One of the many advantages of working for a credit union is that you're free to make business decisions that benefit your members. If those members include commercial and industrial property owners, financing their commercial property assessed clean energy (C-PACE) projects could strengthen your relationship and benefit your institution.
What is C-PACE?
C-PACE is a government-sponsored financing program designed to encourage energy efficiency, water efficiency, and renewable energy upgrades for commercial and industrial buildings. A voluntary program, C-PACE is finding favor with building owners nationwide because it makes building upgrades economically attractive. It does this by facilitating up to 100 percent financing for the project with terms of up to 25 years (the length of the financing corresponds to the estimated useful life of the energy improvements). Almost anything that will lower the utility bills and is permanently affixed to the property qualifies, and because the financing is secured by the property, the building owner is not required to sign a personal guarantee. Even better, in well-designed projects, the energy cost savings outweigh the C-PACE payments, putting cash in the building owner's pocket.
C-PACE project benefits
Aside from the positive cash flow, C-PACE projects lead to lower utility bills, a more comfortable property for occupants and tenants, and reduced greenhouse gas emissions in the community. What's more, the improvements typically make the building more valuable, more marketable, and more competitive. Even better, the building owner can achieve these results without adversely affecting working capital or credit.
How does C-PACE work?
In a C-PACE transaction, private capital providers fund the investment, which is secured by a voluntary special assessment that is recorded against the property. The payments are billed along with property taxes, similar to a sewer assessment, and, since the financing is tied to the property, the building owner can transfer the repayment obligation to a new owner if the property changes hands.
How is C-PACE implemented?
State and local governments typically view C-PACE programs favorably, as they bring about important societal benefits, such as improved building stock, reduced greenhouse gas emissions, and local jobs. Moreover, since C-PACE projects are financed by the participants, these programs have no impact on government budgets. As a result, it is not surprising that 34 states plus D.C. have passed legislation which empowers local governments to adopt a program.
Project implementation
A typical C-PACE project begins with a building owner whose building contains equipment at or near the end of its useful life. Once the building owner develops a project scope and budget with his or her contractor-or C-PACE project developer, if the planned upgrades will be extensive-he or she submits an application to the local C-PACE program. Assuming the project meets the requirements of the program guidelines, the program administrator will then approve the application. (Some programs will even work with the building owner and contractor to model different project scenarios so that energy and cost savings are optimized.) If the building owner has a mortgage on the property, he or she then must obtain consent from the mortgage holder, after which the C-PACE program administrator will facilitate the finance closing with the building owner's chosen capital provider.
The role of credit unions in C-PACE
As noted above, since the C-PACE assessment is senior to all commercial liens, the mortgage holder must consent to the transaction. To date, more than 160 financial institutions, including several credit unions, have consented to C-PACE projects, according to PACENation, an industry trade group. This isn't surprising when you consider that C-PACE projects improve the value of the mortgage holder's collateral as well as their borrower's cash flow and repayment ability.
Given the benefits of C-PACE, it's not surprising that, instead of simply consenting to projects, community banks and credit unions are stepping up to fund them. That's what happened recently in Colorado, when a member of Bellco Credit Union asked Bellco to finance its C-PACE project-a comprehensive energy retrofit for two six-story office buildings in Greenwood Village.
Bellco agreed.
"We're a member-focused institution, and C-PACE was definitely a beneficial program for this member and the property," said Susan Rice, Bellco Credit Union's director of business services."The cost savings that the building's tenants received would improve our collateral and the overall cash flow for the building, which is a measurement we use for monitoring our loans."
Aside from the financial benefits, the project aligned nicely with Bellco's culture. The credit union, which has more than $4 billion in assets and 24 branches, is, according to Rice, "a strong supporter of healthy lifestyles and green initiatives in Colorado, which this project advocates."
The energy-saving equipment upgrades for the twin buildings, which total 414,000 square feet, included new rooftop HVAC units, upgraded controls, revamped lighting, updated water fixtures, and next-generation tenant space metering. With these changes in place, the owner is pursuing LEED certification and initiating a three-year Active Energy Management (AEM) program.
The $7.1 million project-a collaboration between John Madden Company, the owner of both buildings; McKinstry, an energy service company and design builder; Integro, a C-PACE project developer and finance consultant; the Colorado C-PACE program, and Bellco-is the largest C-PACE financing in Colorado to date.
At the project's conclusion, the building owners will save $385,000 in annual energy and maintenance costs-a 30 percent savings.
Advocating for C-PACE at your credit union
Since C-PACE programs are relatively new, your credit union will likely require a bit of education before it's ready to fund its first project. Bellco did. "We met with the borrower's attorney a few times, as well as the Colorado Energy Office, to review the mechanics of the process, standard documents, and the approval process to become a capital provider," said Rice. "We also engaged an attorney that had prior real estate and metro-district bond experience, since both are important parts of the risk analysis for these projects."
C-PACE required internal discussions at Bellco as well. "After our initial meetings with the tenant's attorneys, we spent time meeting with our executives, loan committee members, and our treasury department," said Rice. "After discussing the specifics of the loan and what amount in total would be allocated to these projects, our executives approved."
What's the risk?
Since they're backed by real property, C-PACE investments are relatively secure, but there are exposures to consider before you become a capital provider. "There is some risk related to long-term fixed rates as well as a general understanding of the program," said Rice. "We will need to educate our auditors and regulators on how to review the files adequately. We do not categorize these loans as 'commercial real estate,' since they are not secured by an actual deed of trust on the property, so it actually helps us balance our portfolio risk."
What's next for Bellco?
As far as marketing C-PACE to existing clients, Rice says the credit union is discussing the program's potential with some existing members and will continue to search for the right projects. "We are looking for the right properties to offer this program to, since there are economies of scale to be considered for lower loan amounts. We've had requests for much smaller loans, and while we do contemplate each project separately, we also need to ensure that the risk for the overall portfolio is well managed," said Rice. "Also, due to membership requirements for our credit union, we are currently only considering this program for loans where we hold the first deed of trust on the property. In addition, these loans are long term, fixed-rate loans, so there is some interest rate risk that has to be considered."
If you're contemplating financing C-PACE projects to strengthen your relationship with your members, Rice has some advice. "Ensure that the right individuals are involved from the beginning and that their background is strong in commercial real estate as well as foreclosure and collection laws for your state. This helped us understand the risks, so we could explain
[them] to others in the organization. Also, the attorney we selected really helped shore up the legal risks with additional documentation. We did not have the benefit of other credit unions in the area that were capital providers, which would
have also helped." 
Fortunately for your credit union, you don't have to start from square one.
Brian McCarter is the CEO of Sustainable Real Estate Solutions (SRS). Founded in 2010, SRS provides program administration services for C-PACE programs nationwide. Reach McCarter at (203) 459-0567 or
bmccarter@paceworx.com.
