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Nearly two years since the first Commercial Property Assessed Clean Energy (C-PACE) loan was executed in New York City, the financing strategy has failed to gain traction in the Big Apple.
Since the inaugural $89 million C-PACE deal on 111 Wall Street from Petros PACE Finance closed in June 2021 during the final months of former Mayor Bill de Blasio’s administration, the program has been plagued by stops and starts with red tape that leaves its Gotham future up in the air. While New York state has had its fair share of C-PACE transactions since the 111 Wall Street deal, the city specifically has seen very little of the action, with just one other loan brought to the finish line.
Mansoor Ghori, CEO and co-founder of Petros PACE Finance, said a big stumbling block that has prevented a true takeoff in New York City is the municipal government not permitting new construction or gut rehabilitation projects to be eligible for C-PACE loans, with only renovations currently allowed. The 111 Wall Street deal for Nightingale Properties and Wafra Capital Partners (now called InterVest Capital Partners) involves a renovation of the former 25-story Citibank building that included retrofitting for energy efficiency upgrades.
Green shoots
C-PACE is a form of financing allowing property owners to obtain funding in exchange for certain energy-
efficient building improvements. Thirty-eight states and the District of Columbia have passed laws enabling C-PACE in recent years, according to the nonprofit association PACENation.
A bigger barrier preventing C-PACE from soaring in New York City, according to Ghori, is the program’s guidelines, which require 100 percent electrification with no fossil fuels permitted. Other cities like Seattle also have strict fossil fuel usage standards, but Ghori said only New York has the 100 percent electrification rule.
“The reality is these buildings are going to be built anyway with fossil fuels, but they won’t allow us at this point to be eligible for PACE financing because if they don’t have 100 percent electrification then they’re disqualified,” Ghori said. “One of the deals that we’ve been looking at was a LEED Platinum building, but we were disqualified from the PACE program because it had a gas furnace.”
Austin-based Petros surpassed $1 billion in directly originated and balance-sheet-funded C-PACE transactions since inception in 2016 last November, which includes four deals in New York state, Ghori said. New York state’s C-PACE program does not have the same problems as New York City with electrification guidelines.
The only other C-PACE loan to close in New York was a $28 million transaction from Greenworks Lending, a Nuveen Real Estate Partners subsidiary, in September 2021 for energy-efficient improvements at 730 Third Avenue that include installing smart windows that automatically adjust in response to sunlight. Nuveen and Taconic Partners are working together on a $120 million renovation of the Midtown Manhattan office property, which serves as the headquarters for Nuveen and TIAA.
Long arm of the law
C-PACE funding is considered especially crucial for New York property owners given new stringent carbon-cutting requirements in Local Law 97, passed in 2019 as part of the city’s Climate Mobilization Act. The law limits greenhouse gas emissions from larger buildings starting in 2024 with the legislation calling for buildings to reduce carbon emissions by 40 percent in 2030 and by 80 percent starting in 2050.
“The reality of it is that New York City should be the biggest market in the country for C-PACE,” Ghori said. “When Local Law 97 went into effect, they were touting PACE as one of the ways for building owners to access capital to be in compliance, but the problem is we just haven’t been able to get PACE up and going, so now all these building owners are coming up on some deadlines.”
The uncertainty of New York’s C-PACE program exists during a time when many property owners, especially in the office sector, have been looking to tackle energy-efficiency upgrades to attract tenants. The issue has taken on an even greater importance in the last two years with an increasing number of employees opting for hybrid work and landlords wanting to give workers an incentive to be in the office.
Laura Rapaport, founder of North Bridge, a Manhattan-based C-PACE lender, said she has worked with borrowers across the country who are shocked that the New York program standards are far stricter than other in other entities such as Montana, Tennessee, Alaska and Florida. She noted that making C-PACE financing more attainable for New York property owners is especially important now as the city begins an aggressive push to convert some older office buildings into multifamily.
“They need to adjust the language to allow electrification to count and more projects to be qualified because the city needs it,” Rapaport said. “They need to allow for ground leases and new construction to incentivize people to build the more efficient buildings, which is very much in line with the goals of New York City being a leader in carbon reduction and energy efficiency.
Joseph Lau, president and chief investment officer of LordCap Green, who played an active role in the C-PACE sector during the past decade going back to when he was a managing director at RBC Capital Markets, said about a quarter of the calls he fields nationally derive from investors asking about the status of New York City’s program. He said the two Big Apple deals at 111 Wall Street and 730 Third Avenue were technically “legally not C-PACE deals” since C-PACE is not noted as an assessment on the properties. Lau faulted New York officials for not properly enforcing the program.
“There isn’t a proper mechanism within the City of New York like there is in other places where either the municipality can collect or enforce or the program administrator has the ability to collect and enforce against it,” said Lau, who has invested and originated C-PACE deals since joining LordCap in 2017. “As C-PACE providers, they did what was necessary, but the problem is since the program is not truly active they don’t have a PACE assessment.”
Lau said he hopes the administration of Mayor Eric Adams and the city’s Office of Environmental Affairs will make C-PACE a priority in the next year to iron out much of the confusion now in place with the program. He noted that investors he works with, which are primarily insurance companies, want assurances that C-PACE assessments will be placed on the New York City tax rolls with a “clear line of sight” on how they will be enforced going forward should projects fail.
Andrew Chintz, financing specialist for NYC Accelerator, which advises building owners and operators on financing options to comply with Local Law 97, said the city’s C-PACE program for new construction will be authorized once a public comment period has concluded. NYC Accelerator is managed by the Mayor’s Office of Climate and Environmental Justice.
“In NYC, the field of qualified C-PACE lenders is strong and growing,” Chintz said in a statement. “There are now 14 pre-qualified lenders ranging from specialty shops to major institutions, and we expect the field to continue to grow.”
The New York state C-PACE program has not faced the same obstacles to lenders and borrowers, according to Lau, with LordCap closing many deals in the past year despite “rigorous” engineering standards compared to other states. He noted that state law allows C-PACE only for projects geared toward energy efficiency, while states like Oklahoma and Tennessee enable other uses such as renewable energy and stormwater resilience.
“It’s a more defined opportunity in New York state, but the program is handled well,” Lau said. “That has been a definite success.”
Green flash?
The market dislocation caused by rising interest rates has made it more challenging to close C-PACE deals with many banks now on the sidelines, according to Ghori, but that has also opened doors because of the increasing number of alternative lenders now at the table. Ghori noted that with debt funds more expensive to work with than banks for building owners, it makes C-PACE more attractive as a way to lower borrowing costs.
“When there’s a project that hasn’t been funded, the developer wants to maximize the amount of PACE because the PACE rate is typically cheaper than the debt fund rate, and to lower their overall costs of capital they try to maximize the amount of PACE in that project,” Ghori said. “We’re seeing more demand, and our phone is ringing off the hook.”
Ghori added that he is watching closely what transpires with the commercial real estate markets, especially with dipping office property valuations and how that may impact demand for C-PACE financing. He cautioned that a major freeze in transaction activity coupled with credit downgrades could “rapidly” slow the pace of C-PACE deals.
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