C-PACE vs. Traditional Construction Financing

Introduction

C-PACE (Commercial Property Assessed Clean Energy) has emerged as one of the most significant additions to the commercial real estate capital stack in recent years. For developers and sponsors, it offers a way to reduce equity requirements, lower blended cost of capital, and access long-term fixed-rate financing for eligible building components that would otherwise be funded out of the construction budget.

C-PACE is not a replacement for construction financing. It is a complement to it. Understanding how C-PACE works alongside traditional construction loans, and where it creates the most value, is essential for structuring an efficient capital stack on development projects.

What Is C-PACE?

C-PACE is a financing mechanism that allows commercial property owners to fund energy efficiency, renewable energy, water conservation, seismic resilience, and other eligible improvements through a voluntary property tax assessment. The financing is repaid over 20 to 30 years as a line item on the property's tax bill.

Key characteristics of C-PACE include long-term fixed rates (typically 20 to 30 years), fully amortizing with no balloon payment, repayment through the property tax bill which survives transfer of ownership, non-recourse to the borrower, applicability to both new construction and retrofit projects, and availability in states and municipalities with enabling C-PACE legislation.

C-PACE financing is underwritten based on the energy savings or eligible improvement costs, not on the borrower's creditworthiness. The assessment is secured by the property's tax lien, which means it is senior to the mortgage in priority. This senior lien position is why C-PACE requires consent from existing mortgage holders.

What Is Traditional Construction Financing?

A construction loan is short-term financing used to fund the development of new commercial real estate projects. Construction loans are disbursed in draws as work is completed, with interest accruing only on funds advanced. They are typically structured with floating rates tied to SOFR, terms of 18 to 36 months, and leverage of 60% to 75% of total project cost.

Construction loans are full recourse in most cases, requiring personal guarantees from the sponsor. They are provided by banks, credit unions, and debt funds, and are underwritten based on the project budget, construction timeline, projected NOI, and sponsor experience.

Upon completion and stabilization, the construction loan is paid off through permanent financing or sale.

Key Differences

C-PACE financing and traditional construction loans serve different roles in a development capital stack. Construction loans fund the full project on a short-term basis, while C-PACE provides long-term, fixed-rate financing for eligible energy-efficient and resilient building components.

How C-PACE Complements Construction Financing

C-PACE does not replace the construction loan. It replaces a portion of the equity or mezzanine debt that would otherwise be required to fund eligible building components. This is where C-PACE creates the most value.

Consider a development project with $100 million in total costs. A construction lender provides 65% LTC ($65 million). Without C-PACE, the sponsor needs $35 million in equity. If $15 million of the project budget consists of C-PACE-eligible improvements, C-PACE financing can cover those costs, reducing the equity requirement to $20 million.

The effect is significant: lower equity requirement, lower blended cost of capital (since C-PACE rates are well below equity return requirements), and long-term fixed-rate financing on a portion of the building that does not need to be refinanced at stabilization.

C-PACE can be funded at or after construction closing, and the proceeds can reimburse the construction loan for eligible costs already incurred. This flexibility makes it possible to layer C-PACE into a capital stack at various points in the development timeline.

When C-PACE Adds the Most Value

C-PACE is most impactful for:

• Ground-up development with significant energy-efficient building systems
• Major renovations or retrofits that include eligible improvements
• Projects where the sponsor wants to reduce equity requirements without adding mezzanine debt
• Long-term holds where the 20 to 30 year fixed rate provides meaningful cost-of-capital savings
• Projects in states with active C-PACE programs and experienced administrators

Limitations to Consider

C-PACE is not available in every jurisdiction. State legislation must be in place, and the local municipality must have opted in to the program. The existing mortgage lender must consent to the C-PACE assessment, which some lenders are still reluctant to provide. The eligible improvement scope is defined by statute and varies by state. And the senior tax lien position, while beneficial to the C-PACE lender, can create complexity in the broader capital stack.

How GSP Integrates C-PACE into Capital Structures

George Smith Partners evaluates C-PACE as part of every development and renovation financing assignment where eligible improvements are present. We work with established C-PACE providers to size and structure the assessment, coordinate with construction and permanent lenders to obtain consent, and integrate C-PACE into the overall capital stack to minimize cost of capital and maximize sponsor returns.