C-PACE Financing - What is your opinion on its use in the capital stack?
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[{"id": "hdd84pd", "text": "It's cool and interesting, but has some drawbacks. My perspective is from a senior lender position. First, it's only available in certain states. Second, while it is not a loan per se, it's still secured by certain improvements that are part of the building which is what me (senior lender) is lending on too. This can be seen as \"double dipping\" on those improvements. Given this, I've really only seen it successfully used in instances where the senior loan is constrained by something other than costs such that those PACE improvements can be removed from the senior loan cost build up and not decrease the senior loan proceeds. It's pretty niche, but something definitely worth exploring as a developer as another source of funds in your capital stack. Just need to vet it with your senior lender early on.", "replies": [{"id": "hddbsxh", "text": "Thanks for the response and your perspective. The security is a special assessment on the property and paid through property taxes.  So it does have priority over your payments but it doesn't accelerate in default and it can't impede any of your remedies as a senior lender.  The C-PACE lender just has to wait to get paid.  Theoretically the debt service on the work done should also be offset by utility cost savings.\n\nAs a senior lender would you be open to having it in place if there was a performance bond that covered the debt service on the C-PACE loan in the event of default?", "replies": [{"id": "hdmehs9", "text": "I'm open to having it in the capital stack generally. I'd size my as-stabilized NOI to include market rate RE taxes plus whatever we think the PACE assessments would be so that in a hypothetical default the property could still pay the PACE assessments like they would RE taxes. But again, at no point will we entertain the improvements that build up the PACE equity as part of our mortgageable costs. They'd need to be removed from the senior loan mortgageable costs. In my experience this really only works in high cost urban areas where the loan constraint is going to be something other than construction costs such that the removal of the PACE improvements from the mortgageable costs wouldn't decrease the senior loan proceeds.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hde8krj", "text": "PACE financing takes a superior lien on the property and requires approval from any existing lien holders on a property (CRE lenders, banks, etc). \n\nNo lender (that I\u2019m aware of) is even remotely interested in approving PACE financing that takes a precedence over their lien at an interest rate they can easily beat, minus all of the PACE financing soft costs. It makes more sense just to refi and get cash out for energy/environmental improvements.", "replies": [{"id": "hdevvhp", "text": "With rates at ultra low levels right now it probably makes sense to do a cash out refi to cover the improvement cost. When rates start to rise again it might make sense to do PACE financing, but it will be a tough hurdle to get approval from the 1st lien position and cost money to be paid to the senior lender to analyze it before it is approved.\nI worked on underwriting Fannie and Freddie loans that offer additional loan proceeds that were subsidized for utility savings improvements. Another option offered was supplemental loans without the headaches of utility savings analysis. \nAdditionally the utility savings analysis could not be feasible in some areas where a utility company refuses to release utility bills for tenants to the landlord. Therefore the utility savings loan was a tough sell for very little extra proceeds.\nUnfortunately I see the most effective approach is changing zoning requirements to have more energy and utility efficient buildings and make buildings comply with the new codes over a certain number of years. Building owners have very little incentive to make old buildings more utility efficient since they pass the cost onto tenants and tenants tend to underestimate utility costs.", "replies": [], "depth": 2}, {"id": "hdfe14l", "text": "While most lenders who are unfamiliar with the product will usually not be interested in allowing it, I happen to have a list of over 100 lenders who have allowed CPACE ahead of them. Doesn't mean that they will allow in every case, but it happens/Ed.", "replies": [{"id": "hdg92t6", "text": "I\u2019ve seen that list, and clarified the only CRE financed PACE were SBA loans. It\u2019s the lien priority issue that causes CRE lenders to shy away from PACE", "replies": [{"id": "hduy27c", "text": "Just closed a conventional CRE construction loan with a senior lender at 65% LTC utilizing Pace to get to 80%. There are lenders who are doing Pace deals outside of SBA.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]