What Is CPACE Financing and How Does It Work?

Commercial Property Assessed Clean Energy (CPACE) is a financing mechanism gaining traction across the United States as a tool for sustainable development. This unique approach enables commercial property owners to fund significant property improvements aimed at reducing energy and water consumption. CPACE offers an alternative to traditional lending, providing a flexible and long-term funding solution for various upgrades.

What CPACE Means

CPACE, or Commercial Property Assessed Clean Energy, fundamentally represents a financing structure designed to facilitate energy efficiency, renewable energy, and water conservation projects on commercial properties. It provides long-term, fixed-rate capital for these improvements. Unlike a conventional loan, CPACE is structured as a voluntary assessment that is placed on the property’s tax bill, authorized by state and local governments.

The distinct characteristic of CPACE financing is its attachment to the property itself rather than the property owner. This means the obligation to repay the assessment transfers automatically to a new owner if the property is sold, which can be a significant advantage for property owners planning long-term improvements or potential sales.

How CPACE Financing Works

The operational mechanics of CPACE financing involve repayment through a special assessment levied on the property’s tax bill. This mechanism is similar to how other public benefit assessments, such as those for sewers or roads, are collected. Payments for the assessment are made annually or semi-annually, aligning with regular property tax cycles.

The assessment transfers with the property upon sale, ensuring the long-term investment continues to be repaid by the property’s beneficiaries. Key parties involved in a CPACE transaction include the property owner, who initiates the project, and the CPACE lender, often a private investor or financial institution, who provides the capital. The local government plays a crucial role by collecting the assessment through the existing property tax system and remitting payments to the capital provider.

CPACE financing is non-recourse to the individual property owner, meaning the obligation is secured by the property itself, not the owner’s personal credit. This structure can cover up to 100% of project costs and offers long repayment terms, typically ranging from 10 to 30 years, designed to align with the useful life of the installed improvements. While mortgage lender consent is required for CPACE financing, the assessment is non-accelerating, meaning only past-due payments are due in the event of delinquency, not the entire outstanding balance.

Eligible Properties and Projects

CPACE financing is available for a broad spectrum of commercial properties. This includes office buildings, retail centers, industrial facilities, hospitality venues, agricultural properties, and multi-family residential buildings with five or more units. Non-profit organizations are also eligible to participate, even if their properties are otherwise tax-exempt.

The projects eligible for CPACE financing primarily fall into categories that enhance energy efficiency, promote renewable energy generation, or conserve water.
Common eligible projects include:
Energy efficiency upgrades like HVAC systems, LED lighting conversions, enhanced insulation, and building envelope improvements.
Renewable energy installations such as solar photovoltaic, geothermal heating and cooling, and wind energy systems.
Water conservation measures, including low-flow fixtures and efficient irrigation systems.
Resiliency measures, such as seismic retrofits or stormwater management systems.

Improvements must be permanently affixed to the property and have a useful life of at least 10 years. CPACE can be utilized for improvements in existing buildings, new construction, and can retroactively finance projects completed within the last two to three years.

Key Steps in the CPACE Process

Securing CPACE financing involves several steps. The initial step is to determine if the property and proposed project are eligible within the local CPACE program, as availability and specific criteria vary by jurisdiction. This often involves confirming that the property is located in an area with an active CPACE program.

Following eligibility confirmation, the property owner engages with a CPACE lender or program administrator to discuss the project. This stage includes a project assessment, such as an energy audit, to evaluate the proposed improvements, estimate costs, and project potential savings. The lender then performs underwriting to determine the financing amount and terms.

A formal application and approval process follows, including obtaining consent from any existing mortgage holders on the property. Once approved and financing is secured, the project moves into the implementation phase, where qualified contractors are engaged to carry out the improvements. After project completion, the assessment repayment commences, appearing as a line item on the property’s regular tax bill. The entire process can take between 60 to 120 days.