C-PACE: driving decarbonization - and financial returns

The commercial real estate industry, which is responsible for nearly 40% of global energy-related carbon emissions worldwide, is under mounting pressure to decarbonize in order to comply with stringent sustainability mandates, and to address rising tenant demand for sustainable buildings. As a result, many in the CRE industry have shifted their focus to environmental concerns and responsibilities and have committed to net-zero targets.

This is where C-PACE is coming in to play a crucial role - and there has been a surge in demand for the financing mechanism as an alternative form of CRE capital. C-PACE (Commercial Property Assessed Clean Energy) is a unique, public-private financing tool that provides cost-efficient financing for sustainability measures in new development or rehabilitation projects, and it can be used to recapitalize recently completed projects.

A recent report from Nuveen Green Capital’s parent company, Nuveen, Decarbonizing buildings: The opportunity for private equity investors to invest in solutions driving the transition to net zero buildings, reports, “Over the last five years, owners of institutionally owned real estate (including Nuveen) have voluntarily committed to a net zero target, signing up for an emission reduction pathway 15-30 years in the future – creating a massive long term market opportunity for private equity investors seeking to drive the built environment’s transition to a low carbon economy, fund solutions that drive equity, and drive environmental, social and financial returns for investors.”

While there is significant opportunity on the institutional investing side, on the flip side, what is becoming increasingly clear is that developers, building owners, and lenders can also realize significant short- and long-term financial returns by investing in decarbonization through the use of C-PACE.

Key themes

• Decarbonization is critical to achieve long-term sustainability goals and to combat the climate crisis.
• With continued economic turbulence, the commercial real estate market is seeking alternate forms of debt, including C-PACE, to finance construction projects, and to help address sustainability mandates.
• The combination of regulations and consumer sentiment is driving a significant commercial opportunity for the CRE industry with regard to sustainability.
• Through alternative financing mechanisms, in particular, C-PACE, there is an opportunity for property owners to drive decarbonization, while also realizing financial returns.

Buildings and climate change

According to the Office of Energy Efficiency and Renewable Energy, commercial buildings consume 13.6 quads of electricity (35 percent of electricity consumed in the U.S),³ and generate 826 million metric tons of carbon dioxide emissions (16 percent of all U.S. carbon dioxide emissions).

Not only are carbon emissions of concern, there is also increased focus on the impact of embodied carbon – carbon dioxide (CO₂) emissions associated with material production and the construction processes of a building or infrastructure. It includes any CO₂ created during the manufacturing of building materials and the transport of those materials, as well as construction practices used.²

To address these issues, it will require swift action on the part of the commercial real estate industry.

Decarbonization is becoming an imperative

While sustainable buildings were previously seen as “nice to have,” decarbonization is now becoming an imperative for several reasons:

1. Rising energy prices

As Nuveen’s report explains, “As energy prices increase in the U.S. and are projected to continue to do so for the next several years¹ , the materiality of a company’s energy consumption to their financial performance also increases. As a result, energy efficiency, building retrofits, and even new leasing in energy efficient buildings will become increasingly attractive in the U.S. This is undoubtedly a tailwind for building managers with an intentional focus on sustainability and a more efficient use of energy.”

2. City and state mandates

Many cities and municipalities are enacting clean energy mandates, such as Local Law 97 in New York City, recently added Title 24 requirements for California’s Buildings Standard Code, as well as BERDO in Boston. The fines associated with non-compliance are substantial.

3. National action

The White House continues its clean energy push following the passage of the Inflation Reduction Act in 2022, which offered $1 trillion in tax incentives and credits. According to NAIOP, "proponents of the legislation claim it will reduce the nation’s carbon footprint by 40% by 2030, measured against 2005 levels. Other estimates of carbon emission reductions range from 24% to 42%. Incentives in the bill for the commercial and residential real estate industries are expected to help the building sector make major contributions to that reduction.”

4. Shifting consumer focus on sustainability

As mentioned, with increased focus on the climate crisis, consumers and tenants are seeking responsible, sustainable investments, including in commercial buildings. It is no longer “nice to have” a green building – it is becoming seen as an imperative.

The Case for C-PACE

For property owners and developers seeking financing in a challenging and complex economic environment, C-PACE can help address their needs, while creating an opportunity to realize financial returns for the following reasons:

1. Cost-effective financing to fund sustainability measures

C-PACE funds 100% of the hard and soft costs of commercial building upgrades and new construction elements that improve building energy and water performance. C-PACE’s fixed-rate, long-term (~20-30 years), non-recourse financing makes it a cost-efficient option, particularly in a volatile rate environment. The resulting energy savings realized from implementing sustainability measures often offsets the C-PACE payments.

2. Enables compliance with sustainability mandates

C-PACE can help address ambitious sustainability targets, while providing significant savings – thereby acting as a ‘carrot’ for property owners to have a source of funds available to make the necessary capital improvements to meet strict emissions requirements.

An example of this is in 2021, Nuveen Green Capital provided $28M in C-PACE financing to fund extensive sustainability measures for parent company, TIAA / Nuveen’s financial services headquarters at 730 Third Avenue. The use of C-PACE enabled Nuveen to retrofit the building to become a LEED Gold-certified, state-of-the art, energy-efficient building, while also avoiding nearly $100K in annual fines associated with New York City’s Local Law 97.

3. Helps owners and developers meet tenant and consumer demand

As has been widely reported, awareness and concern for buildings’ carbon footprint have extended beyond builders and investors. A JLL report, Are tenants the next wave of sustainability influencers? states: “The sustainable design practices are just one example of how everyone from mega-corporations to smaller building tenants is flexing their muscles to ensure the space they occupy is as green as possible.”

C-PACE, as a flexible financing tool, can be used toward measures that impact the energy or water performance of commercial buildings. This includes hard, soft and any associated costs related to mechanical, electrical, plumbing, building envelope improvements and renewable energy sources. Measures that are eligible for C-PACE funding include HVAC, heat pumps, LED lighting, facility controls, low-flow water fixtures, insulation, roofing, windows, doors, and solar panels – all of which are crucial elements in the construction of green/sustainable buildings.

Triple-win solution driving financial returns

The use of C-PACE can help offset the costs associated with rising energy prices; it can enable owners to avoid hefty fines related to sustainability mandates, boost buildings’ net operating income (NOI), while providing tenants with modernized, sustainable buildings - all while creating an opportunity for considerable financial returns.

This triple-win scenario can be seen in numerous case studies of C-PACE-financed projects, which further underscore the efficacy of C-PACE. Founded by C-PACE industry pioneers, Jessica Bailey and Alexandra Cooley, the team at Nuveen Green Capital is passionate about helping the commercial real estate community realize the financial benefits associated with decarbonization, which is reflected in their collective commitment to show that ”Saving Energy is Smart Business.”

To learn more and get started with C-PACE financing, visit: https://www.nuveen.com/greencapital/get-started-with-c-pace