Capital Stack Control
Capital Stack Control
By Jim Stanislaus, Chief Financial Officer & Founder
_Jim Stanilaus C-PACE is needed in good times and in bad. A few years ago, senior financing—typically the cheapest money in the capital stack—had the lowest interest rates, about 4% to 5%. Mezzanine was slightly higher, and equity higher than that (as mezzanine and equity assume higher risk). Among this mix, C-PACE rates were comparable to senior financing, just slightly higher given its specialty nature. Interest rates being what they are today (and debt funds entering the market where banks were previously more dominant, senior rates are currently in the range of 9-12%), C-PACE has become the most economically sustainable capital in the stack. We truly consider it the vehicle through which we are financing the way forward.

Senior Financing + C-PACE

In that time—not too long ago—C-PACE financing on a given project needed approval from the senior lender (read as: the bank—my colleague, Andy Meyer, recently wrote about this very subject). The common theme here is changing times. Also changing is the understanding of C-PACE and how it can be utilized and deployed. Many who’ve heard of it in passing might make an association with “green” initiatives. But, to put it in real estate development terms: it’s financing for energy efficiency, water conservation, renewable energy, and resiliency measures. That’s the building envelope, lighting, windows, boiler, HVAC, plumbing… property must-haves; and the list goes on. We view C-PACE as the economically sustainable path to increasing environmental sustainability in commercial real estate. It’s the way forward, and we’re seeing that in the new ways deals are beginning to take shape; C-PACE can be used for a larger piece of the total capital stack, often 25% or possible more. Today, senior lenders actively seek out C-PACE which, in conjunction with senior lending, offers more control of the capital stack, mitigating risk to the bank. On a combined basis, it’s about owning the life cycle of a property for all its financing (sans equity).

On the Horizon: Bigger and Better

We’ve closed single C-PACE transactions over $100 million and the industry is going to continue to see more larger and larger C-PACE transactions. This is among the factors contributing to industry growth. Petros was built with inherent differentiators designed to finance large transactions. We’ve put a lot of work into investor partnerships and our unique, proprietary structure gives Petros the ability to draw capital from perpetually growing pools of product owned by committed institutional investors. It allows us to offer not only certainty of close to sponsors and borrowers in C-PACE markets nationwide, but it ALSO gives us the ability to fund increasingly larger future transactions. Today, we manage approximately $2 billion in C-PACE funded assets – that we originated – which are reflected on our balance sheet. Our unique structure is giving us the ability to close transactions as large as $100 million or more without a “single asset investment grade credit rating” from a rating agency like so many of our competitors have to do. The ability to do this is unrivaled in our industry. Single asset rated deals are particularly arduous and increase risk for borrowers that the rating can even be achieved; many of our competitors need this rating for deals of $40MM or higher. We’re different, because we were built different, by design. Petros is poised to meet the increasing demand for C-PACE, funding even bigger deals and increasing environmental sustainability—through delivery of economic sustainability to our project sponsors.