(excerpted from an article appearing in the Credit Union Business online magazine)
One of the many advantages of working for a credit union is that you’re free to make business decisions that benefit your members. If those members include commercial and industrial property owners, financing their commercial property assessed clean energy (C-PACE) projects could strengthen your relationship and benefit your institution.
What is C-PACE?
C-PACE is a government-sponsored financing program designed to encourage energy efficiency, water efficiency, and renewable energy upgrades for commercial and industrial buildings. A voluntary program, C-PACE is finding favor with building owners nationwide because it makes building upgrades economically attractive. It does this by facilitating up to 100 percent financing for the project with terms of up to 25 years (the length of the financing corresponds to the estimated useful life of the energy improvements). Almost anything that will lower the utility bills and is permanently affixed to the property qualifies, and because the financing is secured by the property, the building owner is not required to sign a personal guarantee. Even better, in well-designed projects, the energy cost savings outweigh the C-PACE payments, putting cash in the building owner’s pocket.
C-PACE project benefits
Aside from the positive cash flow, C-PACE projects lead to lower utility bills, a more comfortable property for occupants and tenants, and reduced greenhouse gas emissions in the community. What’s more, the improvements typically make the building more valuable, more marketable, and more competitive. Even better, the building owner can achieve these results without adversely affecting working capital or credit.
How does C-PACE work?
In a C-PACE transaction, private capital providers fund the investment, which is secured by a voluntary special assessment that is recorded against the property. The payments are billed along with property taxes, similar to a sewer assessment, and, since the financing is tied to the property, the building owner can transfer the repayment obligation to a new owner if the property changes hands.
How is C-PACE implemented?
State and local governments typically view C-PACE programs favorably, as they bring about important societal benefits, such as improved building stock, reduced greenhouse gas emissions, and local jobs. Moreover, since C-PACE projects are financed by the participants, these programs have no impact on government budgets. As a result, it is not surprising that 34 states plus D.C. have passed legislation which empowers local governments to adopt a program.
A typical C-PACE project begins with a building owner whose building contains equipment at or near the end of its useful life. Once the building owner develops a project scope and budget with his or her contractor-or C-PACE project developer, if the planned upgrades will be extensive-he or she submits an application to the local C-PACE program. Assuming the project meets the requirements of the program guidelines, the program administrator will then approve the application. (Some programs will even work with the building owner and contractor to model different project scenarios so that energy and cost savings are optimized.) If the building owner has a mortgage on the property, he or she then must obtain consent from the mortgage holder, after which the C-PACE program administrator will facilitate the finance closing with the building owner’s chosen capital provider.
The role of credit unions in C-PACE
As noted above, since the C-PACE assessment is senior to all commercial liens, the mortgage holder must consent to the transaction. To date, more than 160 financial institutions, including several credit unions, have consented to C-PACE projects, according to PACENation, an industry trade group. This isn’t surprising when you consider that C-PACE projects improve the value of the mortgage holder’s collateral as well as their borrower’s cash flow and repayment ability.
Given the benefits of C-PACE, it’s not surprising that, instead of simply consenting to projects, community banks and credit unions are stepping up to fund them. That’s what happened recently in Colorado, when a member of Bellco Credit Union asked Bellco to finance its C-PACE project-a comprehensive energy retrofit for two six-story office buildings in Greenwood Village.
Read the full article in the Credit Union Business online magazine.