This client alert is co-authored by Ethan Elser, executive vice president and principal at PACE Equity.

North Carolina has joined more than 35 states across the country to adopt a new form of financing for commercial real estate owners and developers. Known as Commercial Property Assessed Clean Energy (C-PACE) financing, the program will allow developers to finance the up-front costs of certain eligible improvements and repay those costs over time through a voluntary special tax assessment. 

For ground-up developers or renovating owners, this tool can be used to finance energy efficiency, renewable energy, and resilience costs in commercial building construction. This legislation unlocks an additional source of low-cost, long-term, and non-recourse private capital funding for up to 35% loan-to-value (LTV). C-PACE financing is substantially less expensive than equity, mezzanine financing, and bridge loans.

The North Carolina legislature passed Senate Bill 802 in June 2024, allowing municipal governments to adopt C-PACE on a local level. Interested developers can consult with outside legal counsel or a C-PACE lender to find out which cities, counties, or towns have rolled out the program.

Since its inception around 15 years ago, 40 states and Washington, DC, have adopted C-PACE programs and over $7 billion has been funded through the program, according to the C-PACE Alliance, an industry trade association. This list includes North Carolina’s Southeast neighbor, Georgia, which passed legislation and started funding projects in 2023. 

The recent approval in North Carolina and Georgia marks a significant milestone for real estate developers in these states. This innovative financing mechanism unlocks new sources of capital, enabling developers to access low-cost capital to improve project feasibility, increase financing, and recapitalize buildings.

What is C-PACE Financing?

C-PACE is a powerful tool that provides long-term, fixed-rate financing for energy efficiency, renewable energy, and water conservation improvements to commercial properties. Unlike traditional loans, C-PACE financing is repaid through a special assessment on the property tax bill, aligning repayment with the useful life of the improvements and often extending up to 20 to 30 years with a fixed rate. There are also built-in borrower protections, including that the C-PACE lender cannot accelerate payments, and that borrowers may prepay. 

Benefits to Real Estate Developers

As real estate developers consider their financing options, there are several important factors when looking at C-PACE programs. Here are a few benefits:

• Unlocking New Sources of Capital: One of the primary advantages of C-PACE financing is its ability to unlock new sources of capital. This is particularly beneficial for projects that might otherwise struggle to secure adequate conventional financing or are utilizing bridge loans. C-PACE can replace or supplement mezzanine or equity financing, and at significantly lower rates or longer terms than traditional sources. 
   
• Recapitalization and Liquidity: C-PACE financing can finance projects which are mid-construction or typically up to three years after completion or installation. This financing can be used to cover a cost overrun, paydown or payoff a maturing construction loan or mezzanine financing, or add working capital for lease up and debt service purposes.
   
• Increased Property Value: Energy-efficient and sustainable properties are increasingly in demand. C-PACE financing allows developers to invest in high-performance building upgrades that can lead to higher property values and increased marketability, including eligibility for Leadership in Energy and Environmental Design (LEED) certification or other industry designation. Tenants and buyers are often willing to pay a premium for green buildings that offer lower operating costs and a reduced environmental impact.
   
• Modernization: The ability to renovate and enhance ecological or climate resiliency presents opportunities for owners of existing structures. Redevelopment can not only improve valuation, but it can also substantially reduce insurance costs.
   
• Transferability: The financing is tied to the property, not to the owner, so it will survive sales or other conveyances, simplifying future dispositions. 

Final Takeaways

North Carolina’s C-PACE program aims to drive investment in clean energy and energy efficiency projects, supporting the state’s goals of reducing greenhouse gas emissions and fostering economic growth. The program is expected to attract significant interest from developers looking to capitalize on the benefits of C-PACE financing.

Adoption of C-PACE financing reflects a commitment to development, job creation, and energy conservation. The program offers flexible terms and competitive rates, making it an attractive option for owners and developers seeking to enhance the energy performance of their properties.

The approval of C-PACE financing in North Carolina and Georgia represents an opportunity for real estate developers to access new sources of capital for financing in today’s constrained capital market environment. By leveraging C-PACE financing, developers can obtain lower rates, improve cash flow, increase liquidity, and contribute to the broader goals of environmental sustainability and economic growth. As these programs gain traction, they are poised to become a vital component of the development landscape in both states.

For more information, please contact me or your regular Parker Poe contact. You can also subscribe to our latest alerts and insights here. 

Ethan oversees PACE Equity’s 35+ state origination platform, public policy, and sits on the firm’s investment committee. He is responsible for the sizing and structuring of all PACE Equity’s projects and collaborates with owners, developers, brokers, lenders, and public officials.