CPACE: All dressed up, but nowhere to go.

It seems CPACE is all the rage today. In the capital markets, everyone and their dogs are opening a CPACE originations shop. WHY? Because values today are penciling lower than they were 4 years ago. Lenders are coming up short on proceeds due to the drop in values, so there is a need to fill the gap in the capital stack. Instead of sourcing more equity at high teen returns, CPACE is a financing product for energy efficient buildings that offers an affordable solution at a lower cost. It is created and approved at the state level, currently available in over 30 states, and growing rapidly. Plus, we get to look like good citizens of humanity if we can claim something as “sustainable” and “energy efficient”. So, WHY NOT, right?

The TLDR; CPACE, stands for Commercial Property Assessed Clean Energy. Yeah, it’s a mouthful, but stick with me—it’s way cooler than it sounds. Basically, it’s a financing tool that lets property owners bankroll energy-efficient upgrades, building envelope materials, MEP, structural, or even seismic retrofits. Depending on local legislation, it can fill 25-35% of the project's completed value. It’s available at rates from 7-8.5% today - much cheaper than mezz debt or preferred equity!

Here’s how it works: CPACE isn’t a loan but an assessment tied to your property taxes, repaid over 10-30 years at a fixed rate with minimal prepayment penalties. The funds are available at closing, deposited into an escrow account, and the payments are added as a line item on your property tax bill. If you sell the property, the assessment transfers to the new owner, keeping your financial commitment flexible. It’s a practical way to make your building more sustainable while boosting its net operating income through lower utility costs, and in some cases can be fully recovered by tenant NNNs. 

GREAT, WHAT’S THE PROBLEM? 

Senior lenders don’t like it. Optically, it is “senior” to their position - at least that’s what they’re sticking with. We can source CPACE quotes all day, you will feel like the belle of the ball. But good luck finding a senior lender who will consent.

IT’S NOT THAT SCARY! Like a bid tax, where the property owner "bids" into the program by agreeing to the assessment for specific improvements, such as energy-efficient upgrades. This annual payment takes priority over other liens, similar to regular property taxes, but the remaining unpaid balance of the assessment stays subordinate to the senior lender. It’s an

obligation to make future payments. There’s no deed in trust, so the CPACE lender can’t impede. Yes, it has cash flow priority, but CPACE is passive capital. If payment is made the CPACE lender has no rights to accelerate. If missed, they only have the right to accelerate the then due annual payment. 

THE SOLUTION in our eyes is purely education for more senior lenders, and of course, some sort of reserve structure for the annual tax payment. It doesn’t work for every deal, but when it does pencil, it’s an excellent gap capital solution. As we continue to learn about the viability of CPACE  - it’s clear that it’s not going anywhere. Personally, I see CPACE as a product that institutional banks should be offering because they finance construction projects, they can maintain a lower risk position (sub 60% LTC), they require deposits (CPACE is funded into an escrow account day one), and they have the infrastructure for selling it in secondary markets, like bond securities. Plus, there are people much smarter than me that tend to agree!