BETWEEN A ROCK AND A CPACE: FINANCING ALTERNATIVE
The 10-Year Treasury sits in the upper-3 percent range, with one-month Term SOFR in the low-5 percent zone. The cheapest interest rates for new origination are almost 6 percent, with max leverage agency debt constantly pricing north of that for non-mission executions. CMBS debt for riskier property types, such as office and hospitality, is often in the 7.0 percent to 8.0 percent band or more. Inflation has yet to be fully curtailed, and the Federal Reserve has not yet formally announced an end to raising rates although they did not hike in June. Borrowers are ravenous for cheaper debt solutions as lending market liquidity continues to dwindle, forcing spreads higher and leverage levels lower from the active debt funds and banks that still have allocation. Bank allocation has been challenging with a severe lack of payoffs, as borrowers continue to extend and have little motivation to refinance because of the challenging rate environment. Banks are trying to shore up their balance sheets as they lose depositors, given higher-yielding alternative options for placing capital and recent regional bank failures
For some transactions, a new champion has emerged to provide some rate relief and, in some circumstances, provide leverage that is otherwise unattainable. That hero is CPACE: an alternative financing strategy that was formerly difficult to deploy in ways that made sense to borrowers. CPACE is now at the forefront as a capital markets solution — particularly for construction and construction take-out bridge financing — to fill the gap in the lending markets previously saturated with non-recourse banks, money center banks and regional banks
CPACE is a state policy-enabled financing alternative that provides developers access to capital for construction, renovation and other building upgrades. The financing is fixed-rate and long-term. It runs with the property so it can be easily assumed by the next buyer, and its debt service is paid as a state property tax. Thus, the CPACE payment is akin to an operating expense. For some commercial buildings, this means an owner could potentially pass through the expense to the tenants as part of a triple-net lease. Not every state has agreed to allow for CPACE, but so far 31 states and the District of Columbia do allow for CPACE. The ease of the process to obtain them and for various costs to qualify does, however, vary drastically by state.
As of June 15 Sources: IPA Research Services; Federal Reserve; ICE Benchmark Administration Limited; Moody’s Analytics; Pace Nation