Nothing wastes energy like outdated commercial real estate assets. From inefficient lighting systems and HVAC systems, to poor plumbing and building construction, you would be hard pressed to find a more wasteful industry. Not only are cities, states, and the Federal government putting more stringent regulations and guidelines in place to change the industry, they are also providing several incentives to developers and landlords to build more sustainable buildings. In today’s post, Riley Grimme from the Northstar development team will talk about one such incentive targeting clean energy in commercial real estate, specifically C-PACE, or Commercial Property Assessed Clean Energy.
What is C-PACE?
C-PACE is a public-private partnership that facilitates financing for energy efficiency retrofits and new construction, a unique financing method for commercial real estate owners and developers. It enables property owners to obtain low-cost, long-term financing for qualifying energy efficiency, water conservation, and other clean energy improvements on their existing properties. For ground-up development projects, developers can finance up to 20% of the building’s total eligible construction costs if it’s designed to exceed IECC code by 5% or more, or 15% of the building’s total eligible construction costs if you meet IECC code. There are two main incentives for buildings that are designed to be energy efficient: you are eligible to receive additional lower-cost capital and your building simply consumes less energy which helps save on utility bills – both of which are very attractive to prospective buyers.
Why C-PACE?
C-PACE allows developers and landlords to not only do their part in creating a more sustainable environment and have a more marketable property, but it also offers property owners long-term (up to 20-year) financing that can significantly reduce the amount of equity needed for a project and hence increase their expected returns. The financing is repaid through an assessment on your property tax bill, due at the same time as ordinary property tax payments. It is this security of the tax lien that sticks to the property and transfers with ownership that is key to the program.
Among the benefits of PACE are:
- Positive cash flow resulting from efficiency gains and lower cost of capital
- Increased property value with the capital improvements
- 100% financing with no up-front, out-of-pocket costs for the property owner
- Landlord and tenant interest alignment as the cost savings of increased efficiency and the PACE assessment can be shared with tenants under a triple-net lease and the savings typically pay for the assessment
- C-PACE assessment is automatically transferred to buyer upon sale
- Compared to traditional bank financing, it is longer term, non-recourse, faster underwriting, and up-front funding
Who is eligible for C-PACE?
C-PACE legislation for commercial properties has been adopted in 32 states and the District of Columbia and is now available in more than 1,000 municipalities across the country. Typical use cases for C-PACE include new construction and redevelopment, large tenant improvement projects, and capital improvements. It can be used for most non-residential property, including commercial office, retail, industrial, hospitality, schools, healthcare, non-profits, specialty owner-operators, and multifamily (>4 units).
While C-PACE may seem too good to be true up to this point, there are a couple important considerations to note. You will need mortgage lender acknowledgement or consent before you can close on C-PACE. Since C-PACE projects increase property values and the C-PACE assessment that is senior to the mortgage loan is only the amount of past due C-PACE payments lenders typically get comfortable. Also, if it is necessary to pay off the assessment early, there is a prepayment penalty.
C-PACE and Northstar
At Northstar, we are implementing C-PACE on an existing property and exploring it on a new ground-up medical office building in Lafayette, CO that we are expecting to break ground on in August. For this project in Lafayette, we anticipate C-PACE will lower our Weighted Average Cost of Capital (WACC) and boost our potential returns. Striving to be best-in-class and seeking innovative solutions like this has a substantial impact on the returns to our investors and is a major reason so many of our investors repeatedly trust us to protect and grow their assets.
This post was written by Riley Grimme who is a member of the Northstar Development Team. If you have any questions, please contactinvestorrelations@northstarcp.com. If you’d like to view current investment offerings, please visithttps://invest.northstarcommercialpartners.com/.