Can C-PACE Be Effective Financing for Multifamily Housing?
Energy efficiency in our homes helps improve health and comfort and saves money on monthly bills. For low-income apartment residents, who spend more than three times the average in energy costs, these savings can have a significant impact in being able to stay in their homes and live healthier lives.
However, to be able to implement efficiency improvements, particularly in the multifamily affordable housing sector, building owners often need access to financing to cover the upfront costs of energy improvements.
One financing mechanism for energy efficiency improvements that has been gaining traction in the commercial building market, is Commercial Property Assessed Clean Energy (C-PACE.) C-PACE is an innovative financing mechanism that commercial, industrial and multifamily property owners can use to secure affordable, long-term financing for energy upgrades to their buildings. In order for C-PACE to be utilized, states and often municipalities must enact enabling legislation, and since 2009, more than 30 states have done so.
C-PACE is taking off with dollar usage doubling since 2016 to more than $450 million, financing over 1,000 commercial buildings nationwide. However, while C-PACE has a number of attributes that could make it attractive to property owners in the affordable multifamily housing sector, few have taken advantage of it. Of the over 1,000 C-PACE transactions in its history, only 15 are in affordable multifamily housing properties.
Can C-PACE be an effective source of financing for efficiency upgrades in this underserved sector?
Vermont Energy Efficiency Corporation (VEIC) has just released a report to begin to answer these questions.
Developed on behalf of the Energy Efficiency for All Project, a joint effort of the Natural Resources Defense Council, the National Housing Trust, the Energy Foundation and Elevate Energy, the report, Commercial PACE for Affordable Multifamily Housing, looks in depth at the handful of affordable multifamily transactions that have used this financing tool.
The report identifies a number of reasons for this slow uptake and offers suggestions for strategies that could allow the affordable multifamily sector to utilize C-PACE to increase energy efficiency improvements.
- The financing structures for most of the completed transactions have been relatively simple, compared to the sector’s typical financing scenarios.
- The use of C-PACE on U.S. Department of Housing and Urban Development (HUD) financed property, and on an affordable, multifamily transactions using the Low-Income Housing Tax Credit (LIHTC) has been extremely limited.
- Each state’s enabling legislation varies slightly. While this has not led to substantive differences for C-PACE Program administrators, these variations at the state or local level may hinder the ability of capital to cross state borders. This can create challenges for PACE financers who seek to work with multiple programs across jurisdictions.
Best Practices and Recommendations
For policymakers and program administrators. State legislators and PACE administrators play a critical role in improving the applicability of C-PACE for affordable multifamily housing. The report recommends that they:
- Encourage open PACE program design. Capital markets are increasingly recognizing the positive risk-reward characteristics of senior-lien-secured PACE assessments. The “open” design that enables multiple capital providers to compete to finance C-PACE projects should result in lower interest rates that benefit affordable multifamily owners.
- Focus on unsubsidized housing deals. Projects without federal subsidies will present the fewest barriers to using C-PACE and thus can build a record of success and serve as champions to move C-PACE forward for this sector.
- Consider opportunities in public housing. Though regulations prohibit the use of real estate as surety for debt financing for public housing, the Rental Assistance Demonstration (RAD) pilot provides an opportunity to use C-PACE as public housing units are converted to privately owned assisted housing. The potential for large-scale applicability grows if RAD goes beyond pilot stage into wider implementation.
- Increase and document communications with HUD. A collaboration among interested C-PACE administrators that could develop a timeline and strategy to identify and eliminate barriers in a structured way could build the familiarity among C-PACE administrators with HUD’s required guidelines and process.
- Consider Local Development Corporations (LDCs). A state’s enabling legislation should encourage using C-PACE administrators who see the affordable multifamily housing sector as a priority, thus more actively marketing to this sector and financing smaller transactions. An LDC is a possible structure for doing this.
- Consider extended financing terms rather than rate buy downs for those situations in which projected energy savings are not realized after the C-PACE investment. This would help some affordable multifamily owners through improved cash flow during the assessment term.
- Consider the potential in USDA properties. The USDA could be a strong partner in exploring the value added from C-PACE in rural areas. The agency has shown itself to be willing to share and transfer information and lessons learned between its regional divisions, thus facilitating change throughout its network.
For Affordable Multifamily Providers and Stakeholders. These recommendations are for affordable multifamily owners, developers and managers, as well as advocates:
- Consider C-PACE as gap financing. Though interest rates available when recapitalizing affordable multifamily projects are typically lower than C-PACE rates, C-PACE can serve as a gap-filler when other financing sources are capped and/or limited. As the “last piece” of the capital stack, C-PACE could help retain efficiency measures that might otherwise be value engineered out.
- Prioritize C-PACE for recapitalization rather than for mid-cycle retrofits. During recapitalization, all of the financing parties are already at the table, which is less resource and time intensive than securing multiple consents for a standalone project. For mid-cycle financing, C-PACE will be most useful for properties with the fewest constraints imposed by existing debt or subsidy structures.
- Encourage state housing finance agencies to get involved. A collaboration of interested C-PACE administrators in concert with a collaboration of interested HFAs could drive the market to higher levels of activity.
- Document and codify C-PACE’s use in the affordable multifamily sector. There is a real need to identify and document challenges in the practice of using C-PACE in this critical part of the housing sector. This will help new users enter the market with more realistic knowledge and expectations of what is ahead.
Accelerating energy efficiency improvements in multifamily affordable housing is an important part of preserving this much-needed housing stock. To be clear, C-PACE is just one of a number of financing and other mechanisms that can increase access to energy efficiency for low-income apartment residents.
Ideally, energy efficiency improvements would be incorporated into traditional financing such as through a mortgage at time of acquisition or refinance. However, there are specific instances in which a mechanism like C-PACE may be able to help unlock additional energy savings in multifamily properties, as the new study shows.
Ultimately, we will need key stakeholders across housing, finance and energy efficiency to continue to collaborate to ensure that financing mechanisms serve the needs of low-income residents and enable investments that promote energy efficiency for all.