There’s a lot of buzz going on about C-PACE. In this blog, I’ll go over Colorado’s C-PACE (Commercial Property Assessed Clean Energy) program at a high-level in the first part and then provide a more detailed narrative as well.
What is C-PACE?
C-PACE is a financing mechanism that enables low-cost, long-term funding for energy efficiency, renewable energy, and water conservation improvements to commercial properties
- C-PACE uses the existing public-sector structures of improvement/assessment districts to create a statewide district for funding energy projects, called the New Energy Improvement District (NEID), but financing is provided by the private sector (i.e. C-PACE leverages the public sector infrastructure of the property tax collection process, but not the coffers)
- Commercial property owners pay back C-PACE financing via a special assessment line item on their property taxes
- If counties choose to voluntarily opt-in to the NEID, then commercial property owners in those counties will be able to access C-PACE
- C-PACE is currently available in 20 of 64 counties in Colorado. Contact Integro to discuss your county.
Why is C-PACE Valuable to Colorado’s Property Owners?
- Financing 100% of project costs results in zero up-front costs for the property owner. With the alternative, a standard commercial loan, the property owner would be asked to pay for the soft-costs (e.g. energy/water audit, feasibility study, attorney fees, etc.) associated with the project out of pocket. With C-PACE, all soft and hard costs associated with the project can be rolled into the financing amount, which means that the property owner doesn’t need to pay any upfront out of pockets costs in order to participate
- Longer duration financing (e.g. up to 20 years) commensurate with the lifetime of the energy/water upgrades improves monthly cash flows and supports deeper retrofits. By way of comparison, standard commercial loans for similar projects typically do not exceed 7-10 loan terms
- C-PACE assessment transfers with the sale of the property to ensure that project costs and savings are always connected, reducing a significant barrier to energy/water project implementation (i.e. prior to PACE, building owners needed to be confident that they would remain in the building long enough to enjoy the financial payback associated with the project.)
- Tying the debt repayment obligation to the property tax bill produces a secure payment stream that is viewed as less risky than typical loans, meaning low-interest capital can be raised from the private sector with no government financing required
Who can utilize C-PACE?
- Commercial property owners in counties that have opted-in to the program
- “Commercial” is defined as any building, other than a residential building containing four or fewer units, which could include an office or retail building, an industrial or agricultural building, multi-family housing, etc.
- Non-profits are eligible to participate, as are government facilities (although TABOR may apply)
- New construction projects can utilize C-PACE to finance a portion of the new construction costs if the building meets a certain energy performance above the jurisdictional code
What role does the county play in C-PACE?
- By opting-in to the program, a county agrees to place assessments on the property tax bills of participating properties, collect those assessments, and remit them back to the statewide District (i.e. the program administrator)
- In return, the county collects a 1% fee on every collected/remitted C-PACE assessment and allows its commercial property owners to access this financing tool
- The county is not responsible for providing any direct financing for projects or committing any other resources to the program other than what is outlined above
Colorado C-PACE Status Update per the Colorado Energy Office
- C-PACE launched in June 2016
- To-date, 19 counties have opted-in to C-PACE. A list of those counties can be found via the
- 16 Projects closed to-date, totaling ~$16.97M of PACE financing
- 43 projects in active development, representing verified deal-flow of ~$83.0M
- 22 registered lenders to-date
Integro’s Role as a Project Developer
- Integro plays a critical role in C-PACE. Working as the owner’s advocate, guiding them through the C-PACE process, looking out for the owner’s best interest and helping to secure the financing that works best for the owner in each particular project. As of June 2018, Integro has worked with the clients responsible for 70% of all Colorado’s C-PACE dollars financed.
What is C-PACE?
PACE programs enable property owners to repay the cost of energy efficiency, renewable energy, and water conservation upgrades through a special assessment placed on their property tax bill. PACE assessments are typically secured by a lien on the property, which is filed with a local or county government. Importantly, and unlike many other types of property assessments, the use of PACE is voluntary for all parties involved—ranging from the government policymakers at the state and local level who authorize the use of PACE in their jurisdictions, to the individual property owners who elect to use PACE for property upgrades.
By enacting PACE-enabling legislation, legislatures in 33 states plus the District of Columbia have authorized PACE as an option for businesses and homes. Commercial PACE (C-PACE) programs are active in 20 states plus the District of Columbia and lending volume currently stands at approximately $600 million for commercial, industrial, and multifamily applications.
The specific financing terms and conditions, as well as eligible expenses covered by PACE assessments, vary by program as well as based on specific provisions in the state’s PACE-enabling statute. Typically, PACE financing covers both hard and soft costs (i.e., expenses related to equipment purchases and installation as well as administrative, financing, legal, audit, and other fees), as well as a wide range of eligible measures (including energy and water efficiency, renewable energy, health and safety upgrades, electrical system upgrades, roof repairs, and seismic retrofits), so long as they achieve the public purpose identified in the state’s PACE-enabling statute.
Three unique attributes of PACE assessments include: its transferability upon sale of the building; the position of the tax lien created to secure it; and the collateral-based criteria used to underwrite it. Each of these attributes is linked to the fact that PACE obligations are tied to the property (as opposed to the borrower) and, as special assessments, are treated in the same manner as other tax and assessment charges.
The first feature, transferability, refers to the ability of the obligation to change ownership if the property is sold; in the event of a sale of a building with a PACE assessment, the outstanding balance of the obligation transfers to the new owner (assuming satisfaction of the debt is not negotiated as a condition of the sale). The feature of transferability may sway some PACE borrowers to take on larger projects with longer payback periods than they would without it, even if they expect to sell their building before the end of the agreed-upon repayment term. It also boosts investor confidence that the full obligation will be repaid over time.
The second attribute of PACE obligations is the position of the lien that secures the PACE assessment, which is equal to other tax and assessment liens and senior to non-tax debt on the property (e.g., mortgage liens). This position creates a high level of security for investors by ensuring that, in the event of default or bankruptcy, the delinquent portion of a PACE obligation is repaid at the same time as other past-due tax obligations and ahead of non-tax debt in arrears, such as missed mortgage payments. This is especially relevant in a forced sale or foreclosure situation, where the proceeds from the sale are used to repay various obligations on the property and distributed according to lien position.
PACE transactions typically rely on unique underwriting practices—the third key feature of PACE. Whereas traditional lending is based on ability-to-repay criteria such as a borrower’s credit history, credit score, and/or debt-to-income ratio, PACE financing typically examines the financial health of the property to determine eligibility for an assessment.
Together, these attributes—transferability, lien seniority, and property-based underwriting–play a role in minimizing credit risk for investors and boosting their confidence in the security of PACE financing. In turn, they have also enabled PACE program administrators to access lower-cost capital and offer borrowers more attractive terms and conditions, such as lower interest rates and longer tenors, than they may otherwise be able to access.
Offering amazing benefits, C-PACE is gaining a lot of attention nationally and is poised for massive growth in upcoming years. Because of the nuances, and multiple parties, trades and variables involved, working with Integro’s expert C-PACE team can help ensure you get the most out of the program, and get the deal that is right for your company. Contact Integro today to discuss how to begin.