Coordinating with first mortgage lender and planning for refinancing is an important topic for the developer and commercial real estate investor looking to use C-PACE 

C-PACE for mortgage lenders and lender consent 

Commercial PACE (C-PACE/ CPACE) is quickly growing into a popular capital source for developers in new construction and renovations throughout the United States with expansion starting into other counties around the globe. C-PACE allows property owners to finance energy efficiency, renewable energy and water conservation projects through voluntary property assessments with payments spread over the functional life of the project. The repayments for C-PACE are made through a non-ad valorem tax applied to the real estate tax bill.

Why do senior lenders consent to C-PACE?

C-PACE improves the subject collateral with positive impact and protections for the senior lender

• Minimal change to refinance risk of the subject loan with little impact to DY
• Many takeout lenders including agency lenders do not mandate refinance of the C-PACE
• No balloon payments
• Improves property net cash flow by funding measures that reduce utility costs
• Lowers blended cost of capital in development to boost IRR
• C-PACE provides effective and flexible options to recover project expenses
• May be treated as off balance sheet debt with resultant minimal impact to debt-equity loan covenants
• The repayments due for C-PACE are generally offset through the utility and maintenance savings achieved by virtue of the improvements
• Repayments due for C-PACE may be passed through to tenants or guests

Protections for the mortgage holder

In addition to the benefits to the subject collateral and ownership, C-PACE provides certain basic protections for the first mortgage lender as follows:

• C-PACE funds are typically held in escrow with full amount available for construction draws as of closing
• C-PACE payments are typically capitalized until projected stabilization of property
• C-PACE has no acceleration clause and by statute is subject to a full standstill
• Like other property taxes, only delinquent C-PACE payments are senior to mortgage loan
• C-PACE may be escrowed by the Lender in the same manner as other real estate taxes
• C-PACE has no due on sale clause and does not need to be paid off upon sale or refinance
• Fixed repayment schedule with options to prepay at any time allows predictable property cash flows
• C-PACE fully amortizes during its term providing no balloon risk
• C-PACE contains no technical defaults and no recourse of any kind
• No intercreditor agreements or financial covenants
• C-PACE does not alter or restrict a senior lender’s foreclosure rights
• Senior lender maintains right to cure delinquent property taxes including C-PACE
• With some attributes similar to a ground lease, C-PACE is fully prepayable

In addition to the above, a study published by Trepp analyzed a significant sample of CMBS loans and indicated that properties with energy efficient improvements reduced default risk by as much as 9% from the average.

Planning for CMBS:

C-PACE has evolved as an important tool to help stabilize properties planning for eventual CMBS.  Due to the flexible nature of C-PACE, Transactions can be structured to optimize DY for those looking for CMBS with creative methods taking advantage of the flexibility of C-PACE as a financing tool. See one example HERE in a case study of an office building leasing up.

For those who are entering CMBS, some investors are adding C-PACE consent language to their loan documents to preserve the possibility of a C-PACE assessment in the future. Unless consent language is included in the original loan documents, it is very difficult to obtain consent from the administrative agents and/or the servicer who often do not feel authorized to give consent. The exact language for lender consent varies by state and program. To preserve the possibility of funding a property’s upgrades in the future with C-PACE, it is important to review jurisdictional requirements and statute to preserve the option of utilizing C-PACE after a loan enters CMBS.

The best opportunity for HUD Lender Consent for C-PACE:

• the ideal property has an existing HUD loan 
• the owner wants to use PACE to support efficiency or renewable upgrades
• the property has increased in value since closing the HUD loan and its rents have increased over time
• mature property-C-PACE does not seem to fit metrics for new construction HUD loans

The best opportunity for C-PACE with a Freddie:

• the ideal property does not have a Freddie loan 
• the owner wants to use PACE to support efficiency or renewable upgrades
• mature property with stable rents looking to close a Freddie loan in the near future
• Property is a multifamily and not a healthcare property

Freddie Mac C-PACE Guidance

 WEBINAR: C-PACE and HUD Workshop

 HUD Administrative Guidance

California case study: HUD consent for PACE

While at this time Fannie Mae prohibits PACE, other agencies have consented to C-PACE such as HRSA and USDA

Background:

Commercial PACE (C-PACE, CPACE, C-PACER) financing makes it possible for owners and developers of commercial properties to obtain low-cost, long-term financing for certain capital improvements for energy efficiency, renewable energy, and resiliency in new or existing buildings. Based on state enabling legislation that classifies energy and other upgrades to commercial real estate as a public benefit, new construction and retrofits can be funded with no CAPEX and are repaid through the property tax bill over a term that matches the functional  life of the equipment, typically 25-35 years.

About Counterpointe Sustainable Real Estate:

Since 2013, CounterpointeSRE has had a major impact through its investments to reduce the commercial building sector’s carbon footprint and to increase resiliency in the nation’s infrastructure. A majority-owned affiliate of MassMutual, Counterpointe Sustainable Advisors invests at the intersection of commercial real estate and energy industries through diversified sustainable financing including mortgages, C-PACE and other energy financial tools.

CounterpointeSRE
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