Bayview PACE Provides $20.5MM of C-PACE for Flex/Industrial Asset

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August 2, 2024

Happy Friday, and welcome to C-PACE Weekly, your go-to source for the latest insights, updates, and opportunities in the C-PACE industry. Let’s dig into the latest C-PACE news!

Bayview Provides C-PACE to Build Master’s Transportation HQ in Kansas City

Bayview PACE has provided $20,500,000 in C-PACE financing for the construction of the 324,000-square-foot headquarters and flex/industrial facility for Master’s Transportation in Kansas City, MO, totaling $72,000,000 in total project costs. The Commercial Property-Assessed Clean Energy (C-PACE) financing provided a complementary role in the development's capital stack. The development is now under construction and will open in 2025. The remainder of the capital structure comprises a $31-million construction loan and $20 million in sponsor equity.

Read more here.

IRS Private Letter Ruling Says CPACE Loans Qualify For REMIC Transactions

Overview

The IRS recently issued a Private Letter Ruling (PLR) with significant implications for the Commercial Property Assessed Clean Energy (C-PACE) financing sector. This ruling marks the first time the IRS has explicitly recognized that C-PACE assets can qualify as "obligations secured by an interest in real property" under the Real Estate Mortgage Investment Conduit (REMIC) rules. This recognition opens the door for the securitization of C-PACE loans, offering new avenues for financing and investment in energy-efficient property improvements.

Understanding the Ruling and Its Implications

C-PACE programs are designed to finance energy efficiency upgrades and renewable energy installations for commercial properties. These improvements are funded through assessments on the property, which are repaid over time via property taxes. The key feature of C-PACE assessments is that they create a lien on the property, which typically takes priority over other liens, including mortgages.

The recent PLR clarifies that these C-PACE assessments can be considered obligations secured by real property for REMIC purposes. This determination means that C-PACE loans can be included in REMICs, a popular structure for mortgage-backed securities that offers tax benefits and streamlined investment opportunities. Specifically, the ruling allows for the inclusion of C-PACE assets in REMIC transactions, potentially reducing the tax burden associated with securitizing these loans.

Benefits for C-PACE Lenders and Investors

The IRS's clarification provides greater certainty for C-PACE lenders and investors. By allowing C-PACE assessments to be treated as REMIC-eligible assets, the ruling enables the creation of new financial products, such as C-PACE-backed securities. These products can attract a broader range of investors and provide additional capital for energy-efficient property upgrades. Furthermore, the tax advantages of REMIC structures make these investments more appealing, potentially leading to lower financing costs for property owners.

Future Considerations and Opportunities

While the PLR is a significant step forward, it is important to note that it is not a blanket ruling applicable to all situations. Each PLR is specific to the facts presented by the taxpayer requesting the ruling, and as such, other market participants cannot rely on it as a precedent. Nonetheless, the ruling sets a positive precedent and may encourage the IRS to issue more general guidance on the treatment of C-PACE assets.

Additionally, the ruling leaves open questions about the suitability of C-PACE assets for other investment structures, such as Real Estate Investment Trusts (REITs). The similarity between REMIC and REIT rules suggests that C-PACE assets could also qualify as "real estate assets" under REIT provisions. Still, explicit guidance from the IRS would be beneficial. Such clarification could further expand the market for C-PACE investments, enhancing liquidity and attracting a wider pool of capital.

In Summary

The IRS's recent PLR regarding C-PACE assets and REMIC eligibility is a pivotal development for the industry. It provides a framework for the securitization of C-PACE loans and signals broader acceptance of these assets in mainstream financial markets. As the market adapts to this new guidance, we can expect to see increased investment in energy-efficient property improvements, ultimately contributing to environmental sustainability and economic growth.

Read more on the Private Letter Ruling from Dechert LLP.

Sources: Dechert LLP, JDSupra, & Cadwalader.

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Jonathan Seabolt
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