An innovative type of securitized asset is increasingly popular among fund managers, specifically bonds backed by commercial Property Assessed Clean Energy (C-PACE) special tax assessments. Although demand for C-PACE financing was slow to get off the ground, interest from property owners has been growing and has led to an increasingly full pipeline of C-PACE products, prompting us to take a closer look.
One company in California completed its debut securitization, worth $103.6 million, in July. The senior class of those bonds received a triple-A rating from DBRS, the first time a C-PACE securitization received a rating at that level. Meanwhile, the originator of the securitized C-PACE assets expects to float another $500 million of bonds in 2019. Similarly, other companies have sold bonds worth tens of millions and are now expecting to place much more.
One key feature that could make C-PACE financing an attractive option for some originators and property owners is that it is expected to be countercyclical. Here’s why: If economic conditions weaken, more property owners looking to sell their holdings might make various upgrades in the hopes of attracting buyers. Among the potential options open to sellers is energy-efficient upgrades.
Insurance companies have taken note, as some are seeking long-term exposure to C-PACE assets in the form of either asset purchases or asset-backed bonds. In making these investments, insurers are confident in the flow of payments, which are generally collected by local government taxing authorities instead of the private sector.
There are some obstacles to C-PACE origination, however ― commercial property owners can obtain C-PACE financing only with permission from their mortgage holders. And investors typically expect thorough underwriting of C-PACE financings, including evaluation of property value, insurance, environmental risk and other key criteria. Still, C-PACE programs are in place in 20 states and in Washington, D.C., signaling that C-PACE securitizations are likely here to stay.