Why mortgage holders provide consent for C-PACE loans
Understandably, the most significant issue for many commercial mortgage lenders is that C- PACE special assessments have lien priority over existing mortgage debt. However, most state C-PACE statutes require mortgagee consent to C-PACE financing.
Historically, lenders have acquiesced to non-voluntary special assessments, such as those mandated for Business Improvement Districts. Lenders with concerns about payments of future assessment bills can require that funds be escrowed with them to make the annual or semi-annual payments and ensure timely payment. Further, commercial mortgages often have provisions for protective advances for payment of taxes or property insurance premiums.
Most importantly for mortgage lenders, C-PACE financing funds projects that improve collateral value by reducing a building’s operating costs. Coupled with long-term C-PACE funding, projects typically result in cost savings that exceed the amount of the C-PACE assessment, increasing cash flow and the debt coverage ratio. To the extent that this value is created without encumbering the property with additional conventional debt, the loan-to-value (LTV) will be lower, thus improving the risk rating for the mortgage lender. In addition, improvements to the energy systems of a building can result in higher worker productivity, greater tenant comfort and satisfaction. This helps with tenant retention, reduces tenant attrition, and increases the competitiveness of the property in the local market.
Lenders already factor property taxes and assessments into their underwriting models and can easily evaluate how an incremental C-PACE assessment would affect a credit decision. C-PACE projects typically comprise no more than 20% standalone LTV, and 75%-85% combined LTV, as dictated by each state statute. In addition, since C-PACE assessments do not accelerate upon a repayment default, a mortgage lender’s only exposure to the senior C-PACE lien is for a C-PACE payment in arrears. Since the average annual C-PACE payment typically represents just 1-2% of the property value, C-PACE contributes minimal, if any, incremental risk to a lender.
If you are interested in understanding more about the long-term, low-risk capital offered by a C-PACE project, we can show you how to finance capital expenditure through energy savings. To learn more, contact us for an overview.