C-PACE: An Accretive Means to Weather the Current Economy

Inflation is currently at 9.1% – that’s less than a point away from being described as “hyper”. This would put us more in the territory we are accustomed to in developing nations – not in the United States. Unsurprisingly, the Fed is eager to curb our current inflation at all costs, which means continuing to raise interest rates until demand is brought back in balance. So, what does this mean for development projects that haven’t secured their capital yet? The answer is that you are going to need to fork over more equity or put the development on the shelf until things settle. Right now, we’re primarily seeing developers opt for the latter. 

For those projects that are currently under development or not stabilized yet, you are in a trickier situation. You are dealing with one or more of the following: a less favorable exit, higher interest rates, lower leverage, higher cap rates, and decreased capital availability. And we haven’t even gotten to the supply chain issues you’ll face when you start construction. Then, depending on your asset type, the path to stabilization may be delayed, as we are staring a likely recession where consumers are more handicapped financially than they were a year ago.  

That was depressing, I know. I promise, we’ll get to the opportunity here, but it’s important that we don’t sugar-coat the current situation. Now that we’ve established the problem, let’s talk about our options.  

One option that should be considered if you find yourself pre-stabilization and need more time to attract long-term financing is Commercial Property Assessed Clean Energy (C-PACE) financing. Did you know that in many state C-PACE programs, C-PACE can be used retroactively for up to three (3) years from Certificate of Occupancy (C/O), and that most new construction projects automatically qualify for C-PACE due to increased municipal energy codes? Well, now you do, so give us a call. (Or, call your favorite C-PACE lender, then give me a call, because we are better, and we always pay for the drinks at the end of the night.)  

So how does C-PACE help you in this situation? Simply put, it can buy you time and maybe reduce your cost of capital for a period of time prior to obtaining a sufficient stabilization loan. During the height of COVID, we implemented this strategy successfully in the hospitality space, as many assets were stranded in construction loans and couldn’t stabilize. We worked with the primary lender to negotiate an appropriate amount of C-PACE that could be placed on the property, typically an amount that could cover interest reserves for all debt for 1-2 years, any additional proceeds would then be used to buy down the primary lender.  

A word of caution: You can’t use C-PACE as a cash-out. Don’t ask. Seriously. 

Outside of the current market conditions, there are many ways that C-PACE can be accretive to a development project, depending on the individual structure of the deal and/or asset class. Imperial Ridge will always seek to maximize on the benefits of C-PACE, but what really sets us apart is that we are gritty and work hard to close both the C-PACE and senior construction debt in one combined offering so that our clients have efficiency in their debt stacks and increased certainty of close.  

We encourage all developers to give us a shout. We certainly can’t do every deal out there, but we are always willing to look at the project, discuss its merits and determine quickly whether it makes sense for our funds.