Bridging the Gap: How C-PACE Can Be Accretive for Developers in the Current Economy
By Joel Poppert, managing director, Imperial Ridge Real Estate Capital
Inflation is currently at 7.7 percent annually (October to October), placing the U.S. uncomfortably close to being in a “hyper-inflation” scenario, which would put us in the territory we are accustomed to seeing in developing nations — not in the world’s largest economy. 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.
For development projects that haven’t yet secured their capital, the current market means developers are going to need to fork over more equity or put their development on the shelf until things settle. Right now, we’re primarily seeing developers opt for the latter.
But projects that are currently under development or not stabilized yet are in an even trickier situation. They 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 that’s without even considering the supply chain issues they’ll face when they start construction. Then, depending on the asset type, the path to stabilization may be delayed as we are facing (or are possibly already in) a recession where consumers are more handicapped financially than they were a year ago.
So, what are the options for developers who find themselves pre-stabilization and in need of more time to attract long-term financing?
One lesser-known option is Commercial Property Assessed Clean Energy (C-PACE) financing. With many state C-PACE programs, C-PACE can be used retroactively for up to three years from Certificate of Occupancy, and most new construction projects automatically qualify for C-PACE due to increased municipal energy codes. So how does C-PACE help in this situation? Simply put, it can buy the developer time and perhaps even reduce their cost of capital for a period of time prior to obtaining a stabilization loan. The decision tree for considering C-PACE pre-stabilization would look something like this: Do you have a development in need of any of the following: time, additional capital, and/or leverage? If yes, move forward. Is your project located in a jurisdiction covered by a C-PACE program? (Here are the Colorado communities that currently have a program in place.) If yes, move forward. Does your project qualify for C-PACE? Does it meet the local requirements? Great, move forward. Now, here’s where it can get tricky. Will your primary lender consent to the C-PACE assessment?
During the height of COVID, Imperial Ridge successfully worked with a number of developers who shared one of the aforementioned needs; most projects were stranded in construction loans and needed more time and capital stabilization. Working with the primary lender, we were able 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 one to two years, and any additional proceeds would then be used to buy down the primary lender. The key here is to work with a C-PACE lender that carries the expertise to prepare the best strategy to negotiate with the primary lender.
Outside of the current market conditions, there are a number of ways that C-PACE can be accretive to a development project, depending on the individual structure of the deal and/or asset class, but right now, this particular application as a bridge solution could prove to be a savior for many projects.
Imperial Ridge Real Estate Capital is a national, private commercial real estate capital provider based in Colorado. The mix of primary debt, gap financing and preferred equity we offer can be combined to provide capital solutions that are both accretive to an owner’s returns and flexible enough to meet the needs of each individual asset