With the higher interest rate environment constraining banks and seniors housing and healthcare borrowers alike, there may be value in knowing more about C-PACE.
An acronym for commercial property-assessed clean energy, C-PACE is a financing structure that was created to encourage developers and owners to incorporate energy efficiency, renewable energy and related features in new or renovated commercial buildings. While not a federal initiative, C-PACE programs are overseen by the U.S. Department of Energy and are authorized and overseen by states, whose programs are similar but not identical.
Currently, 35 states and the District of Columbia have approved and operate C-PACE programs. Borrowers through the programs make loan repayments via an assessment on their property tax bill. Since loan repayments are attached to the property as an additional assessment and are secured by the property with a lien more senior to those of many other creditors, the additional security enables lenders to offer lower interest rates than what can be obtained through unsecured options.
In practice, almost any new construction or renovation at a seniors housing and healthcare facility done to code and using modern mechanical and energy/HVAC systems will qualify for C-PACE loans, which can take the place of mezzanine financing at potentially half the cost.
How C-PACE financing is structured
C-PACE loans are generally between $2 million and $200 million in size and have 20-year to 30-year terms. The non-recourse, fixed-rate loans typically account for between 25% and 35% of the total capital structure of a project. Loans require approval from the senior lender and come with great flexibility in amortization.
Sometimes, no payments may be required for the first few years, followed by a period of interest-only payments and then years of amortized payments. C-PACE loans are prepayable and assumable from inception. Third-party administrators hired by states approve C-PACE loan applications, with funds coming from institutional investors, typically insurance companies.
Costs of a C-PACE loan
Perhaps the chief appeal of a C-PACE loan is its lower cost compared to bank mezzanine financing and other forms of debt. The loans’ price is expressed in terms of a spread over 10-year U.S. Treasuries. That basis-point spread typically ranges from the high 300s to the low 400s, making the rate currently in the mid-8% range — typically lower than the cost of bank mezzanine financing.
In addition, borrowers usually pay an origination fee ranging from 1% to 1.5% and about $50,000 in C-PACE program administrator fees. Some states set a loan-to-cost cap for borrowing, while others do not.
Advantages of C-PACE for borrowers
In addition to its lower cost, two of the great advantages of a C-PACE loan are its flexibility and availability. It can be used at almost any time in the lifecycle of a property, including to reduce equity needs in new construction, and in retrofitting or rehabbing a commercial building, which is becoming more commonplace today.
Others use C-PACE loans as a bridge to permanent financing later. With current market conditions unsettled, many borrowers want to stay in the bridge world a little longer. A C-PACE loan can be brought in as an interim tool until a borrower wants to go permanent.
Such loans are becoming prolific; funding in the C-PACE sector currently totals between $1.5 billion and $2 billion annually. Maybe it’s time your organization considered making space for C-PACE.
Rob McAdams is a director at Lument and is based in the Denver, CO, office. He is responsible for all details involving origination, underwriting and closing processes for many of the firm’s western healthcare clients. He recently worked with Bayview on a $27 million debt placement to assist Mission Senior Living with construction of a new assisted living and memory care community with a financing structure that included approximately $6 million of C-PACE proceeds.
Steve McGee is a managing director in the debt syndications group at Lument, where he serves a dual role leading seniors housing and healthcare debt syndications efforts, as well as directly originating seniors housing and healthcare loans.
Anne Hill is a senior vice president at Bayview PACE, which originated approximately $500 million in C-PACE loans since starting its program three years ago. Hill has been intimately involved with the Commercial PACE industry for more than 6 years, with over $300 million in PACE closings.
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