Improving energy efficiency can reduce utility costs, increase property value, and benefit the environment — but the considerable costs that accompany major property upgrades keep some businesses from making a change. Commercial real estate accounts for $190 billion in energy expenditures every year, 18 percent of the United States’ primary energy usage, and business-related energy costs are only going up. So how can you reduce energy consumption without breaking the budget?
C-PACE financing offers a solution. Let’s take a look at this funding option and see how it can benefit your commercial real estate company:
What Is C-PACE Financing?
Commercial Property Assessed Clean Energy (C-PACE) financing is a government program overseen by the U.S. Department of Energy. It was designed to encourage property owners to decrease their energy consumption by overcoming the common barriers to energy-efficient property upgrades.
C-PACE loans provide full, up-front financing with low, fixed interest rates and long payback periods for eligible upgrades. Qualifying projects increase energy efficiency, advance renewable energy usage, or improve resilience against natural disasters. This includes water and HVAC systems, lighting upgrades, solar energy installation, roof replacements, and more.
How It Works
First, state governments pass legislation enabling local governments to offer PACE financing, and then local governments set up PACE financing programs. Financing capital comes from the government, private investors, or a mix of the two.
Before financing is distributed, the project must be approved by a PACE administrator, and properties with a mortgage must have consent from the mortgage lender as well. Once approvals and financing are secured, a contractor installs the upgrade, and energy savings begin.
Instead of regular monthly payments like most traditional loans, C-PACE payments are repaid through property assessments as an addition to annual property taxes. The payback period generally extends over the useful life of the upgrade, typically 10-20 years.
Advantages of C-PACE Financing for Commercial Real Estate Companies
Full, Upfront Financing
Perhaps the biggest advantage of C-PACE financing for commercial real estate companies is the 100% upfront financing for both hard and soft costs, with no down payment or time spent saving up for the improvement. This leaves property owners with no out-of-pocket costs, improving cash flow and broadening the range of commercial real estate companies who can benefit from energy efficient upgrades.
Since C-PACE financing eliminates the need to save funds over long periods of time, property owners can install their green property improvements immediately. This makes it possible to complete projects in time to meet tax credit deadlines or before energy-consumption fines begin, and allows commercial real estate companies to start saving on their energy bills on a shorter timeline.
C-PACE loans are generally low-risk for lenders, which allows them to offer more favorable terms for borrowers. Financing is fixed-rate and fully amortized, or spread incrementally over a period of time, and interest rates are typically low. The loan doesn’t require refinancing, but it can be paid off early through the annual property assessment if the property owner chooses.
Financing Secured to Building
C-PACE loans are structured like a property tax, meaning that they are linked to the asset and based entirely on the value of the property and the upgrade. They require no personal or corporate guarantees, and the property owner’s credit history has very little effect on the value of the loan.
Since the loan is linked to the property, rather than the owner, it transfers to the buyer in full when the property is sold. The loan’s term does not accelerate and the balance doesn’t have to be paid off like a traditional mortgage. The new owner assumes any remaining balance when the property changes hands.
Government Benefits for Energy-Efficient Businesses
The United States government offers several tax benefits for energy-efficient businesses, such as the 179D tax deduction. The 179D deduction applies to commercial property owners and eligible designers of newly constructed or renovated buildings, allowing them to deduct up to $1.88 of taxable income per square foot of property if they reduce energy consumption to certain target levels. National Tax Group’s specialty tax experts can help you determine if the 179D tax deduction is right for your commercial real estate company — get a free assessment here.
Additionally, as some local governments look towards legislation to reach their carbon-reduction targets, commercial real estate companies should prepare for the possibility of costly fines for excessive energy consumption. For instance, New York City’s Local Law 97 requires most buildings over 25,000 square feet to meet new emissions regulations starting in 2024, with stricter limits beginning in 2030.
C-PACE financing can help commercial property owners in New York (or any other city with upcoming emissions regulations) install the energy efficiency property upgrades they need to avoid fines before the deadline.
Disadvantages of C-PACE Financing for Commercial Real Estate Companies
Mortgage Lender Approval
Since C-PACE loans are paid through the property tax bill, they take precedence over existing debt holders, such as mortgage lenders. Therefore, lenders must consent before a C-PACE loan is created. While some lenders are hesitant to allow financing that sits senior to their first-mortgage position, other lenders find that the clear financial advantages make C-PACE an attractive offer.
C-PACE was first introduced in 2009, and while the program is growing quickly, not all states have passed PACE-enabling legislation or launched active PACE programs. Currently, 30 states plus D.C. have active C-PACE programs available, and eight states have passed PACE-enabling legislation but do not yet have any active financing programs.
However, more and more states are embracing the program — six new states have introduced active PACE financing programs since 2020. Be sure to check with your state and local governments for availability before beginning an energy efficiency property upgrade.
How Commercial Real Estate Companies Can Get Started With C-PACE Financing
The first step to securing C-PACE financing is to see if your state and local governments have an active PACE program near you. Then, check with your mortgage lender to make sure they allow this type of financing. If they do, you can begin securing project approval from a PACE administrator.
If you’re interested in using C-PACE financing for your commercial real estate company’s energy efficiency property upgrades, consult with an experienced advisor. National Tax Group’s specialty tax experts can help you determine whether C-PACE is a good fit for your business and guide you through the application process. Our team is experienced in navigating commercial tax and financing needs, and we can help you plan your C-PACE loan around other benefits, like the 179D deduction and cost segregation studies. Reach out to National Tax Group today, and learn how we can help you save the most money on your property upgrade.