Commercial building owners are under pressure to create more-sustainable properties, and increasingly, they’re pursuing commercial property assessed clean energy loans, which fund green building and resiliency improvements. The program, known as C-PACE, provides investors with competitive, long-term, fixed-rate financing, and unlike conventional loans, a C-PACE loan becomes an assessment on the property and is paid annually along with the real estate tax bill. It also transfers to new owners upon a sale. The concept emerged in the Bay Area early this century, piggybacking off the idea of using tax assessments to pay for a public good. States must enact legislation to allow its use, and to date, C-PACE lenders have provided nearly $4.2 billion to 2,900 projects, according to the association PACENation.

Nuveen Green Capital has supplied about a quarter of that volume, according to chief investment officer Alexandra Cooley. She and CEO Jessica Bailey are two early adopters of C-PACE financing and launched Greenworks Lending in 2015. In 2017, Greenworks completed the first-ever securitization backed by C-PACE assets. Nuveen bought the company in 2021 and rebranded it as Nuveen Green Capital in early 2022.

Cooley discussed the benefits of C-PACE with Commerce + Communities Today contributing editor Joe Gose.

Why should a property owner or developer consider a C-PACE loan?

The commercial real estate sector accounts for between 20% and 30% of carbon emissions. With many clean energy measures, you’re asking building owners to spend a fair bit of capital upfront for solar panels, efficient HVAC systems or other solutions that provide a significant but relatively small amount of operational savings over what can be a very long period of time. It’s a classic financing need, but here in the States, there aren’t a lot of great products for long-dated, fixed-rate financing that provide the upfront capital to make those improvements. As a result, often, building owners will decide: “OK, do I want to install marble countertops in my apartment units or solar panels on my roof? Well, marble countertops have a direct correlation to rent per square foot. Let's go with that.”

C-PACE is financing that is solely for clean and renewable energy, climate resiliency and sustainability. States that have C-PACE programs believe that greener buildings are a public benefit and allow building owners to basically create their own special taxing district at their property. The owners then can leverage that to secure financing from private lenders like Nuveen Green Capital. C-PACE is tied directly to the building. If the property changes hands, the obligation stays with the property, as do the solar panels or the efficient HVAC system, so it is a real transformative tool for upgrading these buildings. It solves a ton of challenges faced by commercial building owners, and it provides access to investments that are solely green.

There are three primary ways that developers and investors can tap C-PACE. Can you lay them out?

One is retrofitting existing buildings. In those cases, it’s often a building owner that uses C-PACE to make efficiency upgrades like putting solar panels on the roof. C-PACE provides that capital upfront to finance the measures that make the most sense for a particular building.

The other use case that we see quite frequently — and this has become more popular as C-PACE has expanded nationwide — is in new construction. C-PACE is typically between 20% and 30% of the capital stack, and developers are using that slice to finance clean and green energy improvements. That has been attractive for a lot of developers because they’re locking in a fixed-rate component of their capital stack that is fully amortizing for the full 20- to 30-year term. There is no refinance risk, and it enables developers to essentially upgrade their properties and reduce operating costs over time before they even build the buildings.

And then you have retroactive financing. This is where developers who have recently completed a building want to refinance part of their capital stack using C-PACE. Most C-PACE programs allow refinancing of eligible clean energy measures within 12 to roughly 36 months after completion. Providing that optionality to building owners can be very valuable, and it became tremendously popular during COVID when developers needed a little more time to stabilize their newly built properties. We’re seeing that retroactive financing picking up again as greater market volatility is prompting some sponsors to lock in a portion of their capital stack with fixed-rate financing.

Which use gets the most business?

All three of those use cases are growing quite a bit, but the largest percentage of our portfolio has historically been on the new-construction side, just because the value proposition is so strong.

How do C-PACE interest rates compare with conventional fixed-rate mortgages?

When we do a credit analysis of an underlying property, we are taking a long-term view regardless of who the sponsor is. We typically assume a hold period of about 20 years; that’s the loan term for the vast majority of our borrowers, although we do see some shorter terms. In terms of how it compares to conventional mortgage rates, in the last year, we’re at a slight premium. That’s because we don't accelerate loans, in that once we file a payment schedule on a property, we can’t call future payments due. And because we’re taking such a long-term view, we want to make sure that we are pricing in some existential risk. Overall, PACE is very competitive for the longer terms — which, of course, reduce the overall payment for building owners — and really, mezzanine financing or preferred equity can’t compete.

Do any special considerations apply to retail property owners who want to use C-PACE?

Depending on the lease structure, the benefit we see for all tenanted properties is the ability to provide a greener property to tenants and pass through a pro rata share of the assessment to them.

Why did you and Jessica launch Greenworks Lending, and what motivated you to become a part of Nuveen?

We were both at the Connecticut Green Bank, which created the first-ever successful commercial PACE program in the country, but we realized that there was no reason that this had to be a story that was unique to Connecticut. It could be a much bigger green solution for commercial real estate borrowers and investors nationwide; it’s a product that is aligned with [environmental, social and governance] goals, long dated and very secure. When we started, C-PACE was available in five states. Today it’s available in almost 40.

We wanted to be as diversified a financial organization as possible and provide the best source of financing to our borrowers, and we’d had a longstanding relationship with Nuveen, which invested in our securitization in 2017. We felt like it would be a great place to grow the platform, and it has certainly held true. We’ve increased our team by over 50% since April of 2021, and our balance sheet has nearly tripled at this point.

Late last year, Nuveen Green Capital completed a $173 million securitization of C-PACE-backed assets in a private offering under Rule 144A of The Securities Act of 1933. It was the largest securitization of PACE loans. Should we expect to see more such securitizations throughout the industry, or are they unique to Nuveen Green Capital?

Because we’re such a strong institution, we have a couple different avenues like Rule 144A for sourcing investors for deals when others might not. That deal, in particular, was oversubscribed in very challenging market conditions, and we will continue to pursue such deals on a regular basis.