Short-term interest rates are finally dropping—with excruciating slowness. The Federal Reserve is widely expected to cut its benchmark rate another 25 basis points at its December meeting. If it happens, the fed funds target rate will still be higher than any time from 2008 through 2023.
Multifamily developers struggle with these high rates when they try to finance new projects. “Banks have limited amounts of construction capital due to the older construction loans in their portfolios that haven’t paid off yet,” says Anne Hill, senior vice president for Bayview PACE, a provider of C-PACE financing based in Coral Gables, Florida.
Many developers have delayed plans until rates come down and capital becomes more available. But a growing number is finding more leverage and lower interest rates with loans from Commercial Property Assessed Clean Energy (C-PACE) programs.
“C-PACE financing often provides rates below senior mortgage rates and allows borrowers to create lower-cost capital stacks,” says Laura Rapaport, founder and CEO of North Bridge, another C-PACE financing provider based in New York City.
Developers Lower Their Interest Cost With C-PACE
C-PACE financing allows apartment owners and developers to take out long-term, fixed-rate loans to pay for systems that can include solar panel arrays or geothermal wells or improvements that will save their properties money in utility costs like electricity or water. Renewable energy improvements like solar panels or geothermal heat have become increasingly profitable thanks to the Investment Tax Credit program, which was expanded as part of the Inflation Reduction Act of 2022.
C-PACE loans are typically paid back through an assessment on the property tax bill for each property. The loans are sized so that the addition to a property’s tax bill is likely to be offset by savings in its utility bills or the potential income from systems like solar panels. As a result, many owners of existing apartment buildings have been able to take out C-PACE loans without disturbing the existing financing on their buildings. As interest rates rose, that became especially useful for properties that already have permanent loans that they took out a few years ago, when interest rates were much lower than today.
“Sponsors don’t want to refinance their mortgages on older buildings if they are locked in at attractive rates, so C-PACE becomes a natural solution for renovation,” says Bayview’s Hill.
As short-term interest rates rose, many developers have also used C-PACE financing to raise capital to build new apartments. “The largest portion of our business is new development financing,” says Michael Doty, senior director of originations for Nuveen Green Capital, based in Darien, Connecticut.
In July, The Hakimian Organization, based in New York City, took out a $12.3 million C-PACE loan from Nuveen to help build 19 Elm Street, a seven-story building in downtown New Haven, Connecticut. The C-PACE loan will cover nearly 30% of the cost to develop the $43 million project.
“Utilizing C-PACE gave them gave them a way of driving down their weighted cost of capital,” Doty says.
The 25-year C-PACE loan will have a fixed-interest rate priced at roughly 300 to 400 basis points over the yield on 10-year Treasury bonds, or about 7%. That is significantly less than the interest rate costs of the rest of the construction financing, including a senior loan provided from debt fund Silver Heights Capital, based in Norwalk, Connecticut, along with equity from Towerline Group, based in New York City.
The C-PACE loan also allowed the borrower to increase the amount of construction debt the project could support. “They were able to get up to a pretty aggressive leverage point,” says Doty.
When it opens in 2026, 19 Elm Street will include 96 apartments and 1,500 square feet of ground-floor retail space. The C-PACE loan will pay for improvements to the building envelope, HVAC, lighting, and plumbing and electrical systems that will make the building more efficient. The building is designed to use 20% less electricity and utilities than a comparable new building that meets the standard of the Connecticut state building code.
Borrowers Take Out More C-PACE Loans
The number of projects that receive C-PACE loans every year has grown rapidly. So has the average size of the loans.
“C-PACE is becoming much more mainstream,” says Hill.
In 2023, project sponsors took out more than $2.1 billion in 247 C-PACE loans to build or renovate commercial properties, including apartment buildings, according to C-PACE Alliance, an industry association based in Washington, D.C. That works out to an average loan size of $8.5 million in 2023. Since the C-PACE program started about a decade ago, it has provided $7.3 billion to 2,322 projects—with an average loan size of $3.2 million.
The annual volume of new C-PACE loans has grown an average 50% year over year for the last five years. “Although C-PACE has been around since 2008, its use for increasingly large projects as an accretive capital solution is new,” says North Bridge’s Rapaport.
C-PACE loans are available in the 40 states where lawmakers have passed legislation. The program treats clean energy upgrades as a public benefit—like a new road or sewer and water lines. That allows C-PACE loans to be repaid as part of the property tax bill for the property, as a benefit assessment. That gives C-PACE lenders extra security that the loans will be repaid, allowing them to offer relatively low, fixed interest rates.
Interest rates on new C-PACE loans are currently fixed at a few hundred basis points over the yield on 10-year Treasury bonds. In late November, the yield on 10-year bonds was about 4%. The term of the loan typically matches the useful life of improvements—usually about 20 to 30 years but can be repaid at any time.
Developers often use C-PACE loans to pay 25% to 40% of the cost to develop new apartments, says Doty. Equity from the developers or other joint-venture partners and a conventional construction loan from a bank or a debt fund typically covers the rest of the cost of development.
“We are often partnering with banks to provide the total debt package,” says Bayview’s Hill. “Several years ago, multifamily could go to banks and get high leverage. Today, banks are more conservative with their construction capital.”
