Over the last ten years, the C-PACE industry has evolved and transformed from a niche financing mechanism connected to residential solar panels to a mainstream, balance sheet solution supporting complex commercial real estate construction projects. Today, as the Chief Revenue Officer for Petros PACE Finance, I have a front row seat to the next round of transformation currently taking shape within our industry.
From the early days of C-PACE, the requirement for mortgage lender consent created a challenging hurdle for closing transactions as lenders were unfamiliar with C-PACE and had concerns about a financing mechanism with a lien priority on par with property taxes. And with a limited track record to show the impact of C-PACE financing, commercial mortgage lenders were naturally more cautious and hesitant in calculating the potential risk of this new form of financing. So, in many ways, the need for lender consent was historically the gating factor for the growth of our industry.
Today, the trend is shifting as C-PACE has become increasingly accepted and understood by institutional capital providers throughout the country. In many transactions, commercial lenders are now seeking out C-PACE financing given it now represents a lower-cost, fixed-rate solution for the capital stack in addition to the sustainable impact on the entire development project. Additionally, C-PACE financing now lowers the overall blended cost of capital to the project compared to traditional financing, resulting in stronger debt service coverage ratios. Lender consent has evolved into lender need.
C-PACE is one of the fastest growing financing mechanisms in the structured finance industry and in a rising interest rate environment, it has become an even more attractive tool for sponsors and developers. As mortgage interest rates have risen steadily over the last year, we’ve seen more and more traditional lenders pull away from financing large commercial real estate projects. Simply put, with some commercial loans reaching double digit interest rates, the deals don’t pencil out. This has created an opportunity for the larger, more sophisticated debt funds to step in, pick up the deal and proactively find an affordable financing solution to round out their capital stack. Known for our strong track record of execution, those same debt funds are now proactively calling on Petros’ C-PACE financing to serve as their fixed-rate solution provider.
Petros is answering those calls by improving coverage metrics, lowering the blended cost of capital and right-size the capital stack in each deal to accommodate the project sponsor’s needs. This increased demand for C-PACE will lead the industry forward into a new era and Petros is primed and ready to meet this need in the years ahead.