CleanFund is looking at a new way of getting banks and other lenders comfortable with Property Assessed Clean Energy for commercial buildings; instead of taking a backseat to a PACE lien, they may want to put some of their own money to work financing energy and water efficiency upgrades.
PACE is a form of assessment financing; it is repaid via a borrower’s property tax bill and so is senior to a mortgage in terms of payment priority. Unlike residential PACE, which has generated considerable opposition from banks and some of their regulators, commercial PACE providers generally require borrowers to seek the consent of a mortgage lender.
But there are still a number of lenders, particularly banks, who either aren’t familiar with PACE or still aren’t comfortable with it. So CleanFund, one of the most prolific commercial PACE providers to date, has created a debt capital markets division to build relationships with mortgage lenders who are interested in extending their traditional lending alongside commercial PACE lending.
It is led by Matt Mustaro, who previously headed credit administration at the firm and also chairs the lender consent committee at PACENation, an industry trade group.
CleanFund isn’t trying to act as a broker; rather, it finds lenders who are comfortable with a particular asset type of a particular credit quality with a commercial PACE lien on it. “We’ve got a stable of borrowers. We help structure the overall deal,” Mustaro said.
“If you have a given project that doesn’t fit the credit standards of a conventional lender, as a borrower there’s a level of debt a bank will say ‘yes’ to and a level it’s not comfortable with; sizing a C-PACE deal so that the lender is comfortable with it is part of the negotiation process,” he said.
For example, a bank may not be comfortable with a C-PACE deal that puts the cumulative LTV at, say, 80%, but it might be comfortable with 70% or 65%.
“Just as some banks are not comfortable with ground leases or non-recourse commercial mortgages, certain banks have different credit parameters pertaining to PACE, while others want to be educated about it,” Mustaro said.
There is also some interest on the part of banks, as well as issuers of commercial real estate collateralized loan obligations, to invest alongside CleanFund, helping to fund the PACE financing itself, as a way to learn more about the asset. “We have a group of lenders we are building a relationship with and we send them deals to review. Some lenders, as part of looking at C-PACE, are interested in putting money to work in this financing as well,” Mustaro said. “If you think about developing lending relationships, this is going to drive their business to the next level.”
This practice has some precedent. For example, a number of banks have purchased whole loans from marketplace lenders and solar providers as a way of getting comfortable with a new asset class. In some cases, these banks have subsequently securitized the loans on their own or contributed them as collateral for securitizations sponsored by the marketplace lenders themselves.
However, holding commercial PACE assets, which are typically 30-year fixed-rate instruments, is not necessarily a good fit for banks; the average bank does not like a lot of duration risk. So CleanFund has discussed doing C-PACE bonds with A and B notes, one of them with a shorter tenure, say three to five years, and the other retained by CleanFund.
CleanFund isn’t trying to partner with lenders as a source of capital as much as it is trying to help them learn about and gain exposure to the product, Mustaro said. “We’ve only been doing this for the last 30 or 60 days, but we know there’s a strong appetite in the banking community. It’s going to be a huge part of the education process.”
CleanFund isn’t just building relationships with banks, it’s also working with other kind of commercial real estate lenders including life insurance companies, conduit CMBS lenders and CRE CLOs.
Mustaro said CleanFund has worked with conduit lenders on several commercial mortgage securitizations, where the ability to incur a PACE lien was structured upfront in the loan documents as well as post-closing, with the special servicer. Word has spread relatively quickly in the conduit lending channel, as there are only about 10 conduits, and they are all watching what their peers do, he said.
Educating banks is a lengthier process, if only because there are so many more of them.
