C-PACE's flexible capital is providing creative solutions

Property owners and developers are becoming more innovative as they structure their capital stacks, navigating market shifts with the strategic use of C-PACE’s stable financing.

Despite continued uncertainty related to a tight credit market, maturing loans, and federal policy, commercial real estate owners and developers continue to demonstrate creativity when it comes to developing and financing their projects.

While C-PACE (Commercial Property Assessed Clean Energy) has been around for over 15 years, several factors are driving the expansion and growth of the financing platform in recent years, with the industry reaching nearly $10 billion in cumulative originations. Increased program adoption remains a key driver, and C-PACE has become a source of stability and certainty to property owners and developers looking to build their capital stacks amid a complex lending landscape.

In addition to C-PACE’s attractive financing terms – 100% upfront, non-recourse capital, available for long-terms (20-30 years) at a fixed rate – it is also often less expensive than the available alternative financing options. Its accretive benefits have contributed to its rapid expansion as an effective financing mechanism, while showing it can also pivot and evolve with every market shift to benefit the industry. Beyond these benefits, C-PACE can also provide creativity and flexibility in its financing structure – another reason it is attracting an increasing number of institutional owners and investors to use it to fund large scale projects, such as 200 Park in San Jose, CA, the second largest C-PACE financed transaction to date.

Financing projects across all stages – pre-, mid-, and post- construction, with recapitalization becoming an increasingly valuable tool

While C-PACE was initially seen primarily as a financing tool for new development and retrofit projects, it is increasingly being utilized by Sponsors to recapitalize projects that are mid-construction, or have recently been completed (up to three years in most states). The attractive lookback period has proven to be useful to owners and developers, particularly as they encounter shortfalls that hinder project completion or their ability to service debt. By injecting low-cost, fixed-rate capital into a project, C-PACE helps fund construction cost overruns, provides additional working capital for interest reserve deficits, and eliminates or reduces the need for capital call or additional equity injection, improving the likelihood of a successful completion.

In the case of Bishop's Lodge, a luxury Auberge Resort hotel in Santa Fe, NGC provided an attractive $76.2 million financing package to recapitalize an existing senior loan on the property.

The project, which marked the first C-PACE financed transaction in the state of New Mexico, demonstrated the Sponsor’s strategic use of C-PACE, which enabled the asset to transition to more favorable financing terms, ensuring its continued profitability and growth.

When used to recapitalize recently completed projects, C-PACE can de-risk and pay down the senior lender or stabilize the asset with lower debt service by paying down other more expensive capital. It can also bridge the gap for slow lease-up periods, while providing the flexibility to push out payments for approximately three years.

Another example where C-PACE was used to recapitalize an existing loan was for the HALL Arts Hotel in Dallas. NGC provided $27 million in C-PACE capital alongside HALL Structured Finance to recapitalize existing construction loans on the 183-room boutique hotel. By leveraging C-PACE, HALL was able to restructure the existing capital stack with long-term, fixed-rate capital at favorable terms to lower the cost of capital and improve cash flows.

Structuring flexibility

While C-PACE is available at fixed rates and long-terms, depending on the Sponsor or a project’s needs, NGC can offer structuring flexibility, including the ability to draw on C-PACE funds in stages. As C-PACE grows and provides larger percentages of the capital stack, its adaptability and ability to provide financing in tranches has become an important option as it enables Sponsors to draw down in stages, thereby saving a significant amount of interest expense.

In addition, for institutional sized projects, C-PACE can be structured to finance pre-development expenses and help Sponsors defer meaningful portions of their equity contributions. For example, NGC recently provided $40 million in C-PACE Capital to JEM Private Residences in Miami, FL to fund the pre-development costs for the first phase of construction for the luxury, 65-story mixed use building.

This structuring flexibility is further evidence of C-PACE’s ability to evolve and adapt to Sponsors needs and shifting market dynamics.

Works alongside other financing

In addition to more traditional forms of CRE financing, C-PACE can work alongside various alternative forms of financing as well, including Historic Tax Credits (HTCs) for the renovation of historic buildings, as well as economic development incentives such as Tax Increment Financings (TIFs) and New Market Tax Credits (NMTCs). Not only is it growing in popularity among owners and developers, but it has also gained widespread acceptance in the lending community, with many senior lenders recognizing that C-PACE can be an attractive source of financing for their borrowers and accretive to their projects.

Senior lenders who once were hesitant about C-PACE and its position in the capital stack are realizing its benefits as a non-recourse, non-accelerating financing option that improves project viability, doesn't restrict foreclosure rights, and can enhance collateral value while bringing down the cost of capital for a project. Over 500 lending institutions having worked alongside C-PACE financing partners to date. C-PACE assessments have closed alongside hundreds of banks, debt funds, life insurance companies and other lenders throughout the country to complete development capital stacks, provide incremental leverage, finance capital expenditures, or recapitalize recently completed projects.

NGC recently closed on The Whitford Senior Living in Dublin, CA, providing $40 million in C-PACE capital, in partnership with Live Oak Bank on an $80 million financing package for the planned senior living retirement and memory care community. The developer, South Bay Partners, will utilize $40 million in C-PACE financing to fund various energy efficiency measures as well as associated soft costs. With the inclusion of C-PACE, the Sponsor diversified their capital stack and lowered the average cost of capital, enabling the project to move forward while prioritizing sustainable development.

Evolves with market shifts to benefit the industry

Regardless of the market dynamics, C-PACE adapts to the needs of owners and developers, while benefiting the CRE market. During the pandemic, C-PACE served as an effective bridge financing tool for many hotels, which were particularly hard hit, enabling them to refinance existing loans and stabilize their assets. In the case of the The Motto by Hilton in Philadelphia, the Sponsor had opened the hotel a few months prior to the COVID-19 outbreak. NGC provided C-PACE capital, in partnership with funding from a hospitality financing firm to recapitalize their maturing construction debt.

C-PACE provides private capital, and as a state and locally legislated policy, it operates at the state and municipal level, so it is largely insulated from federal policy shifts. As reported in Nuveen’s recent C-PACE outlook amid economic and policy shifts report, “C-PACE has consistently expanded under the last four presidential administrations and has received bi-partisan support across both Republican and Democratic controlled states.”

With extreme weather events on the rise, C-PACE’s ability to finance resiliency measures has also added to its appeal. NGC’s $220 million financing for the tallest building in San Jose, CA, was used in part to finance the 19-story tower’s seismic bracing system – a crucial measure for buildings in earthquake-prone states.

Regardless of what market shifts occur, C-PACE adapts and provides financing flexibility, in addition to its cost-effective, long-term, fixed-rate parameters. As Sponsors continue to exhibit ingenuity in their construction financing – the expert team at NGC believes that C-PACE will continue to bring much needed relief to the CRE market.

To learn more about how C-PACE’s flexible capital is revolutionizing CRE finance, visit: https://www.nuveen.com/greencapital/get-started-with-c-pace