were originated nationwide in 2023, a nearly 33 percent increase from 2022. C-PACE deals have risen recently in lock-step with Federal Reserve rate increases that have slowed the pace of commercial bank lending.
Commercial Property Assessed Clean Energy is a sustainable financing mechanism state policy enables. It provides long-term, fixed-rate, and non-recourse loans for up to 30 years for any aspect of real estate construction that enhances energy or water efficiency. The financing is structured so it’s attached to the real estate rather than the property’s sponsor, so the sponsor doesn’t have to put up collateral. The debt is collected on the property tax bill, so some building owners can pass on the cost as maintenance charges to tenants, who enjoy the improvements to energy efficiency. The loans can be used on all types of commercial properties as long as they meet the jurisdiction’s requirements.
The program’s humble origins date back to 2008 in Berkeley, California, when it was a residential financing option called PACE. Initially, it was a way to help homeowners install solar panels. The green financing idea has come a long way since then. Jessica Bailey is President and CEO of Nuveen Green Capital, a leading provider of sustainable commercial real estate finance, and she has been at the forefront of PACE’s development since the beginning. Bailey co-founded Greenworks Lending, one of the largest providers of the financing mechanism in the country. Greenworks was acquired by Nuveen in 2021 and rebranded as Nuveen Green Capital.
Bailey is excited about C-PACE’s growth into a mainstream real estate financing tool, but she’s not surprised by its expansion. “It allows many types of policymakers from both sides of the aisle to meet their goals,” she said. C-PACE can only be accessed in states or jurisdictions that have passed legislation that enables it. California has ten local jurisdictions that allow the program, and PACE-enabling legislation is active in 39 states and Washington, D.C. Arizona, North Carolina, and South Carolina are considering legislation to enable the program. As Bailey alluded, traditionally conservative and liberal states have passed PACE-enabled legislation, a rare bipartisan policy. “I think we’ll see all 50 states with PACE eventually,” Bailey said. “There aren’t many good reasons for a state not to have it. It’s a simple policy that allows private capital to flow in.”
C-PACE loan originations have hit record highs for several reasons, including the pace of legislation in new states. Alaska, Hawaii, Nevada, and Tennessee recently enabled the financing tool, further expanding the market. PACE standards are similar in many jurisdictions, but there are differences in what projects can and can’t qualify. Bailey said most state programs have been successful. California has the most active program, but the green financing is also heavily used in states as varied as Minnesota, Ohio, Texas, and Colorado. Some major cities have also had great success with it. “Philadelphia is a diesel engine for C-PACE deals at Nuveen,” Bailey said. “There’s always a lot of activity there, especially in life sciences projects.”
Nuveen Green Capital has originated more than $2 billion in the green loans nationwide, with almost half of that figure coming in 2023. The average size for Nuveen Green Capital’s PACE loans jumped nearly threefold last year. Projects were larger in 2023, and the loans filled larger pieces of borrowers’ construction budgets because they could raise capital quickly.
PACE is becoming critical in three areas of commercial real estate lending. Traditional lenders aren’t writing as many checks for new construction projects, and PACE has filled the void. The green funding has also helped re-position properties in all asset classes. Properties past their prime are attractive candidates for the loans because they stay with the property and don’t carry over for the owner. The loans are also being used to recapitalize existing buildings. Most states allow retroactive financing of up to three years so that PACE can act as a bridge for stabilization. The green lending program is hotter than ever, and it’s hard to find many borrowers who don’t want to use it.
A slower C-PACE in New York City
While many jurisdictions are hot spots for C-PACE, it’s not the case everywhere. The program has surprisingly floundered in New York City, a commercial real estate market that desperately needs it. The New York City Council adopted the program as part of its Climate Mobilization Act of 2019 and touted it as a way to help building owners meet the carbon emissions requirements of Local Law 97.
The demand for C-PACE in NYC is significant, but how the city has administered the program has made it unworkable. Only three loans have yet to be administered in New York City. The last one was when lender PACE Equity provided a $5 million loan to a Brooklyn nursing home in December. It was remarkably the first C-PACE loan in the Big Apple in two years. The program briefly shut down in 2021 after problems with the technical requirements language but hasn’t been utilized much since it was re-opened.
New York City building owners need green financing like PACE now more than ever because of Local Law 97. Since January, landlords of city buildings larger than 25,000 square feet have been required to track and report carbon emissions. They will face penalties starting next year if they haven’t reduced emissions by 25 percent from the 2006 benchmark. By 2030, landlords must reduce emissions by 40 percent. Most NYC property owners are expected to comply with the targets next year, but the city estimates that as many as 80 percent of commercial buildings aren’t up to snuff for 2030.
