The Commercial Property Assessed Clean Energy market, commonly known as "C-PACE," is an alternative financing source for new construction, renovation, and standalone energy projects within the commercial real estate market. In this Credit FAQ, S&P Global Ratings provides a recent snapshot of the sector by addressing frequently asked questions related to market size(s), an overview of credit risks, and more.

Frequently Asked Questions

What is C-PACE?

To begin, property owners can finance a variety of climate and environment-related projects including, renewable energy, climate resiliency, and energy and water efficiency improvements via C-PACE financing. Per the U.S. Department of Energy, state legislative authority must exist and local governments must setup energy financing districts in order to operate commercial PACE programs. Third-party administrators are appointed to run the PACE program within the district and typically finance the up-front costs of improvements. Therefore, C-PACE programs do not require public funding. The C-PACE assessments are secured by the property on which the improvement is made, and property owners repay the PACE assessment as a line item on their property tax bills. Differences in the enabling C-PACE legislation may exist among states, which may introduce legal risk (more details on that below).

C-PACE financings are generally super-priority liens akin to real estate taxes, senior to most other debt on the property, and typically repaid in the form of an assessment on the building owner's property tax bill over a period of 10-30 years (which typically relates to the useful life of the improvement). Mortgage holder consent is required before PACE applications are approved and assessments are placed. They are transferrable; if the building is sold during the PACE repayment period, the lien securing the assessments remains on the property and becomes an obligation of the new building owner. Similar to real estate taxes, CPACE assessments do not accelerate upon a default. Therefore, only the past due amount is payable.

How are C-PACE financings typically structured? What is the current market size?

Chart 1 is an example of a typical C-PACE financing structure.

Chart 1

In some states, property owners may also obtain C-PACE financing retroactively for any eligible work completed. The time period since completion of the project in which PACE financing is available may also vary by state. The size of the investment market as of the end of 2022 was just over $5 billion, growing by 43% year over year within that annual period (see chart 2). Some 20 states account for over $50 million of investment, with California far and away the leader at over $1.2 billion. Ohio ($682 million), Texas ($407 million), Minnesota ($263 million), and Utah ($251 million) round out the top five.

Chart 2

Unlike Residential Property Assessed Clean Energy (R-PACE) assessments, which are filed at the time of project completion, C-PACE liens are typically filed when the financing terms are agreed to at closing. On the closing date, the notice of assessment is immediately recorded in the applicable county's official real property records and remains in effect until the assessment is paid in full.

Can you further compare and contrast C-PACE and R-PACE?

Table 2 summarizes the differences between C-PACE and R-PACE.

Table 2

What risk factors would S&P Global Ratings look at when analyzing credit risk within this sector?

In order to analyze credit risk within the C-PACE space, S&P Global Ratings would consider many factors that can be grouped in a few major categories. We go into detail below.

Priority 

PACE assessments are billed and collected by the county together with ad valorem taxes. The funds may be commingled with amounts collected by the county prior to disbursement of the funds to the issuer/servicer of the securitization.

Construction 

Many states/underwriters permit the use of C-PACE assessments to finance new construction. Underwriting of construction loans is challenging as project timing may be delayed, costs may be higher than anticipated, or the project may not be completed according to the specifications agreed upon. As a result, the borrower may have limited property cash flow to repay the loan if construction hits a snag, and tenants aren't able to take occupancy and start paying rent according to their lease terms. Some of this risk may be mitigated by the use of escrow accounts, agreed upon timelines for project completion, and disbursement schedules.

Appraisal difficulty  

C-PACE assessments are generally limited to a specified percentage (our observations indicate that the 25%-35% range is common) of the market value of the property. Determination of the market value may be challenging. Appraising green buildings is not necessarily straightforward and requires specific training, as appraisers must be able to assess the potential efficacy of the renovation and its impact on market value. Disclosure and transparency issues may complicate the task further.

Property transfer 

C-PACE assessments run with the property; as such, subsequent property owners may not be re-underwritten. Subsequent property owners may have different (more or less creditworthy) profiles than the initial borrower. As a result, repayment of the PACE assessment may be negatively impacted.

Limited performance history 

C-PACE programs are relatively new; thus, they have a limited performance history. Data on payments, delinquencies, collections, and foreclosure rates are therefore limited. For example, we understand that some local authorities either have tax certificates sales by the respective county tax collector or a judicial foreclosure process to recover delinquent amounts. For example, in California and Florida, legal and tax infrastructure is in place to protect investors against potentially delinquent C-PACE assets. However, we would look for historical data to determine recovery, if any.

Legal/structural 

Rules may differ by state/county, introducing further complication. A recent case in New York, reported in the July 28 "Commercial Mortgage Alert," provided one such example, as "Foreclosure proceedings on a Lower Manhattan office tower undergoing redevelopment are highlighting what many see as a major flaw in the city's commercial Property Assessed Clean Energy program: It does not create liens on properties that receive such financing." Further, properties may be subject to other debt on the property, and lienholders may have disputes over how to resolve future issues related to the property.

What is the size and current status of C-PACE with regard to the securitization market?

The securitization market for C-PACE is quite new, with the first deal priced in late 2021. At least three deals were done in 2023, bringing total issued (securitized) debt to just under $800 million. On the other hand, the PACE sector is a bit older, with deals going back as far as 2014. Our database from 2019 on includes the offerings listed in the following table.

Table 3

What will the future bring for C-PACE securitization?

The growth in total investment portends growth for this sector, although it is clearly not without challenges and growing pains, based on the aforementioned risks. This is manifested in the securitization totals, which show some increase in the number of transactions overall (including a few C-PACE offerings), while not yet posting a $1 billion year. That said, we have seen recent increases in sector volumes, which may be attributable, at least in part, to the bank pullback in lending volume and higher interest rates/cost of capital for alternative financing sources.