C-PACE financing can lower the cost of energy-efficiency upgrades—but it depends on where the property is located

The first phase of Black Desert Resort in Ivins, Utah, adjacent to Zion National Park, opened softly in October. The 630-acre development includes a resort hotel, spa, golf course, approximately 1,000 residential units, and 190,000 square feet of commercial space including retail and restaurants.

The sustainability-focused resort, financed through Commercial Property Assessed Clean Energy (C-PACE), installed energy-efficient HVAC systems, insulation, and implemented seismic retrofitting and water conservation measures.

"We want to develop properties in a way that is environmentally sustainable and responsible to the community, making the community proud," said Jon Day, CFO of Reef Capital Partners, the commercial real estate investment firm that owns the resort. "The 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: using Power over Ethernet low-voltage supply, "lighting, security cameras, and door locks throughout the property operate on just 10 volts," he said. "C-PACE helped us achieve this and the water conservation measures. Because of C-PACE, we were able to fund projects that banks were unwilling to support." Manning described the experience as "seamless."

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

C-PACE is increasingly favored by commercial real estate owners and operators for funding sustainable upgrades, including retrofits and energy efficiency improvements. In applicable jurisdictions, it offers an attractive option for facilities seeking long-term financing with lower monthly payments, said Jennifer Nuckles, CEO of R-Zero.

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 retrofits, upgrades, and renewable energy installations. Interest rates can be as low as 7%, according to investment firm Peachtree Group. The firm says it has facilitated 91 C-PACE transactions totaling $925 million.

The financing has other advantages. The mechanism "looks exactly like a tax assessment. There are no covenants like those in a typical mortgage, 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 Washington, D.C. Ghori said a project can typically obtain C-PACE funding of up to about 30% of the building's value.

Also noteworthy is that repayment is tied to the building undergoing energy efficiency improvements, not to the owner, noted Patrick Dolan and Anna Lee, partners at law firm Norton Rose Fulbright, in a report. The firm represented Petros in New York City's first C-PACE financing transaction. That deal, valued at $89 million, was completed in 2021 for energy efficiency improvements to 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. The company provides C-PACE financing nationwide.

State-level progress and obstacles

State or local governments must pass legislation to enable C-PACE financing, then launch programs to make it available in their jurisdictions. According to the PACENation website, Washington, D.C., and 40 states have passed PACE enabling legislation, while the District and more than 30 states have active C-PACE programs.

North Carolina is among the most recent states to approve C-PACE legislation, signed in July, following legislation in Georgia and Idaho earlier last year.

Minnesota signed a law in May extending the maximum term for C-PACE financing from 20 to 30 years and increasing the loan-to-value ratio from 20% to 30%. The amendments also expanded the scope of PACE-eligible projects to include building resilience improvements and water conservation measures. Golberstein said the state's program now funds energy projects including fuel switching, and no longer requires eligible energy projects to reduce net energy consumption provided 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 whether to use C-PACE financing for a particular 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 can 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 been completed since 2021.

One obstacle is the requirement that all projects achieve a savings-to-investment ratio (SIR) of 1.0 or higher. This means "projected energy savings must equal or exceed the cost of the investment," and "projects must demonstrate that they save one dollar for every dollar of PACE funding sought," said Laura Rapaport, founder and CEO of North Bridge. The company provides C-PACE financing to institutional commercial real estate developers nationwide.

However, in August, the New York State Energy Research and Development Authority updated its state-level guidelines, eliminating the SIR requirement for certain projects, including new construction and major renovations eligible for C-PACE, retrofit projects that will be fully electrified, and installations of HVAC, ventilation, or hot water systems meeting specific energy efficiency standards. These changes apply throughout New York State; 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, its state-by-state nature may give pause to building owners and developers managing portfolios across multiple states. "Each state has its own tax laws," Golberstein said. Companies looking to retrofit properties in multiple states need to obtain financing separately in each state.

"When we think about larger real estate investment trusts or regional owners with portfolios in three or four states or markets, the key is to do one small deal and pilot it. If it works, then replicate it across the portfolio where applicable," Golberstein said.

Nuckles recommends that owners with large portfolios 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 within the portfolio," she said. "Improvements can also always be implemented in phases."

Golberstein emphasized the similarities among state programs. "So, if you've done PACE in Tennessee, doing PACE in Nebraska will be remarkably similar. There will be some nuances, but overall, the process is the same. So the real question is whether you're located 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. "C-PACE operates at a more regional level, with conditions varying greatly by state—rules, vendor availability, and even eligibility all differ," said Del Álamo, who is currently involved in several C-PACE financing transactions. "On a case-by-case basis, it's an excellent financing alternative, but I don't think it's mature enough yet to recommend that a single owner use it nationwide and say, 'Okay, we can finance X properties distributed across the country with C-PACE,' because there are currently many nuances in each market and even in market performance."

Nuckles pointed to the long-term benefits of improvements funded by C-PACE projects, including reduced maintenance and operating costs as well as lower energy consumption.

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