A primer for Tennessee banks on C-PACER financing for energy and resiliency improvements

Brandon England, Energy Efficiency Loan Program Director, Pathway Lending

Commercial Property Assessed Clean Energy & Resiliency (C-PACER) has financed over $4 Billion in energy efficiency and resiliency property investments through 2021. Introduced in 37 states since 2010, C-PACER financing allows property owners to address rising energy costs and changing environmental conditions. In April 2021, Tennessee enacted legislation to create a framework for local governments to implement C-PACER programs. Memphis established its program in December, and Nashville will likely follow in early 2023.

C-PACER’s arrival presents an opportunity for Tennessee banks that understand how it can benefit clients, mortgage holders and bank portfolios.

Traditional assessments offer a useful comparison for understanding how C-PACER works. Much like assessments levy expenses for public improvements to all who benefit – such as requiring all homeowners in an area to pay a portion of the costs for sidewalks – C-PACER offers a way to cover expenses for individual property investments that benefit the public by reducing environmental impacts. But with C-PACER, the assessment is a voluntary one incurred on a specific property by the property owner for qualified projects installed up to 24 months prior, and mortgage holders of the property must all consent.

Across commercial real estate sectors that span hospitality, healthcare, office, multifamily, retail, and industrial, property owners have most often covered the costs of HVAC, lighting, and building envelope improvements with C-PACER. They can also finance renewable energy, control systems, stormwater, water conservation, and other upgrades which improve efficiency and resiliency with C-PACER.

C-PACER offers a financing tool that benefits clients, banks and the public alike.

C-PACER benefits bank clients with long-term, non-recourse financing for high-cost improvements to a facility that borrowers can pass upon the sale of the property to its purchaser. C-PACER also functions as gap financing in a project’s capital stack, allowing investors to increase return on equity and preserve capital for other purposes.

C-PACER benefits mortgage holders on a property as well. The investments covered by C-PACER will improve collateral value through improved net operating income and an investor market more attuned than ever to sustainability and resiliency as important factors in determining a property’s value. And since C-PACER payments cannot be accelerated, a prospective buyer would only be obligated to catch up on missed payments in the event of default by the previous owner. Mortgage holders can also cover C-PACER obligations by escrowing payments along with other tax payments.

Finally, C-PACER benefits a bank’s portfolio with respect to concentration risk by reducing commercial real estate exposure. C-PACER can lower the loan-to-value ratio of the primary mortgage when a project is initially financed and offers the ability to re-capitalize a project to inject capital when a property needs cash or to pay for needed improvements without refinancing the existing mortgage. C-PACER can also keep a project’s ROI on track in the face of rising construction costs and higher rates by bridging a financing gap without the need for a second mortgage or risk rates of mezzanine debt.

As a novel financing tool, C-PACER comes with complexity, but its benefits explain why property owners, mortgage holders, state and local government across the country have considered it worth navigating.

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