Law360 (March 19, 2025, 2:29 PM EDT) -- After a clean energy finance tool gained steam as a relatively low-cost, long-term financing option, property owners in some states are now leaning on its retroactive capabilities to free up capital and pay down senior lenders.

 

Commercial property-assessed clean energy, or C-PACE, is a financing mechanism that allows building owners to fund clean energy upgrades, energy efficiency improvements and resiliency renovations, recouped via a special assessment on annual property tax bills and then repaid by municipalities to private lenders. The tool's popularity first took off during the COVID-19 pandemic as construction lenders pulled back and interest rates rose, becoming an increasingly common addition to the capital stack.

 

But C-PACE may be even more useful now to owners of qualifying commercial real estate assets facing looming maturities in a difficult lending market because of its retroactive applications.

 

Attorneys and capital providers told Law360 Real Estate Authority that property owners that undertook energy-efficient new construction and renovation projects in recent years can and are turning to C-PACE to refinance those assets.

 

C-PACE 101

 

C-PACE loans are long-term, as much as 30 years depending on the state and the lifespan of the energy efficient or resilient components. The financing tool is also nonrecourse, meaning the lender can't go after the borrower's other assets in the event of default, and nonaccelerating, meaning the lender can't demand full repayment due to default.

 

C-PACE loans are tied to the property. If the asset changes hands, either via sale or foreclosure, future owners must assume responsibility for repayments.

 

Brad Molotsky, a Duane Morris LLP partner, said that as of late, C-PACE often offers lower interest rates to borrowers, typically 7.25% compared to interest rates that would otherwise be close to 9%.

 

"[C-PACE] gives [developers] proceeds that they can pay over a longer period of time, so it costs them less per year," Molotsky said. "It's still expensive, seven and a quarter compared to nine ... but their period to pay it back is much longer, so the actual dollars out of pocket is less stressful on the owner."

 

States must adopt legislation enabling C-PACE and R-PACE, a version of the financing tool for residential properties, and then municipalities must create and adopt their own PACE programs. So far, 40 states and Washington, D.C., have passed enabling legislation.

 

Though key requirements may vary from state to state, including the maximum length of loan terms and whether the financing tool can be applied retroactively, C-PACE proceeds may only be used to cover the costs of projects that qualify under the state's definition of a property-assessed clean energy improvement. These laws tend to cover things like efficient lighting, water conservation systems, better air conditioning systems and new roofs.

 

Despite this constraint, C-PACE qualifying components can typically account for anywhere between 20% and 30% of new construction, attorneys said.

 

Due to states' heightened energy efficiency requirements, many standard construction materials used in new construction projects now meet PACE requirements, according to Husch Blackwell LLP partner Rebecca Mitich.

 

"General materials and building standards at this point are oftentimes qualified on their own without being something you would think of as energy efficient, something you would choose specifically for that purpose," Mitich said.

 

Why Now?

 

The macroeconomic conditions ushered in by the pandemic have led to a surge of interest in C-PACE, though the financing tool for commercial real estate has been around in some form since 2009.

 

Pete Morgan, co-chair of Winston & Strawn's structured finance and esoteric finance practices, told Law360 that the appetite for C-PACE grew as construction lenders pulled back. Senior lenders limited in the total capital they could put to work but eager to keep clients active, began warming to C-PACE, Morgan added.

 

Previously senior lenders had been wary of the tool, which is repaid ahead of any existing mortgage liens, even though it cannot be accelerated.

 

"A lot of the reticency to even consider C-PACE turned in that environment," Morgan said.

 

PACE Loan Group Chief Operating Officer Bali Kumar confirmed that the C-PACE lender saw deals take off as banks pulled back and the cost of capital skyrocketed.

 

"Banks aren't lending and so people have to go to more expensive sources of capital, like debt funds. And debt funds' capital is more expensive than PACE capital," Kumar said. "So then people will say, 'Yeah, I'll borrow from that fund, but I'll also try to borrow as much PACE financing as I can, so that way I can blend down my cost of capital."'

 

C-PACE adoption began gradually during the pandemic, then kicked into high gear when regional banks were pushed to shore up their capital requirements amid higher interest rates, Morgan said.

 

Petros PACE Finance CEO Mansoor Ghori told Law360 that the pandemic also expanded the pool of asset classes that gravitated toward C-PACE. Previously, the pool of borrowers Petros worked with had been

dominated by hospitality owners.

 

"[Property owners] weren't able to raise equity and they found out that PACE was available, and that we were active and ready, willing and able to fund their deals," Ghori said. "So more of the asset classes were able to join the party at that point."

 

Now multifamily assets comprise 30% of Petros' loans, hospitality assets comprise another 30% and industrial assets account for 20%, with the remainder spread among various other asset types.

 

A total of more than $2.5 billion in C-PACE deals were completed in 2024, a significant fraction of the $9.8 billion in C-PACE deals completed since the financing tool's introduction. The size of individual deals has also jumped significantly, rising from $5.9 million in 2022 to $11.4 million in 2024, according to data compiled by the C-PACE Alliance.

 

Refinancing in Action

 

Nuveen Green Capital provides C-PACE financing for new construction and refinances construction debt, according to managing director and head of production Kate Cusack. Nuveen provided nearly half of the total originations in 2024 and is aiming to account for an even larger share of the total originations in 2025, a representative added.

 

In one blockbuster transaction, Nuveen extended $220 million in C-PACE financing to recapitalize a Class A office building in San Jose, California. Owner Jay Paul Co. was able to refinance an existing construction loan that had paid for earlier sustainability and resiliency measures, securing financing with a 30-year term, Nuveen said.

 

The capital provider also supplied the owner of a luxury hotel in Santa Fe, New Mexico, with $76.2 million in C-PACE financing in November. The package refinanced an existing senior loan on the property, recapitalizing energy and water efficiency improvements previously made to the property, according to Nuveen.

 

The capital provider added that the C-PACE financing supplied more favorable financing terms and will be used to fund other ongoing improvements.

 

Pace Loan Group provided a combination of retroactive and proactive C-PACE financing for an office building in downtown Los Angeles, in a deal first announced in January.

 

"Really any financing for any office building ... has to be creative to help that office building live to fight another day," Kumar said.

 

A portion of the $24 million provided by the company retroactively covered improvements made to elevators, HVAC, lighting and exteriors and the remainder will cover future tenant improvements and capital expenditures, the company announced in January.

 

Retroactive Applications

 

In states that allow it, property owners can retroactively secure C-PACE financing, if they have completed renovations or new construction with components or upgrades that qualify under the state's enabling legislation.

 

"C-PACE lenders are now, in most states, able to offer financing and to use the proceeds of that financing to actually pay back existing loans on the property," Morrison & Foerster LLP partner Jeffrey Temple said. "When the program first rolled out, as far as I know, that wasn't permitted, but recent amendments have made it possible."

 

Temple added that he has only seen borrowers use C-PACE financing this way in the past two years.

 

More than 25 states allow for the retroactive use of C-PACE, including California, Florida, Michigan and New York.

 

Jason Tiemeier, a partner at Bricker Graydon LLP, told Law360 that property owners with access to C-PACE may gravitate to the financing tool for the stability its longer terms can offer.