C-PACE financing can reduce the cost of energy efficiency retrofits—but it depends on whether the project location is eligible

The first phase of Black Desert Resort in Ivins, Utah, adjacent to Zion National Park, opened on a soft basis in 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 retail and restaurants.

The resort embraces sustainability, having financed energy-efficient HVAC systems and insulation, seismic retrofits, and water conservation measures through Commercial Property Assessed Clean Energy (C-PACE) financing.

"We want to develop properties in an environmentally sustainable and community-responsible way," said Jon Day, CFO of Reef Capital Partners, the commercial real estate investment firm that owns the resort. "Irrigation systems and water storage facilities prioritize water conservation, which is especially important in a desert area like Utah. We used industry-leading technology and materials, and C-PACE funds provided critical support."

Managing Partner Patrick Manning cited other sustainable features of the resort: the project uses low-voltage Power over Ethernet, "running lighting, security cameras, and door locks throughout the property on just 10 volts," he said. "C-PACE helped us achieve this and our water conservation measures. Because of C-PACE, we were able to fund projects that banks were unwilling to support." Manning described the entire process as "smooth and frictionless."

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

C-PACE is increasingly favored by commercial real estate owners and operators to fund 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. 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 has other advantages. The mechanism "looks exactly like a tax assessment. There are no covenants typical of an ordinary mortgage, and no additional collateral is required," 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 noted that a project can typically obtain C-PACE funds of up to about 30% of the building's value.

Also noteworthy is that repayment is tied to the building undergoing the energy efficiency retrofit, 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—an $89 million energy efficiency retrofit of a building in the Wall Street area in 2021.

C-PACE financing "has transformed from a niche product into a fairly mainstream financing tool. The institutional client base it reaches today did not exist in the past, 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 progress and obstacles

C-PACE financing must be authorized by state or local legislation and implemented through a corresponding program. According to PACENation website data, the District of Columbia and 40 states have passed PACE enabling legislation, with the District and more than 30 states operating active C-PACE programs.

North Carolina is one of the recent states to approve C-PACE legislation, signed into law in July, following legislative action 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 eligible PACE projects to include building resilience retrofits and water conservation. The state's program can now fund energy projects including fuel switching, and eligible energy projects are no longer required to reduce net energy consumption provided greenhouse gas emissions are reduced, Golberstein said.

The law also removed the requirement that projects be cost-effective, Golberstein said. At a March Minnesota House Climate and Energy Finance and Policy Committee meeting, he testified that the requirement hindered electrification and decarbonization projects in the state.

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

When evaluating whether to use C-PACE for a particular project, "it must 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 end up adding to long-term costs."

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 1.0 or higher. This means "projected energy savings must equal or exceed the cost of the investment," and "projects must demonstrate that each dollar of PACE funds requested saves a dollar," said Laura Rapaport, founder and CEO of North Bridge, which provides C-PACE financing to institutional commercial real estate developers nationwide.

However, in 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 renovation projects eligible for C-PACE, retrofits that fully electrify buildings, and projects installing HVAC, ventilation, or hot water systems that meet specific 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 SIR barrier removed and the inclusion of new construction and major renovation projects, 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 structure may give pause to owners and developers managing multi-state portfolios. "Each state has its own tax law," Golberstein said. If a company wants to use it to retrofit properties in multiple states, it must obtain financing in each state separately.

"When we think about large real estate investment trusts or regional owners with three or four state markets, the key is to do a small pilot transaction first. If it succeeds, 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 greatest cost-saving potential. "I would tailor each C-PACE transaction to the specific needs of each property in the portfolio. Improvements can also always be phased in," she said. "A hotel owner with four properties should approach it from a portfolio perspective, then drill down to the individual property level. Owners and operators may see savings exceed expenses in certain years."

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

However, Jaime Del Álamo, Head of ESG Value & Risk for the Americas at JLL, sees more differences. "C-PACE operates more at a regional level, with significant variations among states in rules, vendor availability, and even eligibility criteria," Del Álamo said. He is currently involved in several C-PACE financing transactions. "For a single project, it's an excellent financing alternative, but I don't think it's mature enough yet to guide a single owner to use it nationwide, like 'we can use C-PACE to finance a certain number of properties across the country,' because there are currently so 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 and lower energy consumption.

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