Halt to C-PACE funding is crippling to real estate industry
The recent decision by Douglas County commissioners to opt out of the Commercial Property Assessed Clean Energy Program should put the entire Colorado commercial real estate industry on high alert. The program, which serves as a financing tool that enables low-cost, long-term funding for energy-efficiency and water conservation projects, plays a vital role in making new projects a reality.
C-PACE has been available to private-sector property owners in Colorado counties that have approved its use since 2016. It has been used across the country to finance over $1.5 billion in capital investment, creating over 17,848 jobs and 2,400 commercial projects mostly in hospitality, office and retail. All over the country and in almost every major county in Colorado, property owners, employers, developers and local businesses are taking advantage of C-PACE financing.
Why has Douglas County put itself at a significant competitive disadvantage by not allowing the use of C-PACE financing by the private sector? This brief overview describes how C-PACE works, how it can be implemented, the perceived risk and its many benefits. The information is timely and hopefully useful to the commercial real estate industry, government entities and general business interests who want to better understand what C-PACE means to overall growth and success.
How C-PACE works. C-PACE is a proven financial tool with successful application in the private sector in Colorado and across the country. Property owners, developers and others may arrange financing directly with capital providers such as banks and private funds to finance their project. Depending on local legislation, C-PACE can be used for commercial, industrial, agricultural, nonprofit and multifamily properties.
The financing terms are advantageous to the borrower:
• Financing terms up to 25 years – much longer than traditional debt financing;
• Up to 100% of the eligible project costs can be financed;
• Financing is repaid through a voluntary special assessment on property tax bill; and
• In many cases the amount a business saves in energy or water use exceeds the amount borrowed to finance the project.
Energy and water conservation projects are permanently affixed to a property, which can create a more valuable and competitive building by reducing costs and increasing efficiency. Borrowers also can reduce higher-cost capital and their owner-equity contribution as well as fill gaps in their capital stack, which can help make their business more competitive.
There are many benefits for a county opting in:
• Property owners who seek low interest rates to finance projects that reduce water and energy consumption use C-PACE to their benefit and to the benefit of their tenants, employees and the economy by diminishing the drain on our energy and water supplies;
• C-PACE approval provides a business-friendly environment to attract and retain employers and economic development projects;
• C-PACE creates a competitive advantage for those counties that choose to participate by providing businesses in those counties another tool to help reduce costs; and
• Giving property owners a tool to more affordably finance improvements to their property leads to greater commercial property values for those properties and thereby more taxes collected by the county.
3 Steps to Implementation
1. The Board of County Commissioners must pass a resolution to authorize C-PACE, which will utilize the existing billing and collection system of property taxes of the county. To defray any administrative costs associated with the program, the local government may collect up to a 1% surcharge (of the annual C-PACE payment) on the participating property.
2. When a project that meets the requirements of C-PACE closes on financing, the C-PACE administrator submits a request to the county tax assessor to place an assessment on the property tax bill of the participating property. The C-PACE administrator will provide the county a list of all existing assessments and the billing amount to be included on the property owner’s annual tax bill.
3. After collecting the assessment amount, the county transfers the payment into the C-PACE program account to be disbursed to the capital provider that financed the project.
Potential risk. Based on our research, of the more than 2,400 projects across the country only two have ever defaulted, giving C-PACE a success rate of over 99.9%. And if a property were to default, not only does the 1% surcharge help the county defray the de minimis administrative costs but the improved value of the property also accrues to the benefit of the public and the county in the form of an upgraded property and an increased annual tax bill paid to the county. If that property becomes a greater challenge to sell because it has an additional assessment placed on it, let the market dictate the outcome.
Conclusion. The benefits of C-PACE are numerous:
• Businesses and individuals benefit from a reduced demand for energy and water that puts downward pressure on these resources.
• The competitive advantage provided by C-PACE gives the county an edge in attracting small and large job creation opportunities in the form of new business attraction/retention.
• This tool provides businesses with an additional financing mechanism to reduce their costs.
• Counties that participate will see an increase in the value of properties that have improvements made using C-PACE.
Today, 31 counties in Colorado have approved C-PACE, including every county in the metro area. We are facing an unprecedented economic situation and C-PACE is an important tool that can’t be lost.
Published in the July 15-Aug. 4, 2020, issue of CREJ.