The latest hurdle in getting a deal done in the post-Fed-rate-hikes era revolves around the capital stack, which, according to the Commercial Observer, is more complicated than ever. Deals are taking longer because transaction financing is rarely a one-stop shop these days, and with more cooks in the kitchen, you have more competing interests.

In my practice, I've seen an uptick in transactions that utilize Property Assessed Clean Energy (PACE) Programs for part of the financing--specifically the Commercial Property Assessed Clean Energy (C-PACE) product. C-PACE is often used to reduce LP equity needs or to eliminate the need for mezzanine debt, preferred equity, or other expensive gap financing. C-PACE essentially allows a property owner to finance the up-front cost of energy or other eligible improvements on a property—typically up to 20-30% of the property's value—and then pay the costs back over time through a voluntary tax assessment that attaches to the property. As the Commercial Observer notes, “It’s another source in the capital stack and another set of lawyers, and then the relationship between the senior lender and the C-PACE lender is complicated." It is, in fact, complicated. C-PACE is considered a split priority, and C-PACE assessments are given a priority interest on payment under foreclosure laws. But fear not, senior lenders, the devil is in the details: the priority only attaches to any current and/or delinquent amount due. The balance of the C-PACE assessment will always be completely subordinate to any senior debt, as it is specifically non-callable/accelerable.

With no end in sight to the current borrowing cost climate, C-PACE might be what your capital stack needs to make the financing work.

“A lot of senior lenders don’t understand it, so you have to negotiate a recognition agreement between the parties, and it can be a lot of learning and teaching, and it definitely takes a lot of time.”

commercialobserver.com/...