The amendment of an unpopular cost calculation required by New York City law for commercial property assessed clean energy (C-PACE) financing may help win over skeptics and ultimately boost C-PACE supported originations and securitizations.
Only a handful of C-PACE assessments originated in New York City, according to Morningstar DBRS report, "Will C-PACE finally Take a Bite out of the Big Apple?" authored by Stephanie Chin, a senior vice president of structured finance research at DBRS.
Local Law 97, which New York City Council approved in 2019 to help greenhouse gas emission, reductions via C-PACE financing had been problematic. The law backfired due to a methodology glitch affecting thousands of commercial, industrial, institutional, and residential buildings over 25,000 square feet.
Problem solved …
An onerous cost-benefit analysis required by Local Law 97, called the Savings-to-Investment Ratio, or SIR of 1:1 or higher, made C-PACE an impractical financing option for property owners and developers. The issue was that C-PACE assessment amounts capped at the savings, realized through the installation of eligible equipment, according to Chin.
Hence, a recent New York State Energy Renewal Development Agency (NYSERDA) Guidance mandated the SIR 1:1 requirement will not apply to projects categorized as either new construction, or major renovation, Chin explained.
As property owners and developers address sustainability improvements related to Local Law 97, C-PACE may be an attractive addition to the capital stack, now that the strict SIR 1:1 requirement no longer applies in all situations, she added.
Additionally, the guidance expands PACE applications to a wider range of projects. For example, pre-qualified projects exempt from satisfying a SIR of 1.0 or greater include electric heating ventilation and cooling systems that meet or exceed certain sustainability standards. Also, retroactive financing allows C-PACE in completed projects for up to three years after improvement installation, and improvements to NYC buildings with long-term ground leases.
A vast market potential
The updates may finally open the door to C-PACE financing of alternative energy efficiency upgrades as the law initially intended.
Local Law 97 mandates a 40% greenhouse gas emissions' reduction over 2005 levels by 2030, and a 100% reduction by 2050. In New York City roughly 15,000 buildings will need an aggregate investment of $12 billion to $15 billion to comply with Local Law 97 by 2030, according to "Getting 97 Done," a report published by the NYC mayor's office.
About 40% of these buildings will require extensive retrofitting to be in compliance, compared to 25% in need of minor upgrades and able to cover enhancement costs with energy savings.
Credit positives
NYC C-PACE financing also may broaden via resiliency improvements that enable property owners to fortify buildings against hurricanes and storms, according to Morningstar DBRS. If pending New York State assembly bill A7631/S5974 passes, C-PACE financing will apply to extreme weather resiliency upgrades.
New York will likely see an increase in C-PACE originations because of the NYSERDA Guidance, Chin noted. Future securitizations containing assessments from the state will further diversify geographical concentrations, and underlying collateral pool risks, she said.
C-PACE securitization assets initially originated solely in California, raising geographic risk concerns. Currently, C-PACE collateral pools have originated from at least 13 states.
Another credit positive is that C-PACE financing requires borrowers to obtain the mortgage lender's consent, which manages default risk. Yet, only two major capital providers require lender's consent in all their C-PACE financings, according to advocacy group PACENation.
More owners and developers leverage C-PACE as a cost-efficient and flexible financing tool, noted Aidan McLaughlin, West Coast director of originations at Nuveen Green Capital (NGC), Darien, Conn.
Over the past 12 months, NGC has closed over $450 million in C-PACE financing along the West Coast, and over $1 billion nationally. Most recently, NGC announced a $14 million, C-PACE Resilience financing deal in Anchorage, Alaska, expected to be complete in the spring of 2026.
This deal indicates a larger trend, McLaughlin observed, where C-PACE financing is having an impact across the West Coast and the commercial real estate industry.
