CPACE loans have existed for over a decade, but until recently, relatively few borrowers have used or even known about this innovative financing tool. Today, CPACE loans are gaining renown in the healthcare real estate sector as an attractive alternative to mezzanine financing for environmental, social, and corporate governance (“ESG”) projects. CPACE has proven particularly popular in the hotel and hospitality sectors but is currently trending as a “hot” financing structure in the healthcare real estate space.
Commercial Property-Assessed Clean Energy (“CPACE”) loans are a financing program whereby owners borrow money for “Qualified Improvements.” Qualified Improvements are generally “green” initiatives intended to improve a property’s energy efficiency, support its resiliency, or increase its use of renewable energy. Examples of Qualified Improvements vary by state but may include efficiency-oriented projects like lighting upgrades, HVAC, insulation, automatic building controls, boilers, hot water heaters, roof replacement, water conservation, solar projects, EV charging stations, stormwater management, and/or seismic, hurricane, and fire resiliency projects.
Payments on CPACE loans are made via assessments on the owner’s property tax bill and are typically repaid over 10 to 20 years, or the useful life of the improvements being financed. The CPACE financing arrangement remains with the property even if it is sold (thereby supporting long-term investments in sustainable building improvements). CPACE loans may be funded by government programs or by private investors, but they are currently permitted only in the 36 states (and D.C.) that have enacted CPACE enabling legislation. Other states, however, are considering the adoption of CPACE laws.
With a CPACE loan, a borrower may obtain 100% financing of the cost of the Qualified Improvements. The interest rate is typically competitive, fixed, and the debt amortizes fully over the Qualified Improvements’ useful life. The CPACE lien has a priority like that of a special municipal assessment (e.g., a sewer or sidewalk assessment) and is senior as to any mortgages on the subject property. Nonpayment of a PACE assessment results in the same set of repercussions as the failure to pay any other portion of a property tax bill.
The CPACE lien’s senior status as to most other debt on the property incentivizes CPACE lenders to fund over longer terms and at better interest rates than with traditional loans. However, existing mortgage lenders may balk at allowing a CPACE loan to supersede the existing mortgagee’s priority. As most mortgagees do have consent rights over additional debt on their collateral, obtaining an existing mortgagee’s approval to a CPACE loan can present an obstacle to borrowers. Nevertheless, CPACE loans continue to gain popularity, and as more and more borrowers embrace sustainability trends and ESG mandates from corporate investors, conventional mortgage lenders are likely to face increasing pressure to allow or approve CPACE financing. Competition from lenders who accept the CPACE structure may encourage reluctant mortgagees to cooperate with CPACE borrowers.
In addition to the advantages discussed above such as attractive term, 100% up-front financing of ESG projects, attachment to the property (i.e., transferability of CPACE debt to successor owners), and competitive fixed interest rate that is typically lower than rates available for mezzanine financing, CPACE financing offers several other attractive features. For example, CPACE loans do not require personal guaranties because they are based on asset value rather than sponsor credit. Additionally, the costs of CPACE loans can often be passed through to tenants. Moreover, the annual savings from a CPACE-financed Qualified Improvement may well exceed the annual CPACE repayment obligation, so the property owner may see positive cash flow very quickly.
Waller is excited about the opportunities that CPACE financing provides. If your company is exploring ways to implement sustainability, capital improvement, or ESG projects via efficient financing tools, you should explore the possibilities CPACE offers.
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