Higher interest rates and tighter liquidity are forcing the CRE industry to get creative when it comes time to build their capital stack.
When The Real Deal last sat down with Nuveen Green Capital, the leading C-PACE capital provider was predicting a major uptick in adoption of the financing structure across the CRE space, and six months later, those predictions have been spot-on. The tool allows owners and developers to secure the assessment-based financing at various stages of a project, from new-construction, to mid-construction, to refis–as many as three years after completion. TRD caught up with Chris Lawton, Head of Originations at Nuveen Green Capital, for an update on how this cost-efficient financing instrument has become a major piece of the financing puzzle in a tight credit environment.
Solving The Refi Conundrum
As interest rates have remained relatively high and loan amounts have gone down, many in the CRE industry have turned to C-PACE to finance their projects at various phases of construction.
“When people think of C-PACE, they tend to think of new construction, which is a big part of what we do,” explains Lawton. “But C-PACE is a flexible tool that can be used to recapitalize projects as a bridge to stabilization, while offering an attractive rate and long-term paper.”
Over the past year, Nuveen Green Capital has seen a shift in demand for C-PACE financing as more borrowers find themselves in need of post-construction recapitalization as they refi their maturing debt. The combination of downward pressure on loan amounts and high interest rates makes it difficult to access the capital borrowers need. Borrowers are in situations where they don’t have sufficient interest reserves to get a project leased and stabilized to a point where it can access long term takeout financing.
Lawton told TRD about a pair of C-PACE loans Nuveen Green Capital provided for two recently completed hotels in LA. The hotels, which were completed two years ago, were slow to stabilize due in part to weaker demand following the pandemic. Now, in the face of a maturing senior loan amidst a challenging refi market, the new owner turned to C-PACE financing as a reliable, cost-effective financing product to refinance existing construction debt, right-size reserves and complete their business plan.
Even though C-PACE is a 20- to 30-year full term product, people use it as a bridge loan in these situations where they need to refinance or recapitalize a project. Because C-PACE is fully prepayable, it gives the sponsor the ability to secure financing now, and then pre-pay the C-PACE in four or five years when they have the ability to secure other long-term financing.
Funding Projects From the Ground Up
Hotels were one of the first major adopters of C-PACE amid the Covid pandemic to bridge properties to stabilization. While the program’s uses include every type of CRE asset, hospitality remains a focus of Nuveen Green Capital, which recently provided over $30 million to refinance energy efficiency improvements at The Arlo Wynwood Hotel in Miami’s popular Wynwood district. The loan allowed the hotel to increase operating reserves while the sponsors recouped equity.
Today, in addition to energy efficiency, renewable energy, and water conservation measures, C-PACE can also cover building components that address climate resiliency, including greater protection against wind, fire, flood and seismic events. Roughly half of a project’s total construction cost can end up qualifying for C-PACE financing, although most jurisdictions limit the use of C-PACE to 35% of the stabilized LTV of a project.
“While that is generally lower than the typical senior loan, C-PACE can be a very meaningful part of the capital stack, and in many recent projects it has become the cornerstone of the capital stack” says Lawton.
For example, Nuveen Green Capital recently provided a combined total of $92 million in C-PACE financing across three asset classes as part of a 20-acre master planned large-scale development project, Harvest, north of Seattle, in Woodinville, Washington. Nuveen Green Capital provided $30 million in C-PACE financing for The Somm Hotel & Spa, a 164-room full-service luxury Autograph by Marriott hotel, which will serve as the centerpiece of the development; $42 million in C-PACE financing for The Yard, a six-building retail, restaurant, and local winery destination; and $20 million or the River Run Townhomes, a 31-unit luxury townhome development. C-PACE was used to fund core building and seismic mitigation systems, enabling the sponsors to significantly reduce the projects’ weighted average cost of capital.
“It was a pleasure to work with the expert team at Nuveen Green Capital,” said Dave Hutchinson, Principal at Harvest Retail Partners LLC. “They have continually made the process seamless from start to finish, while enabling us to efficiently get these projects to completion while lowering our cost of capital.”
C-PACE Is Everywhere
Retail, hotel, and multifamily destinations are just some of the many types of CRE projects using C-PACE to build a capital stack. C-PACE is financing offices, hotels, retail, apartments, condos, senior living, industrial, and even data center projects across their life cycles. Nuveen Green Capital is continuing to see growth not only in how widespread the adoption of C-PACE is, but also in larger amounts.
“With the higher rate environment, we are capitalizing on the opportunity,” explains Lawton. “We’re working with more institutional sponsors and broadening our relationships with senior lenders. And, we have closed $1.3 billion in new capital commitments over the last 12-months, including closing on our second C-PACE lending fund. We are happy to be able to bring some relief to the CRE industry in what has been a tough couple of years for the market.”
Originations at Nuveen Green Capital jumped to close to a billion for 2023 – representing 41% of all C-PACE capital deployed in 2023, and the firm is anticipating continued double-digit growth going forward as awareness of C-PACE as an accretive financing option continues to spread across the commercial real estate industry.
Lawton expects this momentum to continue. Awareness about C-PACE as a valuable financing tool continues to spread as the lending market remains tight, and more states are adding C-PACE programs every year, with Idaho, Georgia, North Carolina and Hawaii recently joining the club, bringing the number of states with C-PACE programs to 40. Not only are new states joining, but jurisdictions are working to amend existing laws – like New York City, for instance – to improve accessibility, expand eligible measures, and create consistency, opening the floodgates even wider.
If you think C-PACE might be the missing piece of your capital stack, reach out to the Nuveen Green Capital team today. For more information, visit: Nuveen.com/greencapital.