A Guide to C-PACE Financing, Eligibility, and Controversies

Earlier this summer, Last Week Tonight with John Oliver featured a story about a relatively new program designed to help property owners finance green renovations: Property Assessed Clean Energy (PACE). 

PACE (which applies to residential properties) and C-PACE (for commercial buildings) were meant to provide up-front financing for energy-efficient building upgrades, at little risk to property owners or lenders. But Oliver warned of unscrupulous contractors and shady financiers teaming up to dupe homeowners into accepting PACE financing and sometimes losing their homes in the process. 

While Last Week Tonight focused on residential PACE, it naturally raised questions about C-PACE from commercial contractors and property owners. And since more and more states are passing legislation to enable C-PACE, it’s a good time to learn about how to navigate C-PACE financing and avoid its pitfalls.

What is C-PACE?

C-PACE is a program through which commercial property owners can receive up-front financing for building upgrades that improve energy efficiency and resiliency. The funding is provided by private capital, and building owners pay back the cost slowly (PACE loans have terms of up to 30 years, while most other loans last 5-10 years) and at a fixed low interest rate.

C-PACE financing is not a traditional loan but a lien on the property, and repayments are made via increases to the building’s property tax.

Ideally, the situation is a win-win-win for property owners, local governments, and lenders.

• Owners get to invest in improvements they could not otherwise afford and potentially save money through reduced energy costs.
• Governments make progress on local energy initiatives and benefit from job creation.
• Lenders enjoy a nearly guaranteed return on their investment, because C-PACE funds are classified as a “priority lien.” This means that if a building owner defaults, the next owner is responsible for repayment. And even if a property goes bust and fails to get a new owner, the “priority lien” status means that C-PACE lenders can collect repayment ahead of all other debts associated with the building.

Where is C-PACE Financing Available?

C-PACE and PACE originated in California in 2008, and as of 2021, there are active C-PACE programs in 26 states, plus 11 more states which have passed legislation to enable PACE but don’t have active programs. (Residential PACE, meanwhile, has grown more slowly and is currently only enabled in California, Florida, and Missouri.)

It’s important to note that even in states with active PACE programs, individual counties and towns can still choose not to participate. For instance, New York state approved C-PACE years ago, while New York City only implemented the program in 2021.

PACE-Eligible Improvements

PACE funding is often associated with solar panels, but a variety of projects can receive funding that falls under the headings of energy efficiency, renewable energy, and resiliency.

• Energy efficiency: Roof replacement, water conservation systems, HVAC upgrades, automated building controls, energy-efficient lighting, variable speed drives, and upgrades to boilers, chillers, and furnaces
• Renewable energy: Solar panels, fuel cells, EV charging stations, recycled energy
• Resiliency: Stormwater management, hurricane, fire, and seismic resiliency

Not every C-PACE program covers all of the improvements listed above, and some have added their own.

The types of properties eligible for PACE financing typically include all commercial buildings, multi-unit residences, and public buildings on a limited basis. Many states allow retroactive C-PACE financing for work that has already been completed, and some states also permit funding for new construction.

Some PACE programs will only approve projects if the anticipated savings over the life of the upgrades (usually 20 years) are higher than the upfront costs. Other administrators are more flexible on this point, but in either case, estimated savings rely on predicting fuel and maintenance costs for the next two decades, so they’re naturally imperfect.

How the C-PACE Process Works

While there are important variations in how individual states, counties, and municipalities manage PACE financing, the basic program structure is consistent everywhere.

Step 1: Program set-up

First, a state legislature adopts C-PACE legislation and drafts guidelines for the program. Then, the government either manages the program themselves, or, more commonly, contracts with a third-party administrator (put a pin in that part because it will be important later).

Next, local governments can choose to join the state program, or launch their own, if they’d prefer to appoint their own administrators or change eligibility requirements.

Step 2: Getting funding

Once a jurisdiction approves a C-PACE program, property owners can apply for funding. To do that, they work with a contractor to recommend specific upgrades, assess their upfront costs, and determine how much money property owners will save as a result of the improvements.

The property owner submits their application to the C-PACE administrator. If the project is approved, the administrator, building owner, contractor, and financier agree on the details of the contract. According to Colorado C-PACE, “Once a project has been approved for financing, it typically takes an average of 60 days to close.”

After a deal is closed, the financier disperses the funds needed to start the project to the contractor, with total payment to be received upon completion.

Step 3: Project completion and repayment

Once work on a project is completed, the contractor’s involvement with PACE is done. The building owner’s property tax increases to reflect the cost of the work, and the lien remains attached to the building, even if it changes owners.

PACE Funding Controversies and Pitfalls

C-PACE funding avoids many of the excesses and abuses associated with residential PACE financing, but the two programs do share some of the same vulnerabilities.

John Oliver criticized PACE funding for incentivizing predatory behavior from contractors and administrators. He shared the stories of contractors who misleadingly described PACE as “free government money,” targeted homeowners without the means to repay the lien (including the elderly and people with cognitive disabilities), and administrators who approved those projects with virtually no oversight. These tragic situations are much less common with C-PACE funding since commercial property owners are typically sophisticated enough to make informed decisions.

Unlike PACE loans, defaults on C-PACE liens are rare; a federal research lab found only one example of a default in the entire history of the program and only a few delinquencies. And even in the case of a project gone wrong, there’s an obvious difference between a commercial property owner forfeiting an office building and someone forced out of their home.

Still, a C-PACE lien can be an issue when building owners try to sell their property since buyers are likely to balk at a massive property tax bill for improvements that are no longer state-of-the-art.

How Commercial Services Companies Can (Responsibly) Embrace C-PACE

There are two requirements in order for C-PACE financing to work as intended:

1. Contractors being honest about the types of improvements that will benefit property owners and the projected savings from those projects.
2. Administrators whose primary agenda is to protect property owners, not capital lenders.

If you’re a commercial property contractor, you naturally want to give your customers the best possible advice about C-PACE funding. But that’s a challenge, since, as Oliver said: “The people with the responsibility of pitching a very complicated financial product—a pseudo-loan that’s technically a tax lien—are contractors, whose training is not in finance.”

To be fair, most states require contractors to receive C-PACE certification before participating in the program, but the training required for certification may be only an hour-long seminar that can’t teach you how to make sophisticated costs vs. savings predictions thirty years in the future.

That’s why, in order to protect your customers and your reputation, it’s important to make sure you’re working with a C-PACE administrator you trust. Experts say that PACE programs run by governments instead of third-party administrators tend to be more responsible. Likewise, local credit unions have a strong track record of providing meaningful oversight.

While not all major third-party administrators are suspect, Ygrene (which has a C-PACE arm) has approved dubious financing to homeowners, and other major players have been plagued by allegations of fraud.

If your local administrator tends to approve C-PACE applications in which savings are not expected to outweigh costs, proceed with caution. And if you want to test the waters of C-PACE, start with a small project you feel confident about before brokering a million-dollar deal.

Start a Conversation About C-PACE Financing

At heart, C-PACE is a good idea, as long as its primary function is to make necessary improvements to buildings instead of functioning as a complicated financial instrument. At a minimum, it’s worth investigating your local program and checking out case studies of recent projects. If you like what you see, you can make C-PACE part of your sales pitch and prospect to customers who are likely to be eligible. If everything works as it should, it really will be a win-win-win.