Filling the Gap in the Capital Stack
By Jim Stanislaus, Chief Financial Officer & Founder

_Jim StanilausMy Petros colleagues and I often talk about C-PACE as being future-forward financing, and for reasons that go beyond its impact on environmental sustainability. We’re just beginning to scratch the surface on the creative ways in which it can be utilized. A quick refresher for those unfamiliar with it: C-PACE enables commercial property owners and developers to obtain financing for energy efficiency, water conservation, renewable energy, and resiliency measures on their properties. C-PACE is fixed-rate, long-term financing that has become more accepted as a mainstream solution, and more recently—as a result of the nationwide commercial real estate climate—it has become the most efficient (read as: cheapest) money in the capital stack. Currently, senior lending rates are in the double digits, and lending percentage has dropped, creating a potentially precarious situation for owners and developers. But let’s take a look at how these very conditions serve as the catalyst for the evolution of C-PACE, a financing solution that was built to adapt.

Putting “adaptation” into context—a hypothetical scenario

Let’s say real estate firm “X” owns a batch of multifamily apartment complexes. All of these are coming out (or are already out) of their construction phase; and each property exists in a C-PACE enabled market. Now, firm “X” would like to refinance all of the properties; has grouped them together as a package, and is looking for interim/perm financing. Given the conditions mentioned earlier—the high-rate and lower lending percentage of senior lending—coupled with valuations that have dropped since project inception; firm “X” finds itself in a conundrum… There’s a gap in the capital stack.

The Solution

We’ve covered what C-PACE is used for—financing for energy conservation measures (we’ll come back to this). It has become the most efficient, least expensive money in the capital stack and is incremental to the senior loan, providing up to 75%, possibly 80% CLTV, helping to deliver desired advance rates. As C-PACE providers, we have the ability to look back at the last one to three years of project history in PACE eligible markets. This part is crucial as it allows for identification of all the PACE eligible measures in the project. And these measures are everywhere. Energy conservation measures are everything from windows to lighting, HVAC system, plumbing, and beyond. This is something I’ve touched on before: many PACE eligible measures are property must-haves.  As a result, C-PACE can be utilized to help provide the gap capital necessary in today’s market.

From the senior lender perspective, adding C-PACE into the mix can lower their leverage point and lower the blended cost of capital with a non-accelerating product. C-PACE provides a lower-cost, long-term, fixed rate solution to complete the capital stack that extends the credit with a tax expense rather than a principal obligation. These factors result in an improved credit profile and coverage metrics.

The opportunity here is tremendous as it brings a new way to look at C-PACE deal structure into focus. One that also allows for increased efficiency; refinancing portfolios moving from construction to perm financing—executing batches of deals vs. single, “one-and-done” scenarios.

Petros sits poised to take advantage of all the flexibility and adaptability that C-PACE enables, and we continue to find new ways to put it to work. With our unique capital markets structure, relationships, and ability to deliver certainty of close—we’re singularly positioned to be a premier partner to firms with portfolios of projects; using C-PACE—along with our expertise and growing knowledge of how it can be applied—to help sponsors, developers, property owners and other capital providers.