CPACE Lending Is Picking Up The Pace In New York City: What You Need To Know

Real Estate

As if the turmoil created by sharply higher interest rates and economic uncertainty wasn’t enough, another daunting challenge facing New York City building owners looms on the horizon. Local Law 97, which officially becomes active on Jan. 1, 2024, requires most buildings 25,000 square feet or larger to significantly curb their carbon emissions to meet established targets or else face steep fines. Regardless of how much owners currently have on their plates, now is the time to begin the process of identifying, planning, and implementing steps to reduce the environmental footprint of their buildings.

A good place to start for many building owners is exploring the CPACE financing opportunities that could significantly reduce their cost of capital on the required building wide renovations. Additionally, CPACE has several successful use cases for being “rescue financing” for undercapitalized projects either mid-way or near the end of a business plan. In this instance, a CPACE loan can either reimburse or future fund all already paid for CPACE eligible items allowing a developer to retroactively cash out of a project that’s already been fully vested.

CPACE (Commercial Property Assessed Clean Energy) loans have been approved and used in 40 states in recent years but had been unavailable in New York City until recently. City officials voted to allow CPACE financing in late 2019, around the same time Local Law 97 was passed, which was no coincidence. However, CPACE’s launch in New York City was delayed until the revised guidelines were released in the last few months of 2022.

I introduced CPACE in a previous Forbes article published in 2021 and recently discussed the latest developments with Matt Swerdlow, Senior Director in Capital Services at Ariel Property Advisors, and YuhTyng Patka, Partner at Duval & Stachenfeld LLP. Patka is co-chair of her firm’s NYC Climate Mobilization Act Task Force and PACE Financing Practice, and chair of the NYC Real Estate Tax and Incentives Practice Group.

“CPACE financing was designed to pay for energy efficient retrofits and to help offset the cost of compliance that Local Law 97 created,” Patka said. “Unfortunately, in New York City, new construction CPACE is not yet available.”

With 60% of overall carbon emissions in the largest U.S. city attributed to buildings, Local Law 97 requires most buildings 25,000 square feet or larger to meet new energy efficiency and carbon emission limits by 2024, with more stringent requirements coming in 2030. New York City’s goal is to reduce emissions 40% by 2030. By excluding new construction, officials presumably reasoned that new buildings would be designed with energy efficiency in mind and would have less impact in meeting emissions reduction targets.

Regardless of the rationale, the current CPACE guidelines limit the favorable financing to pre-existing buildings. For owners that have invested in environmental enhancements – from energy efficient windows to renewable energy utilization to HVAC component retrofits – CPACE loans can be utilized to finance new improvements or to recoup dollars spent on green upgrades made over the past three years.

Why CPACE Financing Can Be a Great Option

According to Swerdlow, CPACE provides 100% financing of all eligible hard and soft costs associated with improving energy efficiency and reducing emissions.

CPACE financing generally covers but is not limited to:

  • Window Replacements
  • Roof Efficiencies
  • HVAC Systems
  • Boiler, Chiller, & Furnace Systems
  • Smart Building Controls
  • LED Lighting
  • Green Roofs
  • Solar Panels & Energy Storage
  • All Associated Soft Costs

CPACE capital stack and pricing:

  • CPACE is allowed to go up to 85%-90% of the stabilized value of the asset
  • Cost-efficient weighted average cost of capital for the new cap stack
  • Fixed rate, non-recourse and freely repayable
  • Up to 30-year self-amortizing terms with interest only periods
  • Pricing: Interest rates around 6%-7%, making the financing a particularly attractive option given the cost of the most similar supplemental capital. Mezzanine debt or preferred equity can replicate the same amount of proceeds as CPACE but will often cost 2x+ more in annual recurring debt service and is typically not fixed for terms longer than 10-years.

How Building Owners Can Get Started

Complying with Local Law 97 and evaluating potential CPACE financing options both begin with assessing current building efficiency levels and identifying critical areas that need to be addressed to reduce carbon emissions. Except for certain government-subsidized affordable housing properties and buildings with more than 35% rent-stabilized apartments, which have different rules and thresholds for compliance, most other existing building owners face complying with the law in about 12 months. Now is the time to act, experts agree.

“Multifamily, office, hotel, and other building owners must figure out how they can comply or face very large fines,” Patka noted.

“It’s a mistake to assume you’re good because you’re close to compliance for 2024, because the ceiling gets progressively lower as we move toward 2030 and beyond,” she added. “Building owners really need to step back and take a long view on this, because even if you believe you will comply for a couple of years, it is highly likely that 5-to-10 years from now you won’t.”

Swerdlow said, “We are advising owners to start game planning now on how they are going to adapt their properties to avoid fines, which could be up to five or six figures in perpetuity. We start by organizing a team which includes mechanical engineers that specialize in energy savings, contractors, and environmental consultants to conduct a full assessment to help identify the size of the issue in each building.”

Once our Capital Services team understands the scope of the work, procuring senior lender consent is the next step. Since CPACE is billed as an assessment which has priority to all first liens, not all senior lenders have consented to CPACE – although the list of consenting lenders grows exponentially every year. Educating a senior lender to the benefits of CPACE financing can be a nuanced process and is not guaranteed to succeed. In the event that a senior lender does not consent, the Ariel team will simultaneously run a refinance process among our list of 400+ consenting senior lenders.

“The CPACE underwriting and approval process often mimics that of a traditional commercial loan with the exception of some unique steps,” Swerdlow said. “Specifically, clients need to get energy audits, talk to engineers, talk to contractors to itemize a budget, and understand which specific items are eligible for CPACE. A lot of planning will be required and the quicker a client has conversations with appropriate parties, the easier it will be to comply with these laws to avoid fines.”

To listen to my podcast with Patka and Swerdlow on CPACE and Local Law 97, please click on the link below.

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