C-PACE: An Increasingly In-Demand CRE Financing Mechanism

Currently available in approximately 40 states and the District of Columbia, the U.S. Department of Energy’s Commercial Property Assessed Clean Energy (C-PACE) is a locally administered financing program that provides commercial real estate owners and operators with non-recourse, fixed-rate funding for hard and soft costs of completing qualifying energy efficiency, renewable energy, and resiliency improvements to new and existing properties via a voluntary special assessment added to their property tax bill. While C-PACE programs offer owners and operators a host of benefits, these advantages should be weighed against potential drawbacks. Below are some examples of those benefits and drawbacks:

Other stakeholders also stand to benefit. Investors and lenders of a C-PACE loan face lower credit risk thanks to the lien seniority that accompanies C-PACE financing, while potentially earning higher yields compared with the likes of CMBS AAA notes and taxable municipal bonds. At the same time, communities reap increased resilience to natural disasters, reduced carbon emissions, and economic stimulus. As C-PACE financing continues to flourish, Florida-based commercial real estate owners and operators should take the time to better familiarize themselves with how to leverage this increasingly mainstream financing tool in the Sunshine State.

C-PACE in Florida

Florida’s C-PACE enabling legislation is codified in Chapter 163, Part I, of the Florida Statutes. C-PACE programs, however, are not available statewide: they are only available in eligible communities — that is, those counties and municipalities that have authorized by ordinance or resolution a program administrator to administer the C-PACE program. Further, only five categories of qualifying improvements, as defined in Florida Statutes section 163.08(4)(b), are eligible for financing: (i) waste system improvements; (ii) resiliency improvements; (iii) energy conservation and efficiency improvements; (iv) renewable energy improvements; and (v) water conservation efficiency improvements. Clearing those hurdles, the owner of record of the property must submit an application to the authorized program administrator, who then must conduct statutorily prescribed due diligence and issue required disclosures before entering into the financing agreement. Meanwhile, the owner must provide notice of its intent to access C-PACE financing to any existing lienholders and/or loan servicers. For owners seeking C-PACE financing in jurisdictions that have yet to authorize a program, resources such as the Department of Energy’s C-PACE Toolkit and PACENation’s data library can help provide a roadmap for how to convince local policymakers to authorize C-PACE in their area.

Bankruptcy Implications

C-PACE financing is secured by a lien on the property that functions similarly to ad valorem property taxes due to its priority status commonly referred to as “super priority.” C-PACE obligations are first-priority liens superior to other claims against the property, including first-priority mortgages and subsequently recorded liens. However, unlike traditional debt, C-PACE loans cannot be accelerated; therefore, only the currently due and delinquent amounts owed under the C-PACE financing are debts that are addressed in the bankruptcy. The remaining C-PACE obligations that have not been assessed would be treated in the ordinary course as they accrue, similar to future tax assessments, that would remain secured by the property as they are assessed. Thus, the first-position mortgage lender’s secured claim would only be primed by the amounts currently due and owing for the C-PACE financing, and not by the unassessed amounts that will come due in the future.