C-PACE Financing: A Way To Reinvigorate Downtowns Across The US

In every central business district across the U.S., leaders are pushing for new ideas to reimagine vacant office buildings. Most often, the chatter is to convert these properties into apartments or condos or undergo a significant renovation to appeal to new tenants.

The problem with turning office space into multifamily is that most floor plates were designed for large open areas for desks, conference rooms and private offices without interior windows, adequate lighting, plumbing, heat, air conditioning or internal structures. As soon as office building owners calculate the expense for all those items, the idea usually quickly fizzles.

To renovate vacant office properties into more modern hubs for a return to work, most office owners are stuck without enough rent to cover the existing expenses (property tax, loan payments).

To undergo either a significant renovation or a repurpose, the property owner needs a cash infusion or debt. Without positive cash flow from existing tenants, those property owners with nearly vacant properties have few options. Property owners also need a creative team comprised of financing, construction, municipal/government and energy auditors to uncover options that fit the needs and the budget.

There are some solutions. First, local municipalities may decide to fund some of those expenses through tax-increment financing or other infrastructure grants. Second, the city may decide to acquire the property from the owner to provide more flexibility for the long-term city plans. Third, the property owner can assemble capital to cover the redevelopment or renovation.

When the third option is the best, financing quickly becomes a deciding factor in whether a renovation is possible. That’s where commercial property assessed clean energy (C-PACE) financing can be an answer.

C-PACE is a state-by-state financing option that covers windows, plumbing, electrical, roofing—any of the construction components that make a property operate more efficiently and resiliently. Renovations that lead to new uses or to create an asset poised for the long term can be financed without recourse for up to 30 years in most states—even financing improvements that were completed in the previous one to three years.

As many news outlets have reported, office properties are a tough asset to own right now. But with the movement toward businesses requiring more in-person work than virtual, these nearly vacant and struggling office buildings may be able to secure an infusion of capital and turn the story into good news. C-PACE funds can offer a financial path for those properties to reinvent and reimagine.

 

Capitalization

My company is a direct C-PACE lender to the property owner for several complexes—for example, a downtown LA office building, which completed nearly $25 million in renovations over the last three years to modernize the common areas and add amenities. But the timing was off, and when some tenants didn’t return after the pandemic, the lender took possession of the property.

The C-PACE financing enabled the new owner to leverage that $25 million previously invested to amortize over 30 years and bring down the total debt. Without that burden, they can focus on attracting new businesses with these refreshed amenities amid a return-to-office movement—aligning with their mission to implement environmental, social and governance (ESG) principles that will reduce operating expenses and contribute to a more sustainable environment.

 

Acquisition

For two different office buildings my company is providing lending to—one in Minneapolis and one in Milwaukee—the C-PACE loan was a crucial component in the change of ownership and became an important part of the plan to reposition those assets. The challenge with vacant office buildings (or nearly vacant) is that the owner doesn’t get the cash flow from rent to maintain the common areas or amenities.

In both cases, the C-PACE financing acted as a way to bring down the cost of capital from other sources while also financing improvements that will attract new tenants and bring the property back to life. In Minneapolis, a large plaza has completed a significant renovation and is already seeing renewed interest from businesses ready to expand or locate in the downtown core. In Milwaukee, a company will use the C-PACE to fund tenant improvements, a significant cost for all office properties but one that can now be amortized over 30 years.

 

Conversion

Here's another client example. In St. Paul, Minnesota, a former 197,692-square-foot office building is being converted into about 175 apartments using a $15.8 million C-PACE loan in a $72 million project. The project will include the building envelope, windows, HVAC, plumbing, lighting systems, mechanical and domestic hot water pumps. According to the commercial energy modeling done by our professional engineers, the complex's renewable and energy conservation measures are expected to save $1,193,271 annually in a payback period of 13.6 years.

In San Francisco, reduced office occupancy has been the focus of the city government along with a push to convert vacant properties into multifamily. For one property for which my company is a lender, the conversion to multifamily will need significant municipal support with a $25 million C-PACE loan. The owner can’t get a traditional mortgage and has turned to C-PACE to help assemble a package that would transform one building but also be the catalyst to transform a downtown neighborhood.

In short, every major city in the U.S. has vacant or nearly vacant office buildings. C-PACE offers a path to new life, which in turn could rejuvenate the downtown core. Those buildings are crucial to the long-term health of all major cities—especially when they can pay their property taxes and not burden the city’s residents with that hefty expense.

 

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.