Popular C-PACE financing program helps bridge Philadelphia CRE projects to completion
The C-PACE financing program is enabled by a state statute that classifies clean energy upgrades as a public benefit.
By Nuveen Green Capital
Commercial Property Assessed Clean Energy (C-PACE), a previously little-known financing mechanism for property owners and developers to access capital for new construction developments and substantial rehabilitation projects, is quickly gaining popularity in the Philadelphia region, and growing rapidly throughout the country.
C-PACE — a public-private financing program enabled by Pennsylvania state legislation through Philadelphia C-PACE — can help fund new construction and retrofit projects, as well as recapitalize existing developments across the Philadelphia metro area.
Given the recent amendments to the bill to incorporate multifamily rental and mixed-use properties, as well as broaden qualifying measures to include resiliency and indoor air-quality related improvements, more property owners are turning to C-PACE as an efficient financing mechanism.
C-PACE works by providing commercial property owners and developers access to low-cost, long-term, fixed-rate financing for sustainability measures that impact the energy and water performance and resiliency of a commercial property. The program is enabled by a state statute that classifies clean energy upgrades as a public benefit — the same way in which other public benefits like new roads, streetlights, and water mains are paid — allowing these measures to be financed with no money down and then repaid as a benefit assessment on the property tax bill.
The term and amortization of the financing match the expected useful life of the improvements or new construction infrastructure, which is typically around 20-30 years. The assessment transfers upon the sale of the property, and it can be passed through to tenants where appropriate.
While facilitating sustainability efforts, the program reduces property owners’ annual costs and often provides significantly better financing terms than the available alternatives to fund construction projects. Furthermore, during these volatile economic times, C-PACE provides reliable and flexible construction and bridge financing options that can often help reduce the equity requirement for a project and allow property owners to obtain higher combined proceeds. Finally, with many banks reducing their lending capacity due to loan exposure issues, C-PACE can be a great alternative for financing and replacing senior debt participants in the capital stack.
Project eligibility In Philadelphia, C-PACE capital can be used for any non-residential property — this includes commercial office, industrial, retail, hotels, private schools, health care facilities, agriculture, nonprofits, and multifamily properties that consist of more than five units.
Another benefit of C-PACE is it can be layered in with other forms of economic development financing, like historic and new market tax credits. C-PACE financing is a very flexible financing tool and can be used toward almost any measure that impacts the energy or water performance of a property. This includes hard, soft, and any associated costs connected to mechanical, electrical, plumbing, building envelope improvements, and renewable energy sources. Examples of C-PACE eligible measures include HVAC, heat pumps, LED lighting, facility controls, low flow water fixtures, insulation, roofing, windows, doors, solar, and much more. New development and gut rehabs In the case of new development and gut rehab projects, C-PACE can improve developer internal rate of return by up to 50%. C-PACE is accretive to financial returns because it can provide developers with capital at rates that are less than half the cost of traditional mezzanine debt or equity. In addition, it provides fixed rate construction through term, is non-recourse, and the obligation transfers upon the sale of the property, or it can be prepaid at any time.
Retrofit projects For retrofit projects, C-PACE financing can be used to fund capital expenditures by providing upfront capital to replace aging equipment. C-PACE can provide up to 35% of the as-stabilized or as-complete property value for retrofits. Replacing aging equipment saves energy and results in lower operating expenses, thereby increasing net operating income (NOI) and the value of the property.
Recapitalization projects In Philadelphia, C-PACE also allows property owners and developers to recapitalize ongoing, stalled, or recently completed construction projects. Through C-PACE recapitalization, property owners, and developers can access low-cost, long-term, fixed-rate and non-recourse financing with no payment for 24 months to fund cost overruns, replenish operating reserves, and pay down existing leverage.
Philadelphia case study no. 1: Freezpak Logistics Located at 2201 East Allegheny Avenue, Freezpak Logistics will be a new, state-of-the-art 173,080 square foot refrigerated cold storage facility in the Port Richmond section of Philadelphia. Nuveen Green Capital partnered with the developer, BG Capital, as well as the Philadelphia Energy Authority, to provide $30.1 million in C-PACE financing to fund extensive energy efficiency measures. These measures will enable the building to be 30% more energy efficient than is required by Philadelphia Energy Code, ASHRAE 2016. This project marks the largest C-PACE deal to close in the state of Pennsylvania in 2022 and will result in approximately 60 new jobs for the local economy. Philadelphia case study no 2: 499 North 5th Street — Spring Garden Nuveen Green Capital provided $40 million in C-PACE funding to finance sustainability measures in this new, 329-unit multifamily apartment building located in northeastern Philadelphia’s expanding Northern Liberties submarket. This project is the second of the first two C-PACE-financed multifamily deals to benefit from the recent amendment to the C-PACE policy and to close in Philadelphia, as well as the largest C-PACE deal to close in the state.
As a public-private partnership, C-PACE unlocks powerful public policy benefits for development projects. As such, Philadelphia views C-PACE as a key tool for economic development and sustainability goals. At zero cost to the city, the program is quickly turning into a success story of how public-private partnerships can drive investment, not only providing owners and developers significant financial benefits, but benefiting local communities and the environment as well.