5 Reasons CFOs Should Embrace C-PACE Funding

The C-PACE funding program has grown extensively and has the potential to become a game changer for the funding of energy efficiency projects. The market potential is immense, and the benefits of the program are compelling. But it is relatively underutilized.  For C-PACE to accelerate its growth, constant messaging is required for building owners, contractors and legislators to learn about the benefits of the program.  Out of all these stakeholders, perhaps the building owner’s CFO is the most important target as they are the key decision maker when considering C-PACE funding.

The goal of this article is to provide a snapshot of the financial benefits of using C-PACE. It is purposefully narrow in scope and is written in the CFO’s language. There are many other non-financial considerations in determining whether C-PACE is a good fit for a project. See the links at the end of the article to learn more.

C-PACE Testimonials

As of June 30, 2018, building owners have chosen the C-PACE program to fund 1,790 projects. That’s a 75% increase above the 1,020 projects closed through 12/31/2016. However, it’s just the tip of the iceberg for C-PACE’s market potential. Financial decision makers all over the U.S. have validated the benefits of C-PACE 1,790 times. That says something about the program.

“As a former CFO, I would not hesitate to recommend C-PACE to the CEO, board or investors. The benefits are compelling.”

Why? Let’s look at five reasons.                                                                    

#1. Increase Net Cash Flow from Efficiency Retrofits

C-PACE funding is repaid through a 20+ year assessment to a building which is collected similarly to traditional property taxes. This causes annual payments to be very low, especially when compared to 5 or 7-year traditional financing. As a result, energy and maintenance savings will exceed the annual C-PACE assessment for virtually any pure efficiency retrofit. In other words, if companies use C-PACE to fund pure equipment retrofits, their cash flow will increase.

The positive net cash flow can also ease the ability of commercial office building owners to pass along the costs and benefits of a retrofit to tenants. That’s because it’s easier to demonstrate savings will cover financing costs spread over 20 years versus a more traditional repayment period of ~ 7 years.

This is a win-win. Building owners receive an upgrade to the building that could last 15 to 20 years. Tenants enjoy lower overall net expenses and a more comfortable work environment.

What is outlined above is reason enough for many to use C-PACE. But that’s just scratching the surface…

#2. No Acceleration of the Assessment

The C-PACE lender is not allowed to accelerate the full amount owing even if a scheduled payment is past due. Only the unpaid amount that has been billed but not paid, is recoverable. This is a very small amount when compared to the capital involved in a total debt restructuring. Therefore, it should not carry enough voting power to complicate the restructuring process.

#3. Freedom to Sell the Building

The C-PACE lender does not have approval rights regarding a sale. That’s because the assessment is an attachment to the building and becomes an obligation of the buyer. This eases how owners can optimize holdings, particularly for larger commercial real estate developers.

“If companies use C-PACE to fund true equipment retrofits, their net cash flow will increase.”

#4. Absence of Constraints Typically Imposed by a Lender

The C-PACE lender does not impose traditional lender protections such as quarterly reporting, maintenance of debt covenants or similar requirements. There is no need for an inter-creditor agreement and the building owner has one less creditor to deal with in case of a debt restructuring.

#5. Reduced Weighted Average Cost of Capital

This applies primarily to new construction and major renovations where the project is part of a new or restructured capital deck. The concept is simple – to the extent lower cost C-PACE funding can be used in lieu of higher cost equity (common or preferred) or traditional mezzanine debt, it lowers the overall cost of capital to building owners.

Conclusion

As mentioned earlier, an important element in C-PACE’s continued growth is for CFO’s to understand the financial benefits of the program. You can help get the word out by sharing this article with financial decision makers in your network. If they are not familiar with C-PACE, they will appreciate the heads up. And please comment below if you have encountered additional financial drivers for embracing C-PACE.

Please do not hesitate to contact me with any thoughts or questions at lderrett@enfluxbuildingsolutions.com, or, 713.714.0575.

Larry Derrett

Founder, EnFlux Building Solutions

Additional C-PACE information is available on our website:

  • Building owners click here to learn more about how C-PACE funding can help your business.
  • Contractors servicing building owners click here to learn how to introduce the program to your customers/prospects.

About the authorLarry Derrett is the founder and CEO of EnFlux Building Solutions, which provides financing and energy solutions to building owners either directly or through contractors who provide them services.  For contractors, EnFlux provides access to financing, energy solutions, and online sales tools that are customized to help them win more business. Larry brings a unique perspective to financial selling having sat on both sides of the desk as a banker and a CFO. In addition, he has a very strong background in developing financial selling techniques for clean energy projects ranging from a simple $10,000 change out to projects for hundreds of millions of dollars for Fortune 500 companies. For three years, he led the financial structuring group at Enron Energy Services working solely on the origination side of the business helping clients understand the importance of allocating capital to energy efficiency projects. Upon the demise of Enron, he formed HVAC Capital Corp whose clients included large mechanical contractors with a national footprint. HVAC Capital provided a finance program that contractors could access to offer financing to their customers for replacement projects. During this time, Mr. Derrett trained hundreds of sales reps at mechanical contractors on the finer points of incorporating financial selling into their sales process.