New opportunities amid market volatility

C-PACE works by classifying clean energy upgrades as a public benefit, similar to infrastructure projects like sewers and roads, so property owners can obtain low-cost, long-term financing for commercial real estate construction projects. Repayment occurs through a benefit assessment on the property tax bill over 20 to 30 years, matching the useful life of improvements. The assessment transfers with property sales and can often be passed to tenants.

Current market dynamics have created the "perfect storm" for using C-PACE for post-construction recapitalization, Lawton says.

For starters, interest rates are now expected to remain higher for longer, meanwhile, a wave of construction loans are maturing. Developers of recently completed projects are finding traditional takeout financing either unavailable or prohibitively expensive.

In addition, market volatility has made the stabilized performance metrics that traditional lenders require harder to achieve. That's particularly true in hospitality, where revenue can fluctuate significantly in the early years. And office buildings have struggled to lease up despite post-pandemic return-to-office mandates.

Lawton points to a recently completed state-of-the-art office building that's 45% leased. "Bridge debt is pretty expensive, particularly non-recourse bridge debt," he says. "We're able to come in and give them time to stabilize the property at a lower cost of capital."

Unique advantages in capital stack

C-PACE can be used for recently completed (or mid-construction) projects that haven't yet stabilized. Unlike conventional financing, C-PACE can be layered into the existing capital stack alongside senior mortgages and mezzanine debt without creating collateral conflicts, Lawton explains.

"In addition to being assignable and non-accelerating, C-PACE is an assessment on the property, which means it can be added to the stack where there’s a mortgage, and even mezzanine financing, in place," he says. “Or the opposite can occur. C-PACE can be used for the recapitalization, and then a mortgage can come in later once progress has been made toward stabilization." C-PACE's relatively low leverage (up to 35% of stabilized value), gives lenders reassurance about entering deals that need time or additional capital to realize their business goals.

A prime example is the $190 million C-PACE financing for the Virgin Hotel in Las Vegas, where Nuveen provided financing to recapitalize expensive senior and mezzanine debt following a major renovation. "C-PACE was able to take out the rest of the debt and they were able to significantly decrease their cost of capital," Lawton says.

As market volatility continues and refinancing challenges persist, C-PACE recapitalization is positioned to play an increasingly important role in helping developers bridge the gap between project completion and stabilization.