CleanFund Commercial Capital is making its debut in the securitization market with $109.3 million of bonds ultimately backed by of assessments on commercial property used to fund energy efficiency improvements in six states.

CleanFund Commercial PACE 2018-1 is collateralized by commercial PACE contracts involving 82 properties totaling more than $115 million. A single tranche of Class A notes with preliminary triple-A ratings from DBRS will be issued.

CLEAN 2018-1 is only the second commercial PACE securitization to date, but the first to be marketed as a Rule 144A transaction under securities regulation being offered to a wide base of institutional investors. Last year GreenWorks Lending of Darien, Conn., launched an inaugural $75 million C-PACE transaction that was privately placed by an investment group led by TIAA Investments (via Guggenheim Securities).

CleanFund, based in Sausalito, Calif., provides long-term financing through PACE programs available in 34 states for commercial properties to install energy efficiency improvements (such as solar panels), with the properties securing assessments collected by local and regional tax authorities.

The notes in CLEAN 2018-1 will be repaid through the long-term property assessments on the properties (weighted average original terms of 22.7 years), collected by local and regional tax authorities or PACE program administrators.

Nearly all of the assets were funded and underwritten by CleanFund through various commercial PACE programs in California, Connecticut, Texas, Ohio, Missouri and Colorado (about $5.8 million of the assets were acquired in a secondary transaction and were not underwritten by CleanFund, according to a presale report from DBRS).

The variety of properties in CleanFund’s deal include office, mixed-use, hospitality, industrial, health care and multifamily.

PACE funding for commercial properties has been slow to develop because of the more complex financing arrangements for C-PACE contracts. CleanFund must typically obtain mortgage lender consent (which is not required in residential PACE contracts) and also undertake more intensive underwriting due to large loan sizes (an average of $1.4 million in the CLEAN 2018-1 pool) as well as the mix and types of commercial buildings being fixed up.

Like residential PACE programs, commercial properties have one or two installment levies a year to pay back the PACE financing. They share a first-lien status with property taxes or special assessments to the secured property in four of the states (California, Missouri, Ohio and Texas). The PACE lien is junior to real property taxes in Connecticut and Colorado.

The PACE assets have a weighted average annual interest rate of 6.19% with a weighted average original term of 22.9 years.

The initial credit enhancement on the Class A notes includes 5% overcollateralization, a liquidity reserve account equal to 2.5% of the initial $115 million PACE balance. The Class A notes will also benefit from excess spread of about 1.69%, based on the assumed Class A note rate of 4.5% subtracted from the expected collateral yield of 6.19%.

CleanFund was formed in 2009, and has doubled its financing volume year over year, funding about $125 million or one-fourth of all C-PACE transactions across the U.S.

Last fall, CleanFund received a $15 million investment and a $100 million funding pledge from Vulcan Capital (the investment arm of Microsoft co-founder Paul G. Allen) to warehouse assets that were to be securitized. Securitizing the PACE assets contains the cost of financing for clients, which have interest rates ranging from 4.5%-7.25%.

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