Navigating the Growth of CPACE: Temporary Trend or Lasting Impact?
In 2016, I closed my first Commercial Property Assessed Clean Energy (CPACE) transaction. This $4 million component of a $20 million capital stack was integral to a new multi-family construction project in downtown Denver. At the time, leverage was high, the economy was robust, and C-PACE was often treated as quasi-equity, even though it’s fundamentally different. CPACE is an assessment-based financing tool, not equity, but there was widespread excitement about its potential as such.
The next year, I co-founded Imperial Ridge Real Estate Capital with partners Mark Boyer and Kevin Morse . We raised a sizable fund through a mid-cap private equity group with the vision of establishing CPACE as a viable asset class within the nation's capital markets. But despite this optimism, the C-PACE market was initially—**I’d even say, painfully—**slow to scale, only reaching around $100-$200 million annually in those first few years. Early players in the field included Greenworks (now Nuveen), Petros, Twain, and CleanFund, among others.
Our experience was marked by the challenges of underwriting and securing lender consent, often involving lender education with each transaction. (It didn’t help that there was a persistent misconception within the origination space that CPACE could replace equity.) This process was slow, especially with larger lending institutions like Wells Fargo, but worthwhile, given the high premiums, closing fees, and the value CPACE delivered to the capital stack.
In the following years, while some competitors aggressively pursued rapid growth, Imperial Ridge took a more measured approach. Recognizing we weren’t going to hit the $500 million target in a reasonable timeframe without a massive capital investment into corporate infrastructure and juggling warehouse lines, we shifted to a more flexible, resilient CPACE financing structure.
Today, the CPACE market has grown substantially, evolving into a multi-billion-dollar industry that fills a critical niche in the commercial real estate debt space, particularly for development and extensive rehab projects. Large CPACE deals now range from $50 million, with some even exceeding $100 million, and leverage ratios reaching 30-35% loan-to-value (LTV) in certain cases. This growth raises questions about CPACE’s sustainability as such a large component of the debt stack, nearing a level where it is equal to or exceeds the size of the primary debt and could be construed as a whole loan product. The question is whether this trend is here to stay or a temporary response to the current lending environment—an answer that rests with our lending institutions.
I personally believe CPACE’s current prominence as a large component of the debt stack is temporary, and it is a response to sluggish debt markets and restrained bank lending. With leverage at historic lows, CPACE has become essential in maintaining momentum in commercial real estate. However, I anticipate that as banks resume lending at competitive rates and increase leverage again, CPACE will recede to a more supportive role in capital stacks, as it was pre-2022. While it remains valuable, I expect 30-35% LTV will eventually return to 10-20%.
Still, CPACE is driving positive change. It’s spurring energy-efficient development, supporting retrofit projects, and proving its stability, even amid market fluctuations and distressed asset sales. We have seen assets with sub-6% CPACE debt transferred to multiple owners, proving the value of CPACE’s transferable nature.
Looking forward, I see CPACE continuing to scale in the development space, but I am also optimistic that the industry has now overcome an education hurdle within the traditional credit environment. This will likely lead to a rapid increase in more traditional efficiency and resiliency projects across the country. As banks and credit committees become more familiar with CPACE, we are seeing more sophisticated underwriting that incorporates it seamlessly into capital stacks while still meeting the primary lender's standard underwriting criteria. Lastly, the industry is more consolidated and mature than in the pioneering days, having eliminated much of the noise that once tarnished our emerging asset class.
In conclusion, CPACE has certainly proven its staying power, and for the next few years, as interest rates stay high and banks remain conservative, CPACE will continue to play a vital role in sustaining commercial real estate activity. It’s an indispensable tool that has supported and catalyzed a struggling commercial real estate market over the past few years, and it will continue to serve a unique and valuable function within our capital markets.