PLG’s Matthew McCormack on C-PACE Financing’s Growing Relevance

The closing panel at Connect Investment & Finance 2023, taking place Oct. 24 at the Hyatt Regency O’Hare in Rosemont, IL, will focus on “Navigating the Capital Markets and Financing Options.” Among the options gaining attention from borrowers in the current market is C-PACE (Commercial Property Assessed Clean Energy) financing, and Matthew McCormack, SVP of Originations at PACE Loan Group (PLG), will discuss how it can fulfill their needs. Here, McCormack sets the stage for Tuesday’s conversation.

Q: For borrowers faced with lower LTVs from banks, what advantages does C-PACE financing provide?

A: In today’s market, C-PACE is priced similarly to bank construction financing. The benefits of C-PACE are the long-term, fixed-rate, non-recourse structure of the funding. C-PACE can help reduce the recourse exposure to the borrower, eliminate the need to purchase a SOFR cap, and provide longer-term financing for projects to reach stabilization and complete the business plan.

Q: Are you seeing C-PACE financing inquiries coming from a wider range of borrowers compared to a few years ago?

A: We are. Historically, we served the middle market and lower middle market segment of commercial real estate developers and operators. We continue to provide loans for these clients, but today C-PACE financing is being explored by larger, more “institutional,” groups. Construction and traditional senior financing are scarce for owners and developers of all profiles. C-PACE provides a key source of liquidity to complete capital stacks.

Q: What, if any, are the limitations in terms of applying C-PACE financing to a given situation?

A: We have three major loan constraints:

1. We cannot lend more than 100% of C-PACE eligible proceeds. This varies from state to state and program to program, but generally is any improvement that relatively impacts the utility spend of the property.

2. We cannot lend more than a certain percentage of a property’s appraised stabilized value. Certain states and C-PACE programs set these guidelines themselves. These generally range from 20% to 35% of stabilized appraised value.

3. We cannot lend more than what any mortgage or lienholder on the property will consent to. This is most commonly the limiting factor to the C-PACE loan size. The senior lender will underwrite each sponsor and project on its own accord to evaluate the LTV’s, DSCR’s, and loan structure to determine the amount of C-PACE financing they will consent to in each deal.

Q: Do you find that borrowers are using C-PACE options more creatively today?

A: Definitely! Sponsors historically have used C-PACE to renovate/improve existing buildings and to obtain higher leverage in development deals. Today, sponsors are using C-PACE as a source of senior financing and to recapitalize recently completed or mid-stream construction deals for many of the same benefits listed in my first response.

For up-to-the-minute insights on the state of the market and what’s next in the current cycle, be sure to attend Connect Investment & Finance 2023 on Oct. 24 at the Hyatt Regency O’Hare in Rosemont, IL. Click here to register.