Commercial Property Assessed Clean Energy (CPACE) programs present a financing option that commercial real estate owners might consider to get through leaner times. Under a CPACE program, a property owner can borrow money to finance qualifying property improvements in the form of an assessment attached to the land that is paid over time (generally 20-30 years) by the property owner.
How the programs work
What constitutes a qualifying property improvement varies widely at the state level and the municipal level. Approximately 36 states and the District of Columbia have enacted enabling legislation, and approximately 20 of these states have active CPACE programs. Qualifying property improvements typically relate to improvements that increase energy efficiency, harness renewable energy, conserve water or, in some jurisdictions, like Florida, protect against storms.
The financing comes in the form of an assessment on the property and is typically added to the property tax bill. However, the financing is funded not by local government but rather by a qualifying capital provider. Each CPACE program has different qualifications and processes by which an entity can become a capital provider. The tax collector typically collects the assessment payment and forwards it to the capital provider.
The debt is one of the property and not the property owner, so if the ownership of the property changes, the debt remains. The CPACE assessment does not accelerate with a missed payment. It can be repaid in full, and late payments and missed payments will generally incur fees and interest charges. The assessment primes any mortgage lien, so it is customary, if not required by statute, that mortgage lenders consent to the CPACE assessment.
Mortgage lenders generally do not have an issue consenting to the CPACE assessment, because it does not affect the lender's foreclosure rights, the CPACE assessment cannot be accelerated, a senior lender can escrow the payment (similar to the escrow for taxes), the related qualifying project may increase the value of the property and the CPACE assessment may improve debt service coverage.
Funding is available for new builds, sometimes retroactively
In many jurisdictions, CPACE funding is available for new construction projects. Meeting higher standards for energy efficiency in new buildings raises the cost of new construction, and CPACE financing can help mitigate those costs. CPACE financing can also replace mezzanine financing, which is generally at a higher rate and shorter tenure than a CPACE assessment.
To date, approximately eight states have adopted "look-back" provisions where building owners can apply for CPACE financing within two to three years of construction being finalized, and other programs in other jurisdictions are considering projects on a case-by-case basis. This retroactive financing can provide much-needed liquidity to property owners amid the economic disruption caused by the pandemic. In some jurisdictions, there are even deferred payments in the first two years. The work completed must still be a qualifying project in the related jurisdiction. An influx of cash combined with a deferral of payment for the CPACE assessment can help property owners pay bills and buy some time until the market recovers and the property value increases.
New York's CPACE program on the horizon
One of the municipalities that recently implemented a CPACE program is New York City. Last year, we wrote about how the Climate Mobilization Act created opportunity for New York real estate, because it was combined with CPACE enabling legislation.
New York City's CPACE program provides building owners with a tool that can help them comply with New York City's tough new emissions and energy conservation requirements. New York City CPACE financing will be available through the New York City Energy Efficiency Corporation ("NYCEEC") open C-PACE program, and deals are expected to start closing in New York City in early 2021.
CPACE and funds
For funds that own companies that own real estate, CPACE financing may be considered as described above.
There is also a market for the purchase of the assessments themselves created by the CPACE financing. The assessment can be purchased from the capital provider. The new owner will receive the assessment payments and have the rights and remedies of an assessment holder in the case of nonpayment.
Funds may also wish to consider becoming a capital provider of CPACE financing.
In certain jurisdictions, the assessments created by the CPACE financing are not transferred to the capital provider but rather remain with the municipality, which issues a special revenue bond (meaning, the payments on the bond are derived solely from the related CPACE assessment). The sale of the proceeds of the CPACE bond provides the financing to the property owner.
Last but not least, some capital providers pool CPACE assessments and/or CPACE bonds in a securitization vehicle and issue debt backed by the pool of CPACE assets.
There are many ways in which funds can be active in the CPACE market. Whether and how one may get involved depends on one's financial situation, on applicable investment policies and on potential tax consequences. Any unique aspects should always be reviewed by your legal and financial adviser.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.