The Ultimate Guide to Funding Energy-Efficient Upgrades with CPACE Financing

Aviva (00:15)
This week's listener of the week is Carly 47. Carly, thank you so much for leaving us a five star review. And for those of you listening, if you leave us a five star review below, you might be next week's listener of the week, week, week. This week on Commercial Real Estate Secrets, we have Jason Schwartzberg. Jason is the president of MD Energy Advisors. Jason, thank you for being on the show today.

Jason Schwartzberg (00:46)
Thank you.

Aviva (00:47)
So Jason, can you tell the listeners who you are, where you hail from, and what you do here on Commercial Real Estate Secrets?

Jason Schwartzberg (00:56)
Sure. I'm Jason Schwartzberg. I am husband of 20 years to Tiffany, father to Jack who's 16, father to Ava who's eight and co -founder and president of MD Energy Advisors. We founded our company in 2010 as a nights and weekends project. We bootstrapped from 2010 to 2012, kept our full -time jobs.

And we have two concerted focuses. We work with commercial real estate owners and we work with utilities. And on the commercial real estate side, we broker electricity and natural gas. We do energy efficiency and solar projects and we have the means to finance them. So I work with a lot of commercial real estate owners to reduce operating expenses and increase net operating income. And on the utility side, we run a lot of demand side management programs or rebate programs for utilities around the country. So those are our.

concerted focuses at MDEA.

Aviva (01:54)
So you're like an umbrella company for financing,  environmentally forward thinking initiatives in commercial real estate.

Jason Schwartzberg (02:08)
Yeah, I think that's accurate.  we help folks who just are looking to reduce operating expenses. And we can do that on the price side by brokering the power. And then we can also do that on the quantity side by doing energy efficiency projects. And many of our clients are very sustainably minded. And some of our clients are bottom line minded. But if we can accomplish both of those objectives and, you know, green up the building stock, that's right down the middle for us.

Aviva (02:13)
Wow.

Are you doing these on new developments, existing projects? Where are you finding you spend most of your time?

Jason Schwartzberg (02:44)
Yeah, both. I mean, we work with the existing housing stock and then we work with ground up projects. I think, you know, on the on the financing side, which is going to be a lot of our focus today, it's going to be on ground up construction reposition, and even in some cases, some retroactive applications. So I think that's where you and I are going to be spending most of our time today. In our business, though, we work with

existing product type all the time and how do we reduce operating expenses through energy for commercial real estate owners.

Aviva (03:19)
Makes sense to me,  with rising taxes, rising insurance, owners are looking for ways that they can A, like you said, protect the environment, but B, protect their bottom line as well. Tell me about CPACE. Can you give the listeners an overview about what CPACE is?

Jason Schwartzberg (03:41)
Sure. I'm not a big acronym person, but CPACE stands for Commercial Property Assessed Clean Energy. So if you think about a real estate, I'm going to building an old furniture warehouse right now where our office is in Harbor East in Baltimore. And anything that uses a unit of energy or a unit of water can be financed through this program. So think roof, lighting, HVAC, building envelope.

Plumbing, any of that stuff, that content can be financed through the program. And there's a couple of applications. Again, we talked about it for a moment earlier. Ground up construction, reposition, or energy related capital projects. In each of those instances, you have energy or water stuff to finance. So, you know, if we have a project that has

adequate debt service coverage and stabilization, we can layer in this additional form of financing in the form of CPACE. And there's really three hurdles to a CPACE transaction. We need coverage, as we were talking about before. We need debt service coverage and stabilization in order to slot in some additional debt on top of the senior loan. So that's hurdle number one. Hurdle number two is we need to pass the technical review. The entire program was founded

with the idea of reducing energy or reducing water in the building housing stock. So we need to prove out on the technical side. We need to show that what we're doing is energy saving or water saving. So, you know, our energy, we have a 71 person energy company. So we rely on a lot of our engineers to help our building owners get through that process. And we talked about the acronym, Commercial Property Assessed Clean Energy. This actually isn't a deed of trust on the project.

It's a special assessment on the property tax bill itself. So that's our collateral in the CPACE space. So we need to make sure we have what's called lender consent. The senior lender needs to be comfortable that we're putting this assessment on the property tax bill. So that's the third hurdle. We talk about financial sizing, technical review, and lender consent are those three hurdles to really unlock this financing.

Aviva (05:57)
Speaking of hurdles in lending in 2024.

Getting alone is a, talk to me about that. How's that going for you? Because it's a struggle for me.

Jason Schwartzberg (06:01)
There's a...

Yeah, it's I was chuckling. It's it's tough right now. We just actually closed a self storage deal yesterday in Pennsylvania. So C CPACE is it's about 35 ish markets around the country right now. 35 states. So it represents about 85 % of total addressable real estate market has an active C pace program in place. North Carolina, South Carolina and Arizona are three states on the wish list. North Carolina will have a program by the end of the year.

Aviva (06:22)
Okay.

