Why Even Well-Capitalized REITs Recognize the Benefits of C-PACE Financing
Much of the increased real estate asset value that Petros PACE Finance has helped to unlock is for customers organized as Real Estate Investment Trusts (REITs).
Many of our customers rely upon C-PACE financing for necessary improvements, from cool roofs, HVAC and chillers, to others that reduce energy use or increase on-site renewable energy generation in fulfillment of environmental, social and governance (ESG) goals.
The Benefits of C-PACE Financing for REITs
Beyond serving simply as a source of third-party capital, the essence of C-PACE financing’s benefit to REITs is its structure.
Specifically, C-PACE offers several unique advantages for REITs that make it an attractive source of competitive, external capital:
C-PACE Lowers Overall Cost of Capital
- C-PACE financing lowers the weighted average cost of capital for development or redevelopment projects by replacing more expensive equity or mezzanine debt in the project capital stack with lower-priced C-PACE capital.
- Petros’ proprietary structured finance offerings also enable REITs to incorporate tax-equity financing for more efficient use of energy investment tax credits for solar and other tax-incented energy improvements, further reducing costs
C-PACE Allows More Effective Recovery Alternatives
- C-PACE financing provides flexibility in recovering project expenses either as an operating expense or as a real estate tax (RET) assessment on the property tax bill
C-PACE Enables More Advantageous Balance Sheet Treatment
- Because C-PACE financing has no acceleration terms, it is not generally treated as mortgage debt on the balance sheet and has minimal impact on debt-to-equity loan covenants
Petros PACE Finance Serves as a Reliable Source of Programmatic C-PACE Funding
- C-PACE financing from Petros is a reliable source of programmatic capital for funding large-scale energy-efficiency or renewable energy projects, both new construction and renovations, preserving internal capital for other core business operations
Petros PACE Finance has the experienced team, track record, committed capital and customized solutions ready to structure, finance and support projects for REITs.
Representative C-PACE Projects Among Types of REITs
There is often a “split incentive” in office leases in which the savings generated for tenants by energy-efficient upgrades do not benefit the property owner. Because C-PACE assessments can be passed to tenants for recovery in the same manner as property taxes, C-PACE offers REITs the ability to align tenant and landlord interests by sharing costs and savings.
Additionally, green building features lead to market differentiation and improve financial performance, as sustainability increasingly drives tenants’ decisions about leasing space.
Industrial properties frequently have low energy rates but high demand charges and abnormal energy loads, spending a substantial amount of their operating income on energy costs.
C-PACE makes it more feasible to upgrade energy-consuming equipment while preserving capital for other business functions.
The “split incentive” issue is also common in retail, where, under many lease structures, savings generated by reduced utilities go directly to the tenants’ bottom line, generating negative cash flow for the owner.
Because C-PACE assessments are repaid via the property tax mechanism, property owners can offer tenants cost-saving opportunities that enhance lease value while recovering the costs for capital improvements from tenants.
C-PACE enables multifamily REITs to meet the high consumer demand for green residential spaces, while generating free cash flow on an asset.
In addition to enabling retrofits that improve tenant comfort and reduce deferred maintenance needs, C-PACE can fill gaps in the capital stack for new construction when other financing sources are capped and/or limited. As the last piece of the capital stack, C-PACE can help encourage efficient and sustainable building elements that might otherwise be value-engineered out, leading to a more marketable property and boosting property values.
C-PACE allows hotel owners and developers to finance energy-efficient features without having to use existing capital and with no impact on existing loans, enabling hotel properties to meet the demands of guests seeking modern, green accommodations and avoid being locked into a less competitive market as high-performing buildings become the norm in hospitality.