Interest rate changes won’t slow down appeal to developers for C-PACE financing

All of the talk about interest rates finally ticking down is making some developers wonder if C-PACE financing will continue to be accretive to their capital stacks.

What’s changed since March 2022 when interest rates began their climb is that more than a dozen states have improved or created C-PACE programs. Those rules have added more flexibility in how to deploy C-PACE, lengthened maturity dates, and expanded the reach of what is covered through C-PACE to include plumbing and resiliency.

Use of C-PACE to increase in a falling interest rate environment

The decline in interest rates is expected to start with a decrease of 25bps or 50bps, causing the 10-year treasury rate to fall. That has two positive knock-on effects.  First, C-PACE quotes can have lower floor rates.  Second, as rates decline, deals and DSCRs begin to pencil again! 

Banks benefit from bringing C-PACE into deals

Many borrowers worry about mortgage lender consent, but since 2022, more and more regional banks and debt funds have benefitted from combining C-PACE with their mortgage.  These senior lenders see the benefit of leveraging the C-PACE to allow their borrowers to get to an acceptable LTC/LTV without finding participants or extending their credit limit. This option opens up the bank’s balance sheet to lend with less risk.

Will it cause developers to jump off of the sidelines?

Many developers are sitting on the sidelines, waiting for interest rates to go down. Few industry experts expect that rates will hit 2019/2020 levels but the new normal is still appetizing relative to rates today. While office vacancy remains stubbornly high across most CBDs, multifamily, hospitality, and self-storage have remained resilient, reflecting the need for more product. Developers generally want to get a head start on the competition, making the next 12-18 months that window. C-PACE financing is part of the capital stack that produces returns that entice developers off of the sidelines.  

More and more states adopt C-PACE legislation

Unlike previous development cycles, the next cycle will have the benefit of leveraging C-PACE financing in nearly all states, since over a dozen have recently adopted expanded or new C-PACE legislation. This means that developers in over 30 states now have an immediate new path to make their capital stacks work. With the lead time often needed for new developments, once entitlements and municipal approvals are finalized, C-PACE financing closes in tandem with other lenders. Since C-PACE financing is required to pay for parts of the project that are “sustainable,” we are finding that most developers of every property type build “above code,” and so we are able to finance key portions of the project, such as windows, HVAC, roofs, roofing, plumbing, lighting, and water runoff – all of which are often PACE eligible by their nature.

East Coast benefits most from expanded legislation

Of the states that approved C-PACE, the most benefit will be felt along the East Coast, with New York, New Jersey, North Carolina, and Georgia creating or perfecting their programs. While New York previously had a restrictive program, the most recent changes will now apply to new construction as well as retrofits/renovations. Given the sheer size of the New York CRE market, demand has been pent up for many years, with senior lenders ready to partner with C-PACE lenders. New Jersey was slow to add a program for many years, and ultimately may require prevailing wage rules. While the rules are still being written, interest remains high in bringing relief to stalled developments.

In the Southeast, North Carolina, and Georgia are bringing statewide programs online for the first time. Previously, legislatures have been hesitant to approve the legislation due to a misperception that it is a part of the “Green New Deal.”  To the contrary, the growth has been in red and blue states since property owners can operate properties more efficiently, realize a lower cost of capital, and leverage a fixed interest rate for up to 30 years.