By Larry Derrett, Founder, EnFlux Building Solutions
You can view the original publishing of this article here.
The C-PACE funding program has grown extensively and has the potential to become a game changer for the funding of energy efficiency projects. The market potential is immense, and the benefits of the program are compelling. But it is relatively underutilized. For the program to accelerate its growth, constant messaging is required for building owners, contractors and legislators to learn about the benefits of the program. Out of all these stakeholders, perhaps the building owner’s CFO is the most important target as they are the key decision maker when considering this type of funding.
My goal here is to provide a snapshot of the financial benefits of using C-PACE. This article is purposefully narrow in scope and is written in the CFO’s language.
As of June 30, 2018, building owners have chosen the C-PACE program to fund 1,790 projects. That’s a 75% increase above the 1,020 projects closed through the end of 2016. However, it’s just the tip of the iceberg for C-PACE’s market potential. Financial decision makers all over the US have validated the benefits of C-PACE 1,790 times. That says something about the program.
“As a former CFO, I would not hesitate to recommend C-PACE to the CEO, board or investors. The benefits are compelling.”
Why? Let’s look at five reasons.
#1. Increase Net Cash Flow from Efficiency Retrofits
C-PACE funding is repaid through a 20+ year assessment to a building which is collected similarly to traditional property taxes. This causes annual payments to be very low, especially when compared to 5- or 7-year traditional financing. As a result, energy and maintenance savings will exceed the annual C-PACE assessment for virtually any pure efficiency retrofit. In other words, if companies use C-PACE to fund pure equipment retrofits, their cash flow will increase.
The positive net cash flow can also ease the ability of commercial office building owners to pass along the costs and benefits of a retrofit to tenants. That’s because it’s easier to demonstrate savings will cover financing costs spread over 20 years versus a more traditional repayment period of ~ 7 years.
This is a win-win. Building owners receive an upgrade to the building that could last 15 to 20 years. Tenants enjoy lower overall net expenses and a more comfortable work environment.
What is outlined above is reason enough for many to use this type of funding. But that’s just scratching the surface…
#2. No Acceleration of the Assessment
The C-PACE lender is not allowed to accelerate the full amount owing even if a scheduled payment is past due. Only the unpaid amount that has been billed but not paid is recoverable. This is a very small amount when compared to the capital involved in a total debt restructuring. Therefore, it should not carry enough voting power to complicate the restructuring process.
#3. Freedom to Sell the Building
The C-PACE lender does not have approval rights regarding a sale. That’s because the assessment is an attachment to the building and becomes an obligation of the buyer. This eases how owners can optimize holdings, particularly for larger commercial real estate developers.
#4. Absence of Constraints Typically Imposed by a Lender
The C-PACE lender does not impose traditional lender protections such as quarterly reporting, maintenance of debt covenants or similar requirements. There is no need for an inter-creditor agreement and the building owner has one less creditor to deal with in case of a debt restructuring.
#5. Reduced Weighted Average Cost of Capital
This applies primarily to new construction and major renovations where the project is part of a new or restructured capital deck. The concept is simple – to the extent lower cost C-PACE funding can be used in lieu of higher cost equity (common or preferred) or traditional mezzanine debt, it lowers the overall cost of capital to building owners.
As mentioned earlier, an important element in C-PACE’s continued growth is for CFOs to understand the financial benefits of the program. You can help get the word out by sharing this article with financial decision makers in your network. If they are not familiar with C-PACE, they will appreciate the heads up. And please comment below if you have encountered additional financial drivers for embracing C-PACE.