by Andy Holzhauser
Here’s a pretty standard scenario when it comes to major new construction or redevelopment projects: the amount of capital secured isn’t quite enough to fully fund the project and/or the cost of capital is getting too high.
This is a tough spot to be in.
Taking on bank debt at a competitive rate is certainly one of the more standard ways to fund a project; however, it’s often not enough. There may be a gap and an accompanying challenge to keep your cost of capital from creeping up.
A common approach to solve this is to bring in mezzanine financing, short-term debt at a much higher rate. But this can create the aforementioned cost of capital challenge if the project didn't already have one.
Commercial property assessed clean energy financing, or C-PACE, should be utilized in these scenarios. It’s available to projects before AND well after completion.
That’s right. Oftentimes, C-PACE as a source of financing can be applied to completed construction as a way to free up cash that went into the project. For more on this, please read this previous blog post here.
The benefits of C-PACE
Anyone involved in property construction - bankers, lawyers, financial advisors, developers, construction managers, etc. - should advise their clients to explore and apply for C-PACE financing as part of a project’s capital stack.
The benefits of using C-PACE financing are multifold:
Requires minimal upfront investment and no corporate guarantees or personal financing
Can replace or fill a significant gap in expensive mezzanine debt
Offers fixed-cost, 30-year financing at a rate that is approximately ⅓ less than typical mezzanine debt
Allows for financing of 100% of project costs, including soft costs
Obligation to repay can transfer to the new property owner
Easier application process than you might expect
C-PACE, debt and equity can all be friends
C-PACE is a third component that complements debt and equity. It can be used to adjust the financing mix. If used to reduce equity or as a substitute for mezzanine debt, it lowers the cost of capital.
This may make it sound too risky, different or unconventional but it really isn’t. I’ve worked with a number of clients who after doing their first C-PACE project, realize both how relatively straightforward it is and also how much sense it makes.
A growing number of lenders are also familiar with C-PACE and view it positively. They do not see it as a competitive element or as introducing unwanted complexity into the deal. Instead, it helps projects achieve viability at lower risk.
Comparing costs: C-PACE vs. bank debt vs. equity
Why would you utilize C-PACE when it’s more expensive than senior bank debt?
This is a question that often gets asked. The answer is you probably wouldn’t - unless you’ve already maxed out that senior bank debt. Now when you compare C-PACE to remaining available financing sources, it starts to make sense.
The proper way to understand the cost of C-PACE is in comparison to the cost of equity, mezzanine debt or other financing options, not senior bank debt.