Jason Schwartzberg (06:39)
We're hopeful that South Carolina might follow thereafter, but you have the majority of the country with active CPACE programs. And to your point earlier, senior powder is hard to find right now. So CPACE is actually playing a nice complimentary role in the capital stack. So if you're a senior lender and you have, you you have

Aviva (06:54)
Hmph.

Jason Schwartzberg (07:02)
limitations on how much you want to lend because capital is so constrained right now. We're actually seeing CPACE as being complimentary in the capital stack. And that deal in Pennsylvania that we just did, we had a senior lender who lent about $11 million. We did about $4 million of CPACE. And then the balance of the project was through a borrower equity. The project debt services for 15, 16 million of senior, but the senior didn't want to write the full check.

Aviva (07:11)
Okay.

Jason Schwartzberg (07:31)
in that transaction and they were happy to have some pace in the capital stack there. So to your point, it's very difficult to structure transactions right now. The C -PACE lenders, the source of capital is insurance companies and REITs. Excuse me, they like the risk adjusted return of this capital and they're actively lending. So we're seeing CPACE being used almost as participation in a lot of the transactions that we're looking at.

Aviva (07:48)
Mm -hmm.

Wow, hey, that's cool. That makes sense. C -PACE has a complimentary financing arm. What are some unique use cases you've used C -PACE on?

Jason Schwartzberg (08:15)
Yeah. So we talked about kind of those couple of buckets and we talked about ground up construction. We talk about reposition and we talked about energy related capital projects. I can speech speak to each of those three. And then we also have a retroactive component that the listeners might be interested in ground up construction. did a Baltimore's first heavy timber office building. That was a really fun project to work on. Again, debt service coverage at stabilization were able to slot in some pace for a ground up project.

We financed the HVAC. This was delivered right after COVID, so air quality was super important. They had a very efficient HVAC system that they put in the project to address air quality. And they used heavy timber construction, because similar to the building that I'm in right now, they wanted that old feel. The lease up is everything, and the heavy timber gave that warehouse feel.

to that project. So that was a fun one on the ground up construction side. The reposition, this is another Baltimore project, but we've done stuff in Texas, Connecticut, California, Pennsylvania, all over the place. There's a building in Baltimore, it was an old bank headquarters. It looks like the Flatiron building in Manhattan. We repositioned that project to 250 apartments and structured the full capital stack. It was about $65 million.

Aviva (09:36)
Wow.

Jason Schwartzberg (09:40)
20 million, this was a good example of CPACE being complimentary. We had a life insurance company that did 20 million of senior. That's the maximum check size they could write on one project. So even though they liked the project, by policy, they couldn't go above the 20. We did 20 million of senior from a Lifeco. We did 15 million of CPACE. We did historic tax credit equity, Bridge, and then borrowers equity.

Aviva (10:03)
Wow.

Jason Schwartzberg (10:07)
But that's taking a beautiful building. Looks like the Flatiron building, putting it on the tax rolls. It was an office building converting it to multifamily and instilling a lot of life into the central business district with that project. So that was a fun one. And again, there's, you imagine an office used to an apartment use, there's a lot of energy stuff, know, roof lighting, HVAC, building envelope, toilets.

Aviva (10:30)
Right.

Jason Schwartzberg (10:35)
You name it that there was enough. And I think to just give a feel, CPACE is usually about 20 to 30 % of the capital stack. So we can easily find that in energy related improvements. And the why is not just gap financing, but it's fixed rate, long -term, non -recourse, non -dilutive financing are some of the reasons why people are going through the process and activating on some C -PACE.

Aviva (10:43)
Okay.

Wow.

Wow. Let me ask you, know, retrofitting buildings is such a hot topic, right? Maybe not a hot topic for everybody, but a hot topic for you and me and the listeners. What do you think about the conversion of office space to residential hospitality, et cetera?

Jason Schwartzberg (11:15)
Mm -hmm. Mm -hmm.

Yeah, I love it, but it's for the right building. know, every, unfortunately, every building is not going to be conducive. I think the kind of easy rule of thumb, if there is such a thing as the pre -war buildings lend themselves to conversions, the floor plates are of such a size that, you know, it works. You you had to be close to light and air before there was air conditioning in buildings for it to work. So that building I mentioned earlier, pre -war building,

Aviva (11:37)
Hmph.

Jason Schwartzberg (11:52)
Floor plates were adequate size. You they weren't super super deep. You had efficiencies of floor plates and you maintain net rentable square footage, right? Like if you just have a ton of waste from a core factor standpoint, it's hard to make those buildings work. So long answer to a short question, I think it's a phenomenal opportunity for the right building. And unfortunately, all of the building stock is not going to lend itself to conversion, but the right ones. It's an unbelievable application.

Aviva (12:22)
Yeah, it'll be really interesting to see how it plays out. You know, I watched the buildings in Denver and it's like you're saying some, are up for it. Many are not. And I'm on the edge of my seat when it comes to office space, but I'm, I'm still bullish. I think there's a huge application for it, but

Jason Schwartzberg (12:36)
Hmm.

Aviva (12:47)
Let's navigate. know, we have a lot of listeners to this podcast who own warehouses. Can you talk to me about CPACE applications in warehousing?

