By Jared Schlosser, senior vice president, Stonehill
Commercial Property Assessed Clean Energy (C-PACE) is an innovative financing program that is gaining popularity across the U.S., as it offers a low-cost, long-term capital solution that doesn’t require upfront equity from the property owners. The central appeal for using this program for energy-efficient upgrades and retrofits is that any level of C-PACE used will lower the overall cost of capital compared to mezzanine, third-party equity or even many senior loans. This is impactful for commercial property developers.
In the current market, the cost of capital has increased significantly, along with higher interest rates and wider spreads from lenders. In addition, higher financing costs put pressure on loan-to-value (LTV), loan-to-cost (LTC) ratios, and the amount of capital lenders are willing to provide, reducing liquidity for new developments. Construction costs have also increased significantly with back-to-back years of double-digit increases, with further increases in 2023 as CBRE expects a growth of 5.4% for construction costs.
Low-Cost, Fixed-Rate Capital
C-PACE is in heavy demand because it’s a fixed-rate product, starting in the mid-single digits. It also can be up to 35% of the capital stack. With a typical senior loan at 65% loan-to-value, providing C-PACE at 30% of the stack, the lender becomes below 40%, lessening its capital risk. As a result, it is helping development projects across all real estate sectors pencil to start construction and those in mid-construction reach completion.
Mid-Construction Case Studies
Today we see more requests for this financing as budgets are blowing out with cost overruns. C-PACE provides the needed capital when the developer cannot offer additional equity or banks are unwilling. The following are examples of mid-construction projects that utilized C-PACE funding from Stonehill to bring projects across the finish line.
C-PACE for Cost Overruns
A developer faced roughly $2 million in cost overruns for a five-story, 58-key hotel in Florida that was 65% complete. Stonehill provided the developer $4.5 million in C-PACE financing.
C-PACE Can be Utilized Retroactively
One of the benefits of C-PACE for mid-construction projects is it can be used retroactively. Similar financing was utilized to construct a $32 million multifamily and retail project in Rehoboth, Delaware. Construction on the project began in January 2021 and was 40% completed. Stonehill provide the developer $4.8 million in C-PACE financing. Most of the funds were used retroactively for the building envelope, HVAC, lighting, plumbing, elevator, seismic and other qualifying soft costs.
States where C-PACE is Available
Unlike other loan types, C-PACE financing is not available in every state. The Stonehill team is well versed in requirements per state, as well as actively involved in lobbying efforts to bring new states on board. Our first originated C-PACE financing in the newly C-PACE certified state of Washington was a $53 million development for a 199-unit multifamily project with 1,233 square feet of retail development. We provided $16.3 million in C-PACE financing, representing approximately 30% of the development costs, significantly lowering the overall cost of capital for this development to begin construction.
Reducing Cost of Capital
These are three great creative capital solutions of C-PACE financing, supporting efficiency and resiliency while reducing a developer’s cost of capital. Stonehill PACE has executed C-PACE financing on hundreds of projects and has the expertise to offer creative solutions to your capital needs.
It’s not only helping banks reduce their LTV for construction, but it can also reduce their exposure on recently completed projects. Stonehill PACE can help get your project off the ground or reach the finish line.
Contact us today to talk about your project.
Jared Schlosser is a vice president at Stonehill and responsible for originating debt, preferred equity, and PACE transactions for across all asset classes. Jared has over 10 years of experience as a lender, completing over $600 million of transactions.
Previously, Jared served as a loan officer for Voya Financial where he was responsible for the origination of construction, bridge and permanent loans ranging in size from $10 million to $200 million. Prior to Voya, Jared cofounded the real estate lending platform for AloStar Bank, where he grew the CRE balance sheet to over $500MM, and started his career as an underwriter for Colony Capital.
Jared earned his business administration degree in real estate finance from the University of Georgia. Contact Jared at [email protected].