With these deadlines looming and the rising cost of capital, a low-interest lending option like C-PACE should be enormously popular in New York City. One reason that New York City’s program has suffered is a mandated savings-to-investment ratio that requires every dollar of a C-PACE loan to generate at least a dollar of energy savings. That requirement is challenging to meet in New York City, which has the highest cost of construction in the world. Some PACE programs have included the ratio requirement because of its residential origins. The problem is the requirement isn’t as relevant for commercial buildings, especially in major cities with high construction costs.
Jurisdictions with the savings-to-investment ratio mandate have created loopholes allowing PACE to flourish. Interest rate savings in Washington, D.C., are allowed to count as savings. In Connecticut, lawmakers are in the process of removing the ratio requirement altogether. New York City hasn’t created a loophole, which has disadvantaged the city regarding green lending. It’s likely the biggest reason PACE hasn’t taken off in the Big Apple, as some deals have died specifically because of it.
The green funding mechanism hasn’t caught on in New York City for other reasons. The city’s program mandates all properties that use the funding must be fully electric. The all-electric requirement creates an additional cost that may not be in building owners’ business plans. Additionally, the green financing program isn’t available for new construction or ground-lease properties in New York City. The funding is only available for renovations. This means that an immensely energy-efficient new construction project that qualifies as LEED Platinum could be built in New York City today and not qualify for C-PACE financing.
Laura Rapaport is the Founder and CEO of North Bridge. Her New York City-based sustainable commercial real estate finance company helps borrowers nationwide access C-PACE financing. California, Florida, and Pennsylvania are popular states for North Bridge clients, and the firm works specifically on institutional-level projects of $10 million or more. Rapaport says her company is working on one New York City-based deal, but otherwise, the language lenders must work with in NYC is too tricky. “Many borrowers and lenders in New York City are asking us when they can use C-PACE,” Rapaport said. “It’s going to be very costly to upgrade the city’s building stock, so we need this program.”
Efforts are being made to reform NYC’s program, such as modifying or removing the mandatory savings-to-investment ratio and opening it up to new construction and ground lease buildings. A task force has formed to work on the program’s language, but there’s no set date for when these changes might be announced. Until those changes are made, C-PACE will likely continue floundering in New York City’s massive real estate market. Rapaport of North Bridge knows how vital the program will be to decarbonizing the city’s buildings, and she has hopes the city will figure it out. “I wouldn’t bet against New York City,” Rapaport said.
Predatory residential lenders swoop in
C-PACE has been more successful in California, which makes sense since the program originated there. Last year, Bay Area developer TMG Partners completed the largest PACE office deal to date: a $172 million loan for sustainability upgrades at 300 Lakeside Drive in Oakland. The financing upgraded or replaced electrical, plumbing, and mechanical systems and provided energy-efficient lighting throughout the office to prepare for a new tenant, Pacific Gas & Electric Co. The office will be PG&E’s new headquarters after they signed a 35-year lease with an option to buy the mid-century tower.
PACE success stories like this abound in California, but problems with the program have also arisen in the Golden State, though mostly on the residential side. Last year, a Consumer Financial Protection Bureau report used new data on residential PACE loans. It revealed that, over two years, taking out one of these loans increased a homeowner’s risk of mortgage delinquency by nearly 35 percent. These borrowers were more likely to live in minority neighborhoods, and the loans charged significantly higher interest rates than most home equity loans.
Homeowners who don’t make the increased payments because of PACE on their property taxes risk losing their homes. The liens are also ‘super-priority,’ so the loan must be paid before any other mortgage. The report was a troubling finding, revealing a pattern of predatory lending practices for the program. The Federal Trade Commission and the state of California sued home improvement financing provider Ygrene last fall over deceptive and fraudulent marketing practices.
Most of the residential PACE loans in California are associated with solar panel installations. Florida also has a high concentration of these loans, mainly used for disaster-related improvements. Some Florida counties have tried to bar the program. A judge ruled against local efforts to do so, ruling that a special district should be created to administer the program. Los Angeles County recently settled a lawsuit over PACE for $12 million after claims of predatory lending schemes. In Los Angeles, home improvement contractors would sell the loans door-to-door. L.A. County ended its PACE program in 2020 after a firestorm of controversy that vulnerable residents were being targeted.
The issues with residential PACE don’t pertain to the commercial lending side, but they show there’s more to the green finance success story than one usually hears. This isn’t to say PACE lending hasn’t been a lifesaver for many commercial owners or helped residential owners, too. The main lesson is that even the best intentions for a policy can be manipulated by bad actors.
Commercial Property Assessed Clean Energy Funding is a superstar option for real estate now, and more states look poised to enable it. But while the market expands, it will be interesting to see if the popularity of C-PACE cools once interests fall again. The real estate industry has always sought obscure ways to obtain cheap debt, and C-PACE has filled that need recently. More mortgage lenders nationwide are offering the green financing mechanism, so we will likely keep hearing about it for a while. However, a program as attractive as C-PACE is only as good as the jurisdiction that administers it. And even the best-laid plans of PACE legislation can go awry.
