C-PACE financing can lower the threshold for energy-saving renovations, but its scope of application remains limited

The first phase of the Black Desert Resort project in Ivins, Utah, adjacent to Zion National Park, opened for a trial run last October. The 630-acre development includes a resort hotel, spa, golf course, approximately 1,000 condominium units, and 190,000 square feet of commercial space, including shops and restaurants.

The sustainability-focused resort used Commercial Property Assessed Clean Energy (C-PACE) financing to fund high-efficiency HVAC systems, insulation, seismic reinforcement, and water conservation measures.

"We wanted to develop the project in a way that is environmentally sustainable and responsible to the community, something the community can be proud of," said Jon Day, Chief Financial Officer of Reef Capital Partners, the commercial real estate investment firm that owns the project. "Irrigation systems and water storage prioritize water conservation, which is especially important in a desert region like Utah."

Managing Partner Patrick Manning cited other sustainable features of the resort: the project uses low-voltage Power over Ethernet, "with lighting, security cameras, and door locks across the entire project operating on just 10 volts." He said, "C-PACE helped us achieve this goal as well as water conservation measures. With C-PACE, we obtained financing that banks were unwilling to provide." Manning described the process as "very smooth."

Petros PACE Finance, which provided $153 million in C-PACE financing for the project, called the Black Desert Resort project "the largest single transaction in C-PACE history" when the deal closed in October 2022. Day revealed that the resort secured financing with a 30-year term, a 7% interest rate, and a 25-year amortization period.

C-PACE is increasingly becoming an important avenue for commercial real estate owners and operators to finance sustainable retrofits, including renovation and energy efficiency projects. Jennifer Nuckles, CEO of R-Zero, noted that in jurisdictions where the mechanism is available, C-PACE is attractive for facilities seeking long-term financing with lower monthly payments.

Features of C-PACE Financing

Through C-PACE, building owners and operators can typically obtain long-term, fixed-rate, non-recourse financing of up to 30 years for real estate projects that improve energy or water efficiency, including renovations, upgrades, and renewable energy installations. According to investment firm Peachtree Group, interest rates can be as low as 7%. The firm says it has facilitated 91 C-PACE transactions totaling $925 million.

The financing offers other advantages as well. The mechanism "looks exactly like a tax assessment. There are no restrictive covenants typical of ordinary mortgages, and no additional collateral," said Mansoor Ghori, Founder and CEO of Petros PACE Finance. According to its website, the company has funded C-PACE transactions in 17 states and the District of Columbia. Ghori said the maximum C-PACE funding a project can typically obtain is about 30% of the building's value.

Also noteworthy, according to a report by Patrick Dolan and Anna Lee, partners at law firm Norton Rose Fulbright, repayment is tied to the building undergoing efficiency improvements, not to the owner. The firm represented Petros in New York City's first C-PACE financing transaction. That $89 million deal, completed in 2021, funded energy efficiency upgrades for a building in the Wall Street area.

C-PACE financing "has evolved from a niche product into a fairly mainstream financing tool. It now reaches an institutional client base that didn't exist before, largely thanks to legislative expansion and educational resources," said Rafi Golberstein, CEO of Minneapolis-based PACE Loan Group, which provides C-PACE financing nationwide.

State Progress and Obstacles

C-PACE financing must be authorized by state or local government legislation, after which program administrators can operate in that jurisdiction. According to data from the PACENation website, the District of Columbia and 40 states have passed PACE enabling legislation, with the District of Columbia and more than 30 states having active C-PACE programs.

North Carolina is one of the most recent states to approve C-PACE legislation, signing a bill into law last July, following legislation in Georgia and Idaho earlier last year.

Minnesota signed a bill into law last May that extended the maximum term for C-PACE financing from 20 to 30 years and increased the loan-to-value ratio from 20% to 30%. The amendments also expanded eligible PACE projects to include building resilience improvements and water conservation measures. Golberstein said the state's program can now finance energy projects including fuel switching, and no longer requires eligible energy projects to reduce net energy consumption as long as greenhouse gas emissions are reduced.

Maryland requires an amortization period of no more than 20 years, which makes the mechanism less financially attractive in that state, said Chris Nevin, Midwest Regional Manager of Institutional Real Estate at First National Bank.

When considering C-PACE financing for a specific project, "it has to make good financial sense. C-PACE can provide significant support for projects that are difficult to finance or for borrowers with weaker equity positions—but established developers with strong balance sheets may not see the same benefits," Nevin said. "In fact, in some cases, it could actually add cost over the long term."

While states like Minnesota are making progress in expanding C-PACE, New York City faces a more challenging path. The city established its C-PACE program in 2019 under the Climate Mobilization Act, but according to PACE Loan Group, only three transactions have closed since 2021.

One obstacle is the requirement that all projects achieve a Savings-to-Investment Ratio (SIR) of at least 1.0. This means "projected energy savings must equal or exceed the cost of the investment," and "projects must demonstrate that for every dollar of PACE funding requested, a dollar is saved," said Laura Rapaport, Founder and CEO of North Bridge, which provides C-PACE financing for institutional commercial real estate developers nationwide.

However, last August, the New York State Energy Research and Development Authority updated state guidelines, eliminating the SIR requirement for certain projects, including new construction and major renovations eligible for C-PACE, retrofits that will achieve full building electrification, and projects installing HVAC, ventilation, or hot water systems that meet specific energy efficiency standards. These changes apply statewide; New York City's Accelerator PACE financing program also updated its guidelines in August to reflect these changes.

"The SIR requirement previously limited C-PACE adoption because many projects struggled to demonstrate immediate cost parity," Rapaport said. "With the removal of the SIR hurdle and the inclusion of new construction and major renovations, we expect C-PACE adoption in New York City to expand rapidly."

C-PACE and Multi-State Projects

Despite the appeal of C-PACE financing, the fragmented nature of state programs may give pause to building owners and developers managing multi-state portfolios. "Every state has its own tax law," Golberstein said. Companies seeking to retrofit properties in multiple states must obtain financing separately in each state.

"When we think about large REITs or regional owners with portfolios across three or four states or markets, the key is to do one small transaction as a test. If it works, then replicate it across the portfolio where applicable," Golberstein said.

Nuckles advises owners with large portfolios to conduct a portfolio-wide audit to identify properties with the highest cost-saving potential. "I would tailor each C-PACE transaction to the specific needs of the properties in the portfolio," she said. "Retrofits can also always be phased."

Golberstein emphasized the similarities among state programs. "So, if you've done PACE in Tennessee, doing PACE in Nebraska will be surprisingly similar. There will be some nuances, but overall the process is the same. So the real question is whether you're in a PACE-eligible state," he said.

However, Jaime Del Álamo, Head of ESG Value and Risk for the Americas at JLL, sees more differences. He is currently involved in several C-PACE financing transactions.

"C-PACE operates more regionally, with conditions varying significantly by state—rules, servicer availability, and even eligibility requirements all differ," Del Álamo said. "On a project-by-project basis, it's an excellent financing alternative, but I don't think it's mature enough yet to guide a single owner to use it nationally and say, 'We can finance X properties across the country with C-PACE,' because there's still a lot of nuance across markets and even market performance."

Nuckles noted that retrofits funded by C-PACE programs can yield long-term benefits, including reduced maintenance and operating costs as well as lower energy consumption.

C-PACE "is adaptive and cost-effective," Nuckles said. "It symbolizes the evolution of the real estate industry, moving toward a more sustainable future."