PACE Loan Group Links Real Estate to Sustainability with C-PACE – Business Observer
C-PACE provides developers with low-cost, long-term financing for the energy efficient and otherwise environmentally friendly aspects of new and redeveloped projects. Partner Insights spoke with Rafi Golberstein, President and CEO of PACE Loan Group, one of the nation’s leading C-PACE lenders, to learn more about the potential for financial savings and energy improvements in C-PACE in the current development landscape.
Trade Observer: Can you tell us about PACE Loan Group?
Rafi Golberstein: PACE Loan Group (PLG) is a real estate focused direct lender of C-PACE loans. I founded PLG in 2017 following a career in mortgage lending. We work across the country on projects large and small, and our goal is to provide efficient and smooth closing certainty. It’s our job to make C-PACE easy for our customers.
What is C-PACE financing?
C-PACE, which stands for Commercial Property Assessed Clean Energy, has been around for about 10 years, but only started gaining traction about five years ago. It is used to fund energy conservation measures such as improving the building envelope, HVAC, electrical and plumbing. It is available in over 35 states. Developers and owners can use it as a financing tool to supplement their capital reserves. In the current environment of rising interest rates, C-PACE is particularly effective in reducing the overall cost of capital.
How to use C-PACE financing for a new construction?
C-PACE can be used for both new builds and renovations. In new construction, if a building is built above code or has a renewable energy component, it is generally eligible for C-PACE. What most developers might not realize is that their base projects are usually eligible for C-PACE without requiring scope changes. PLG has unique expertise in researching energy saving measures in C-PACE eligible projects on behalf of our borrowers.
How does a sponsor determine if C-PACE funding is right for a project?
For most projects, there will be some level of C-PACE that will work. But it really depends on what the rest of the capital stack looks like to see how and where we stack up. So there are two parts to this question. First, is this C-PACE project eligible? To which the answer is 99% yes. Second, how does C-PACE fit into my financing plan to lower my weighted cost of capital? PLG’s expertise and experience in home loans helps us answer the second question.
How much of a project does C-PACE typically cover?
C-PACE can cover energy saving measures which typically represent around 30% of the total project cost. However, in specific cases, such as solar installations or seismic upgrades in certain states, C-PACE may cover 100% of the cost. PLG works with our clients to find what we call the “maximum possible” C-PACE loan and find opportunities where others might not. For a recent deal for the Four Seasons Hotel in Minneapolis, we identified C-PACE eligibility in the building envelope, which ultimately increased loan size and saved energy. C-PACE is best approached on a project-by-project basis, and we work to find the ideal outcome for our customers.
Why is C-PACE financing better than traditional financing for certain projects?
Many reasons. C-PACE financing is non-recourse. They are also long-term, fixed-rate bonds, which are very attractive, especially in today’s rising interest rate environment. C-PACE is also non-accelerable, which is unusual for a debt product. Some people consider C-PACE a mezzanine replacement because it’s cheaper, but there’s also a structural advantage to a C-PACE loan. For example, if there is a default on a mezz loan, the lender can foreclose very quickly. Because it’s not accelerable, C-PACE has none of those rights and remedies, so it’s much less risky and more attractive to developers.
Generally, C-PACE loans are less expensive than other debt funds, mezz or pref equity alternatives. Especially as interest rates rise, we continue to quote loans in the mid 5% which is clearly more profitable than the alternatives.
Discuss how C-PACE funding can be used retroactively on completed or nearly completed projects.
Many states have retroactive funding that allows homeowners to look back typically one to three years from when an improvement was completed. (Each state has its own C-PACE program, so there may be different standards and requirements by state.) The owner may say, “Eighteen months ago we installed a new solar system. Can we retroactively use C-PACE to pay for this? The answer in many states is yes, and the retroactive C-PACE becomes a return on equity for the borrower.
Let’s talk about a case study. Explain to me how that applied to the Four Seasons Hotel in Minneapolis.
The Four Seasons Hotel is Minneapolis’ first five-star hotel. We went into this project just before completion and looked at all the different measurements. We found $20 million in eligibility that the developer was able to put back in their pocket and redeploy to other projects across the country. In addition, they have benefited financially from energy efficiency measures – they have a more efficient building. For this project, we qualified items such as the building envelope, windows, part of the curtain wall, roof materials, all HVAC systems and water pumps, and much of the electrical components, both in elevator systems and in lighting. and control systems.
A pretty good rule of thumb is that anything mechanical, electrical, or plumbing will be the lowest fruit for C-PACE.
Why is PACE Loan Group uniquely qualified to handle C-PACE loans for clients?
PACE Loan Group is rooted in real estate. I built PLG from my previous expertise in NYC investment banking and REITs. We understand how C-PACE works within the capital stack and how to structure our loans for the greatest benefit of our client. We know the nuts and bolts of the home loan, which when you take out a home loan is pretty important. Our clients appreciate this expertise. PLG transforms what can be a really nuanced and confusing program into something that makes sense and is easy to process.
Last year we closed over 40 C-PACE loans, which is a staggering amount in one year, and this year we closed nine loans in May alone. We are also internally managed, so we have no outside influence on our credit committee, which increases our certainty of closing. That’s been another very interesting distinction for us in the market – we can control that internally and really commit to our customers. We do what we say we will do and we live by our terms.
What’s next for C-PACE?
C-PACE is growing rapidly, both in terms of nationwide deployment and prominence in the capital stack. We are seeing larger loan amounts across more project types. Not only are we expanding to different states, but C-PACE as a concept is growing. For example, Washington State’s new law incorporates “resilience” as an eligible C-PACE measure, going beyond traditional energy efficiency. We will see C-PACE as a tool to complement ESG objectives, as developers begin to view C-PACE as an integral part of the capital stack rather than an alternative financing option.