For decades, real estate’s masters of the universe have found increasingly obscure ways to score cheap debt.
Bundled mortgages were once all the rage, then the EB-5 “cash for visas” program and later the Israeli bond market.
The next hot thing was supposed to be Commercial Property Assessed Clean Energy. C-PACE allows building owners to borrow at low rates to make energy upgrades. Rising interest rates only heightened interest in the green financing program.
But so far, C-PACE in New York City has been a dud.
Only two deals have happened since the program went live in 2021. One was $89 million for Nightingale Properties and Wafra Capital Partners to upgrade an office building at 111 Wall Street. The other was a loan from a Nuveen subsidiary for 730 Third Avenue, which is co-owned by Nuveen, a leading C-PACE provider.
Industry experts say deals are getting done across the country. But New York City’s green financing initiative has been plagued by bureaucratic delays and senior lenders’ reluctance to accept C-PACE in the capital stack.
Office woes aren’t helping either as cash-strapped owners are wary of throwing more money at a slumping asset.
“No one has come through saying, ‘I need five C-PACE loans yesterday,’” said Matthew Swerdlow, a debt broker at Ariel Property Advisors.
Origin story
C-PACE differs from other types of alternative financing. It provides the upfront costs to a property owner for both big and small energy-efficiency improvements — from new windows to retrofits to gut renovations. C-PACE is not technically a loan, but a property tax assessment at a fixed rate and paid back over time.
Because of that structure, the program requires legislation by state and local governments. At least 37 states, including New York, have passed enabling legislation, as has Washington, D.C.
“CPACE really mirrors other ways to finance long-term public infrastructure projects,” said Genevieve Sherman, who heads Nuveen’s program.
New York City’s version was enabled by the Climate Mobilization Act of 2019. The centerpiece of the legislative package was Local Law 97, which requires building owners larger than 25,000 square feet to meet greenhouse gas emission limits starting in 2024. C-PACE was seen as a key tool to help landlords avoid fines for exceeding the caps.
But for two years the program was stuck in bureaucratic purgatory as the city finalized rules. Eventually it was made available to existing buildings, but not new development.
Not until June 2021 did Nightingale and Wafra finally close the first C-PACE financing deal as part of a $500 million refinancing of 111 Wall Street, a 25-story office building.
The deal was met with fanfare from industry proponents and even then-Mayor Bill de Blasio.
“Today, I want to send a clear message to all building owners in our five boroughs — you have a critical financial tool to redesign your properties for energy efficiency and sustainability,” de Blasio said in a statement.
If the message got through, it certainly didn’t resonate. After the second deal, at 730 Third Avenue, the city suspended the program. It relaunched in the fall of 2022, but remained unavailable for new construction. Firms that control buildings through ground leases — a common arrangement in the city — were also excluded.
“New construction C-PACE is what everyone is really excited about,” said YuhTyng Patka, co-chair of Adler & Stachenfeld’s NYC PACE finance group and Climate Mobilization Act task force.
Financing large-scale projects in New York City is complex. Capital raisers scour the globe for investors, adding layer upon layer of debt and equity with varying stakes and seniority. Organization charts for the equity piece alone can look like a Russian nesting doll or John Nash’s notebook in “A Beautiful Mind.”
The allure of C-PACE is financing at 6 or 7 percent, which is much cheaper than mezzanine or even senior loans today. EB-5 and other sources of capital used to fill financing holes have dried up, so although only two C-PACE assessments were made in the city, a fair number of building owners facing Local Law 97 penalties were counting on it.
Another pressing issue is that senior lenders, often banks or debt funds, are concerned about C-PACE’s seniority in the capital stack. Because it is recorded as a tax assessment, C-PACE jumps ahead of the senior loan in the event of a default. Without the senior lender’s sign-off, a developer can’t include C-PACE in the stack.
“There is not one lender in the market that I know of that’s like, ‘Bring all the C-PACE deals to me,”’ Swerdlow said.
But experts say lenders can protect themselves in the event of default. Senior lenders can create reserves to pay for the C-PACE piece. Also, C-PACE does not accelerate like default interest does, and a lender can pay off C-PACE to prevent foreclosure.
“The concerns that the senior lenders have with the PACE program are usually unfounded,” said Patka.
To be sure, deals are happening, just not in New York City. More than $2 billion in projects have been financed with C-PACE, according to the U.S. Department of Energy. Last year, Reef Capital Partners secured $153 million in C-PACE financing from Petros PACE for a 580-acre Utah resort near Zion National Park. And HB Capital snagged $42 million to upgrade a 1960s beachfront hotel in Sunny Isles Beach, Florida.
The lodging sector became a natural suitor for C-PACE as hoteliers used the program as rescue capital during the pandemic. Hotels can also charge fees to pass on some of the costs to guests, according to one source.
In New York, C-PACE can even be used by real estate owners to pay for already completed energy improvements. Insiders call it “retroactive PACE.”
“The longer new construction rulemaking takes in New York, you will see a little more volume on the retro stuff,” said Sandeep Srinath, a director of the global securitization group at ING, which provides financing for C-PACE lenders.
Many expect the city to become one of the top destinations for C-PACE because of its vast, aging building stock. But first real estate owners and lenders need to get more comfortable with the program.
“Someday we are going to wake up and the loans will all start closing, one by one,” said Swerdlow. “Unfortunately, that day is not today.”