Jason Schwartzberg (12:59)
Yeah, good question. So again, I mentioned we closed the deal in Eastern Pennsylvania yesterday for a self storage facility. I think it functions very similar to a warehouse. You don't think it of that type of house or product of having a lot of energy related matters in it to finance. We were still able to finance 25 % of the capital stack for that particular transaction. So the financing is definitely not asset class specific. If it has

Energy stuff to finance and there's that service coverage and we can get that senior lender on board It's going to work for all asset classes I mean if for your warehouse listeners if I take off my finance hat for a second and put on my energy hat We're looking at a lot of solar opportunities for warehouse If there's unencumbered roof space Not a lot of HVAC equipment on the roof and the roof is five years or newer

Aviva (13:35)
Hmph.

Jason Schwartzberg (13:55)
It could be a really interesting solar play, whether it's behind the meter, community solar, it's going to be driven by the local tariffs and the structure there. But there are, there is real estate above the roof line that can be monetized. It's not going to be, you know, five, six, $7, you know, a square foot, like, you know, maybe some of the, the warehouse space is, but you know, 40, 50, 60, 70 cents a square foot of additional revenue could, could definitely move the needle.

Aviva (14:09)
Hmm.

Jason Schwartzberg (14:23)
I would think you want to have a warehouse, a roof of like a hundred thousand square feet or more for this to kind of come into the equation and for folks to consider it. But that's an additional monetization strategy. But to specifically answer your question, the CPACE is asset class agnostic. Like it works for hotels, it works for warehouse, it works for retail. I just mentioned the self -storage. did 25 % of the capital stack on a self -storage facility, which you wouldn't think of having a lot of energy.

related content in it. So it works for all asset classes.

Aviva (14:57)
Fascinating. I know there's been some challenges with solar in the past. Do you see solar becoming more efficient in and of itself for long -term usage?

Jason Schwartzberg (15:12)
Yeah, it's a good question. So the panels continue to get more efficient. I think the real question is, look, we want to be as sustainable as we possibly can, but we also need to be value proposition driven as well. So the solar is going to be really driven by local policy, right? You know, what is I think it's two things. What is the cost to compare, right? Like what

Aviva (15:27)
Yeah.

Sure.

Jason Schwartzberg (15:40)
What is the local utility charging versus how much is it charged? Is it costing me to generate on my roof? Is there a renewable energy certificate market or not? And do I have the ability to sell back into the grid at a profit? So I think, you know, I think it's going to be driven by a lot of those factors like Hawaii. Solar is like a no brainer because of what the cost to compare is. If you look at what it costs to buy from the utility.

Aviva (15:54)
Hmm.

Jason Schwartzberg (16:08)
versus what it would cost per kilowatt hour to generate solar, there's very, very strong value proposition there. If your power is four cents a kilowatt hour, it might be hard to make those numbers work. So I think it's going to be driven by that cost to compare ultimately at the end of the day.

Aviva (16:26)
Sure. So let me ask, what do you think are the long -term benefits of CPACE financing and these energy applications?

Jason Schwartzberg (16:34)
Yeah. Again, I think it's helping plug gaps in capital stacks. So if you like the transaction and you're having trouble putting your capital stack together and you think that there's a return in that deal, it's cheaper than equity, right? Fixed rate, long -term, non -recourse, non -dilutive financing, and it's getting you to the finish line. The pace is going to be priced off of the 10 -year.

Aviva (16:50)
Wow.

Jason Schwartzberg (17:00)
fixed at closing, you probably 350 to 400 over the 10 year fixed at closing, you know, your, your closing deals in the sevens, which is a lot cheaper than equity and is not non dilutive. And the C -PACE lenders are actively lending right now. Like there's no slowdown. There's no, I was lending yesterday. I'm not sure if I'm lending tomorrow. Like these folks are actively lending into the marketplace right now. So I think

Aviva (17:11)
Sure.

Jason Schwartzberg (17:26)
It's a good opportunity to unstick some of those stuck projects.

Aviva (17:32)
Hey, it's fascinating and a really interesting, just new revenue stream and options for owners and developers and future owners. Jason, what makes you happy with what you do every day in commercial real estate?

Jason Schwartzberg (17:53)
I think impact. mean, I mentioned that one project of, you know, taking a derelict office building and infusing life into it, getting the economic development benefits, the job creation, and ultimately having homes for people. So on our energy side, you know, we're, we're brokering electrons, right? You can't like see and touch and feel that. So I really love impact and seeing a project that we help finance.

you know, come to life, have residents have feet on the street and get back on the tax rolls from an economic development standpoint.

Aviva (18:31)
Hey, the more you give, the more you get.

Jason Schwartzberg (18:34)
For sure.

Aviva (18:35)
Jason, where can the listeners find you, follow you, and or contact you?

Jason Schwartzberg (18:42)
Yeah, we're our website is MD like Mary David energy advisors .com. My email is Jason at MD energy advisors .com and I'm pretty active on LinkedIn that Jason Schwartzberg.

Aviva (18:56)
Jason, thank you so much for being on Commercial Real Estate Secrets today and for everybody listening, we'll see you next week.