New York City landlords and developers can finally tap into a new green financing tool that could become a major source of capital for real estate projects in the Big Apple.
More than two years after the program was signed into law, the city has approved its first Commercial Property Assessed Clean Energy, or C-PACE, deal, according to the New York-based law firm Duval & Stachenfeld.
The deal was for a downtown Manhattan office project and was announced during a webinar today hosted by NYCEEC, New York City’s PACE loan administrator. The identities of the project and its developer remain unclear.
“All stakeholders in the real estate community are chomping at the bit to get involved,” said YuhTyng Patka, co-chair of the law firm’s NYC Climate Mobilization Act Task Force.
Property owners can retroactively tap the financing tool to secure a lower interest rate for work already done on projects like adding LED lights, upgrading insulation or installing solar panels on buildings. C-PACE financing can also replace existing debt that building owners took on to make these energy-savings improvements.
Patka said the program is currently available for existing projects, but expects the city to allow new construction to qualify for the financing in September.
In another win for the program, Patka said C-PACE will not be subject to a mortgage recording tax, something that attorneys were unclear of previously. She also said that ground lease holders will now be eligible for C-PACE financing.
C-PACE was passed into law in 2019 as part of a broader series of laws known as the Climate Mobilization Act. It took the city two years to finalize the rules before it could be implemented.
Attorneys expect C-PACE activity to pick up across the country.
“(C-PACE) could occupy a sizable piece of the capital stack, said Randy Eckers, chair of the New York-based law firm Akerman’s real estate finance practice.
Eckers believes that the program could become even more popular for property owners than EB-5 financing, the cash-for-visa program which attracted developers in droves after the great recession and was used in projects such as Hudson Yards and Atlantic Yards to finance gaps in building costs that not covered by the senior construction loan.
Part of the appeal of C-PACE is that it’s not a loan. Instead, it is recorded as a property tax assessment. It offers an interest rate of around 5 to 6 percent—far cheaper than mezzanine financing. And in the event of default, the financing cannot accelerate payments.
One roadblock for C-PACE has been getting senior lenders on board. Since C-PACE financing has priority over the senior lender, gaining their consent has been a challenge. But attorneys who have worked on C-PACE deals say this is changing as demand for the program grows and more lenders understand how it works.
“It’s not this very painful process that people believe it is,” said Eckers.
Since the financing is recorded as a tax assessment. C-PACE financing requires legislation enacted by state and local governments. So far, 37 states including New York — as well as Washington, D.C. — have passed laws enabling it.
Proponents of the program believe that C-PACE could play a key role in covering the costs
property owners will incur to comply with Local Law 97, another bill passed as part of the Climate Mobilization Act.
Local Law 97 requires most commercial buildings larger than 25,000 square feet to reduce their carbon emissions by 40 percent by 2030 and 80 percent by 2050. Absent any changes to the law, landlords who don’t comply will be on the hook for hefty fines.