C-PACE Lending Momentum Shows No Signs of a Slowdown

In a commercial real estate lending environment that has often proved challenging for borrowers over the past couple of years, an indisputable bright spot has been C-PACE (Commercial Property Assessed Clean Energy) financing. 2024 has seen a dramatic increase in C-PACE awareness as well as lending volume. Connect CRE spoke with Ina Montejo, originator with PACE Loan Group, about how C-PACE functions and what makes it click.

Q: How has borrower awareness and understanding of PACE financing evolved since you began originating these types of loans?

A: Borrower, broker and lender interest in C-PACE financing has grown significantly. While education around its nuances remain imperative, C-PACE has gained recognition as an accretive solution for various challenges in the cap stack—including blending down the cost of capital and refinancing maturing debt.

Not only is it becoming popular amongst borrowers, but more and more states are also revising or adopting C-PACE legislation. Just this year, nearly a dozen states/counties have either adopted or expanded their C-PACE program, and we anticipate that number to continuously grow year over year.

Q: In terms of getting deals closed, what advantages does PACE financing offer compared to other loan products?

A: PACE offers a non-recourse, long-term, fixed-rate type of financing secured by a special assessment on the property, and can finance up to 35% of the project’s as-stabilized value.

Because it is a self-amortizing loan with terms of up to 30 years, it’s quite unique in that it self-amortizes down to $0 at the end of its term with no interest rate risk and limited prepayment penalties. With its long-term nature, it gives borrowers the option to either keep the PACE assessment in place or prepay it out upon sale/stabilization. For example, it works as a term hedge when paired with construction debt.

Retroactive PACE allows for capital recapture of up to three years, depending on the state, which can be especially helpful in refinancing maturing loans. For instance, borrowers can use PACE proceeds to pay down maturing loans with existing lenders and replenish interest reserves to negotiate loan modifications.

Q: What does a typical borrower situation look like — or, alternately, are there many different scenarios that borrowers bring to the PACE Loan Group team?

A: Today, borrowers are generally using C-PACE to blend down cost of capital, refinance maturing debt and replace traditional A-notes.

Even with interest rate cuts, PACE remains to be an effective solution to reduce cost of capital and replace dollars that would have otherwise been provided solely by debt fund, pref equity, etc.

C-PACE can also supplement mortgage debt and act as a participant/A-Note to make mortgage lender’s terms more competitive. For example, if a mortgage lender’s credit criteria allows them to fund at 70% LTC, but they have a credit check limit that effectively limits them to 40% LTC, PACE can come in to fill the gap and act as their participant.

As mentioned, with retroactive PACE, bank and debt funds can utilize PACE to achieve paydowns for maturing debt as long as the improvements were completed within the lookback period.

Q: C-PACE financing has become almost a buzzword in 2024. Do you see that continuing through 2025?

A: Absolutely – C-PACE popularity will only continue to increase even with rate cuts, as C-PACE quotes can have lower floor rates and deals will pencil again as rates keep declining.