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Why C-PACE Should Be Part of Every Major Project - Current AND Past

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.



Comparison of capital stacks with and without C-PACE


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

  • Scalable

  • 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.