Updated: Oct 27, 2022
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 too high.
This is a tough spot to be in.
Taking on traditional bank debt at a competitive rate to fund a project is certainly one of the more standard ways to fund a venture; however, it’s often not enough. There may be a gap and an accompanying challenge to finance the full cost of your project and keep your cost of capital from creeping up.
One common solution is to bring in mezzanine financing, which is intended to be short-term debt, but at a much higher rate. At issue here is the aforementioned cost of capital challenge.
Commercial property assessed clean energy financing, or C-PACE, is the perfect tool to use in these scenarios. And even better - 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 projects as a way to free up previously-committed cash invested into the project. For more on this, please read this previous blog post here.
The benefits of C-PACE
Anyone involved in real estate project development - bankers, lawyers, financial advisors, developers, construction managers, etc. - should advise their clients to explore and apply 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 of the capital stack that complements project 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, following 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 or risk 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.
If you are interested in learning more about C-PACE financing and how it can bring benefit to your project, we’d love to help.