Will C-PACE Finally Take a Bite Out of the Big Apple?

New York State Energy Renewal Development Agency (NYSERDA) released updates, known as NYSERDA Guidance, to New York State's commercial property assessed clean energy (C-PACE) program earlier this summer, which are widely expected to finally open the door to C-PACE being used to finance alternative energy efficiency upgrades. Morningstar DBRS believes that New York will likely see C-PACE originations occurring in increasingly larger numbers because of the NYSERDA Guidance, with future securitizations potentially containing assessments from the state, helping to further diversify geographical concentrations in underlying collateral pools. Highlights include:

-- Approximately 15,000 buildings will need an aggregate investment of approximately $12 billion to $15 billion to comply with Local Law 97 by 2030. About 40% will require extensive retrofitting to be in compliance.
-- Under the NYSERDA Guidance, the SIR 1:1 requirement will not apply to projects categorized as either a new construction or a major renovation. In addition, "pre-qualified projects," including electric heating ventilation and cooling (HVAC) systems, electric domestic hot water systems, and electric energy recovery ventilators that meet or exceed certain sustainability standards, are also exempt from having to satisfy the SIR of 1.0 or greater. As a result, the NYSERDA Guidance expands the feasible application of PACE to a much wider range of projects.
-- In addition, retroactive financing remains another key element, allowing C-PACE to be used for completed projects for up to three years after the designated improvements are installed. In New York City, C-PACE can also be used to help finance eligible improvements to buildings under long-term ground leases.

"In the future, we may see C-PACE use cases in New York City broaden to include resiliency improvements, enabling property owners to fortify their buildings against hurricanes and storms," said Stephanie Chin, SVP, Structured Finance Research. "In the meantime, as property owners and developers seek to address energy efficiency, renewable energy, water conservation, and HVAC improvements related to Local Law 97 requirements, C-PACE may serve as an attractive addition to the capital stack now that the strict SIR 1:1 requirement no longer applies in all situations," added Chin.