C-PACE financing bridges gap in capital stacks

In a volatile market where other commercial real estate lenders are pulling back, Nuveen Green Capital remains firmly at the table providing financial solutions to property owners and developers. The private lender has deployed over $1 billion in C-PACE financing since the company started in 2015 and anticipates more growth ahead.

“There is so much opportunity in the market. We’re just scratching the surface,” says Alexandra Cooley, co-founder and chief investment officer of Nuveen Green Capital. Nuveen Green Capital is a national leader in sustainable commercial real estate financing solutions and an affiliate of Nuveen, the $1+ trillion global asset management firm.

Commercial Property Assessed Clean Energy (C-PACE) is a financing mechanism that provides commercial property owners access to low-cost, long-term, fixed-rate capital for energy efficiency, water conservation, and renewable energy improvements that are paid back over a 20+ year term through a special property assessment. As C-PACE moves further into mainstream financing, the sector is riding a hockey stick-shaped growth trajectory. The use of C-PACE across the U.S. has more than doubled in the past three years, with cumulative funding currently totaling an estimated $4.2 billion across 2,900 commercial projects, according to the industry association PACENation.

One of the drivers for growth is the policy environment. In the early days of the industry, C-PACE only existed in a handful of states across the U.S. Today, nearly 40 states have now passed C-PACE policies. Demand for C-PACE also is growing along with greater awareness of ESG and the push for greener, more energy-efficient real estate assets. “C-PACE also has benefitted from some of the turbulence in the commercial real estate lending market,” notes Jessica Bailey, co-founder and CEO of Nuveen Green Capital. In a market where interest rates are rising and leverage is more constrained, borrowers are discovering that C-PACE can bridge the gap in the capital stack, she adds.

Flexible financing solution

C-PACE is being put to work in a wide range of commercial and multifamily real estate projects, including renovations, new development and recapitalization. The non-recourse financing offers property owners and sponsors a number of attractive features. One of the benefits of the long-term, fixed-rate structure is the predictability in underwriting.

Sponsors and building owners are looking to understand what cash flows a building will generate across their entire hold period. Returns can fluctuate higher or lower, depending on financing rates. C-PACE provides long-term, fixed-rate financing that can extend 20+ years. “We are able to lock in a big portion of the debt service on pro formas, and C-PACE has become so much more attractive to sponsors because of that long-dated, fixed-rate nature,” says Cooley.

For example, Nuveen Green Capital recently provided $10.3 million in C-PACE financing for a new mixed-use development in Denver that was structured with a 25-year term. Developers will use C-PACE to finance solar, roofing, windows, insulation, lighting, plumbing, boiler, chiller and elevators. 

Another key feature that borrowers like about C-PACE is the flexibility. As an assessment, a building owner or sponsor doesn’t have to prepay if they decide to sell or refinance. As an assessment, it transfers automatically upon property sale, much like a street assessment, or a sponsor can choose to take advantage of a prepayment option. The assessment structure also allows mortgage lenders to maintain the first lien position, and the cost of C-PACE is attractive on a relative basis as compared to mezzanine loans or preferred equity. 

Nuveen Green Capital has established a significant track record in the industry, providing financing across a variety of projects. The firm funds 100% of the hard and soft costs of qualifying commercial building upgrades and new construction elements that improve energy performance with net proceeds up to 35% of property value. The interest rate is fixed at ~7% with a long amortization of 20-30 years from the first payment date.

“One of the things that has differentiated us is our capital markets execution and having developed this product for the securitization market,” says Cooley.

The assessment structure, coupled with the very low LTVs on commercial real estate, allowed Nuveen Green Capital to create very standardized underwriting, which is attractive to investors. For borrowers, the result is an attractive, accessible structure that is backed by reliable institutional capital, she adds.

C-PACE can be applied to renovations, new development

C-PACE can be used in a variety of different situations – renovation of an existing building, new ground-up development and recapitalization. In some cases, C-PACE might finance deferred capital expenditures, such as upgrading equipment. “For developers, this is a new way to think about the traditional capital stack that can bring down the overall cost of capital for a whole project,” says Bailey. 

Nuveen Green Capital recently provided $6.4 million in C-PACE to Pioneer Companies for the development of the Albany Hyatt Hotel in Albany, N.Y.  Due to the COVID-19 Pandemic, construction was paused on the project, but with the help of C-PACE financing from Nuveen Green Capital, the project will be able to continue unimpeded. “Nuveen Green Capital’s C-PACE program knowledge was invaluable in navigating the process with other capital providers, engineers, attorneys, and professionals. Closing of the financing was very efficient in large part due to their established internal framework and systems. This is our second transaction with Nuveen Green Capital, and we consider them a valuable partner,” says Mark Roney, CFO at Pioneer Companies.

Another important point is that C-PACE financing can come into a project retroactively. The policy provides a look-back of two to three years depending on the state. One example of a project that Nuveen Green Capital provided C-PACE capital for retroactively was the Hotel Marcel in New Haven, Conn. Hotel Marcel, which is part of the Tapestry Collection by Hilton, is the first anticipated net-zero hotel in the U.S. Nuveen Green Capital provided $7 million in C-PACE to finance the property’s large-scale solar array, which will allow the property to generate its own electricity for lighting, heating, cooling and hot water. C-PACE financing was also used for roofing, windows, insulation and lighting. 

“I think a way for a developer to think about C-PACE right now is that it has an embedded credit enhancement through a state policy that allows for us to lend in a market where other lenders are pulling back,” says Bailey.

“The magic of the C-PACE policy is that it allows us to continue to invest in commercial real estate and climate change solutions. State legislators pass these policies to create a financing option for economic development for climate change mitigation. The policy framework enables us to use the tax collection mechanism, which enhances the credit of the loan and promotes liquidity in the market.”