Reimagining historic buildings using C-PACE

As the commercial real estate industry faces continued challenges, it is no surprise that creative solutions have emerged, including the use of C-PACE (Commercial Property Assessed Clean Energy)’s flexible, cost-efficient capital to finance projects pre-, mid-, or post- construction. Many owners and developers are also finding that C-PACE is a particularly efficient tool to finance the repositioning and adaptive reuse of historic buildings.

As the commercial real estate industry braces for maturing loans and persistent, high interest rates, and owners and developers shift and pivot in a challenging economy, many are turning to the rehabilitation of existing buildings as an option - and another opportunity to move projects forward¹. Office to multifamily conversions have been a recent focus in the industry in the post-pandemic, hybrid work world. A recent Globest. article reports that “office-conversion completions are expected to more than double this year over last.” And a recent CoStar article shares, “of 120 office conversion projects nationwide, one-third of them are slated to become reimagined multifamily properties.” The article explains that the broker community has even started marketing properties as “conversion opportunities.”

Demand for sustainable buildings

In the backdrop of the challenging economic environment, there is also the looming climate crisis. Given that the commercial real estate industry is responsible for nearly 40% of global energy-related carbon emissions, the impact of climate change is driving a push toward sustainable buildings via sustainability mandates in many cities. A recent JLL article reports, “The drive to create more sustainable, healthier buildings is gathering momentum. It’s what employees want and it’s what society increasingly expects. Now it’s up to companies to deliver.” This demand is creating positive forward momentum for decarbonization – as well as the corresponding emergence of creative solutions to achieve it.

Innovation and imagination in CRE – repositioning existing buildings

While there is an emphasis on office conversions now, innovative developers are finding that there are numerous benefits to reposition existing properties, among other asset types, as well - such as industrial, mixed-use and hospitality. Historic factory buildings are becoming luxury apartments, warehouses are becoming trendy breweries, retail spaces are being transformed into mixed-use apartments with restaurants and entertainment venues, and so on.

There are many reasons to repurpose older buildings, including typically lower construction costs associated with retrofitting a building vs. building a new structure, enhanced building performance and energy efficiency, the increase in property value, as well as the ability to address tenant demand for modernized, sustainable buildings and the changing needs of communities. And there is often an opportunity to realize significant financial returns, while preserving architectural heritage.

With the current focus on conversions, it is no surprise that C-PACE financing - which has emerged as a flexible and cost-efficient form of debt – also has attracted many owners and developers to utilize it for adaptive reuse and historic rehabilitation projects.

Historic rehabilitations – pairing C-PACE and Historic Tax Credits (HTCs) for greater financial returns

Offered on a national and state level, HTCs incentivize and aid owners and developers in the preservation of historic buildings. A recent Novogradac article explains, “The federal historic rehabilitation tax credit (HTC) program is an indirect federal subsidy to finance the rehabilitation of historic buildings with a 20 percent tax credit for qualified expenditures.” Another Novogradac article highlights that “HTCs and C-PACE are two popular programs that are complementary in accomplishing the public objective of preservation of historic buildings while also modernizing their systems and efficiency.”

When C-PACE’s cost-efficient capital is used to fund eligible measures (including HVAC, plumbing, solar, heat pumps, and many more), alongside HTCs, property owners can dramatically lower their overall blended cost of capital on historic repositioning or rehabilitation projects, while increasing their property’s value.

Michael Doty, Senior Director, Originations at Nuveen Green Capital, who oversaw several notable conversion deals, including the Hotel Marcel (highlighted below), shares, "In my opinion, C-PACE works well to finance projects of almost all commercial asset types at varying stages of construction. With conversions, it also effective as it tends to fund these projects at a much lower, long-term rate vs. the alternative forms of capital, which enhances projects' return. And when paired with HTCs, developers may see even greater returns, while repurposing and preserving historic buildings."

Hotel Marcel – Reimagined and net zero emissions

Drivers on I95 in New Haven, Connecticut were familiar with the sight of a large, iconic building that, despite its striking appearance, convenient location, and adjacency to Yale University (which is also the graduate school alma mater of NGC’s co-founders, Jessica Bailey and Alexandra Cooley), for nearly 20-years, stood vacant. This was until it captured the imagination of visionary architect and designer, Bruce Redman Becker of Becker + Becker Associates. Not only did Becker reimagine the building, but his redevelopment has made it a beacon of sustainability as the nation’s first Net Zero and first anticipated Passive House certified hotel in the country.

Becker leveraged $7 million in C-PACE capital to fund numerous measures, among them a solar array that enables the hotel to generate 100% of its own electricity for lighting, heating, cooling and hot water for its common areas, restaurant, laundry, meeting rooms; 165-guest rooms and suites. C-PACE was also used to finance the hotel’s roofing, windows, insulation, and lighting. Through these measures, Hotel Marcel operates without the use of fossil fuels, resulting in zero carbon emissions.

Given the building’s landmark status, Bruce Becker was able to utilize HTCs alongside $7 million in C-PACE capital to realize significant overall savings on the adaptive reuse for this energy efficient hotel. He recently shared, “The hotel is worth a lot more money because it has more cash flow [and it] has lower operating costs. And in some ways, a dollar of energy savings is worth more than a dollar of additional income.”

The Fidelity & Deposit Building – Award-winning office to multifamily historic conversion Winner of the Mid-Atlantic Real Estate Journal’s  “Largest Historic Preservation Project of 2023” award, the Fidelity & Deposit Building is an iconic, 15-story Romanesque Revival historic office tower that was built in 1894. Located in downtown Baltimore, a half-mile from the famed Baltimore Inner Harbor, upon completion, the $65 million office to multifamily conversion project will feature 231 apartment units, retail and office space, as well as a ground floor restaurant.

Not only is this project notable because it is a conversion of an historic office building to a multifamily property, but also for its use of HTCs alongside C-PACE, NGC’s $13.1 million in C-PACE capital, which funded the building’s envelope, lighting, HVAC, insulation, plumbing upgrades, and roof repairs, provided dramatic savings to the sponsor, while helping to reimagine an iconic building that will be modernized and energy efficient.

As the commercial real estate market, tenant demand, and the way people live and work continue to shift and evolve, the need for smart building renovations and repositionings will likely only increase. As a flexible financing tool, C-PACE can fund nearly all commercial asset types at varying stages of construction – and for historic repositioning projects, it works well alongside other beneficial programs, such as HTCs.

The experts at Nuveen Green Capital are involved at every stage of a C-PACE financed project and are well-versed in the use of HTCs. To learn more about C-PACE, and how it is revolutionizing commercial real estate finance, visit: https://www.nuveen.com/greencapital