DBRS Morningstar’s Takeaways from ABS East 2021: The Pace of C-PACE Continues to Pick UpProperty Assessed Clean Energy (PACE)
As part of its takeaways series, DBRS Morningstar is publishing several write-ups about pertinent topics discussed at ABS East 2021, an industry conference for the asset-backed securities sector. DBRS Morningstar’s Stephanie Mah, Vice President, moderated a panel on the second day of the conference about commercial property assessed clean energy (C-PACE) financing. Given that C-PACE is a relatively new asset class, the pandemic was the first test. According to Mah, C-PACE transactions have continued to perform as expected, with minimal delinquencies and zero losses to date. When there were delinquencies, borrowers rectified their payments in one or two payment periods.
“C-PACE delinquencies were measured in basis points, not percentage points,” added Lain Gutierrez, Chief Executive Officer (CEO) of CleanFund Commercial PACE Capital. He said a big reason for this was because C-PACE payments are bundled with taxes and more senior in priority than a mortgage. Tax collectors do not offer forbearances unless a mandate from the governor allows them, which did happen in certain states.
Thanks to multiple factors, the C-PACE industry also had tremendous growth in 2021. Mansoor Ghori, Co-Founder and CEO of Petros PACE Finance, thought this sudden surge in interest was another instance where the pandemic accelerated already existing trends (e.g., online shopping). Before the pandemic, C-PACE was expanding rapidly year after year. Then the market froze. Property owners and developers went looking for capital and found C-PACE lenders, who were able and willing to lend. Per Ghori, the education that he and other market participants have been providing for years has finally started to sink in. He said that most often borrowers tapped into C-PACE to have a cash buffer to withstand the effects of the pandemic or to complete unfinished projects.
Because C-PACE loans are more senior than other debt on a property, lender consent is necessary. Gutierrez mentioned that hospitality owners with empty hotels were taking advantage of C-PACE to cut operating expenses and pay off their debt. “The senior lenders in those properties were then faced with the question either to consent to C-PACE and allow the fresh capital to cover those expenses or reject C-PACE and face potential default a few months later,” he said. Most lenders consented. “It was at that point during the pandemic that C-PACE really started gaining traction.”
Another reason for C-PACE’s success was the program’s expansion into other markets. North Carolina and Kansas each introduced their own C-PACE enabling legislation, and New Jersey, Maine, and Montana enacted C-PACE enabling legislation. Boston; Virginia; Anchorage, Alaska; Cook County, Illinois; and New York City came to market with their first C-PACE transactions. Alexandra Cooley, Chief Investment Officer of Greenworks Lending, highlighted that C-PACE is a public-private partnership. The public sector was looking for ways to help the businesses in their communities, and a lot of them turned to PACE to do so.
While not all markets include language allowing C-PACE on new construction, Ghori believes that area represents a huge driver of this industry in the future. The average size of C-PACE transactions is increasing exponentially thanks to the larger price tags of new construction projects. According to Ghori, a $500,000 transaction was a pretty big deal in the beginning. Now the average deal is between $15 million and $17 million. Of note, his company, Petro PACE Finance, completed the largest C-PACE securitization to date for $89 million on 111 Wall Street in New York, though it was not for new construction but to reduce the carbon footprint of an existing building.
A greater emphasis on Environmental, Social, and Governance (ESG) factors is also driving growth. Climate mandates to reduce carbon emissions have ignited interest in C-PACE. Gutierrez has heard from developers of new construction and retrofit projects that they want to make their buildings greener because their tenants are demanding it. The panelists believe that C-PACE is not a case of greenwashing—marketing claims that misdirect people into thinking a company is greener than it actually is. “We are by definition a green bond, and we cannot use these funds for anything else but energy efficiency, renewable energy, or resiliency measures,” said Ghori. All the panelists mentioned that there is an energy audit as part of providing C-PACE loans. This can help measure the impact of C-PACE. However, Ghori pointed out that each energy auditor does it differently, though having more metrics is good for the industry. Thinking beyond the environmental aspect of ESG, Cooley brought attention to how PACE addresses the social part of the ESG acronym. She highlighted that these projects create local construction jobs, providing a social benefit to the community.
All the panelists believe 2022 will be a banner year for C-PACE, and DBRS Morningstar has a stable outlook for C-PACE next year. Ghori said he “doesn’t see it slowing down any time soon.” Gutierrez recapped the drivers that will still be there to further boost C-PACE, including geographic expansion, acceptance among lenders for consent, and the available capital that far outstrips the available paper, which will bring down the cost to fund these projects. Finally, Cooley is anticipating more financial innovation in the space, such as combined offerings. Her company, Greenworks Lending, issued its first public C-PACE securitization in December. This is big news for the industry because most of these transactions are private. A public securitization is one of several reasons to expect more growth next year.
Written by Caitlin Veno
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