CPACE for New Construction

Author

Nathan Whigham
September 17, 2024

In partnership with

Using CPACE to Lower the Cost of Construction Debt

We all know that interest rates are the highest they’ve been in the last 15-years. While the Fed is expected to cut this week by 25-50 bps that still leaves the Fed Funds Target Rate around 5%, meaning that the cost of debt will still be much higher than it was just a couple years ago. Construction debt specifically is hovering between 10-12% depending on whether it comes from a bank (very hard to find) or a private debt fund. Generally the only way to get cheaper construction debt is to reduce leverage as much as possible and provide personal guarantees. Both are not great options for a developer.

However, in some states there is a way to reduce the cost of construction financing while keeping leverage attractive by using CPACE in combination with construction debt. Right now 40 states have PACE legislation in place, each have their own programs and requirements but we’ll use California as an example. In CA the CPACE loan is sized to the as-completed value of the project, typically around 35% so the actual leverage from CPACE as a percentage of the project cost is higher. This combined, with a construction loan can achieve attractive combined leverage while reducing the overall construction financing cost. Here’s an example for a condo project in CA:

Project Cost

 $ 15,000,000

Completed Sales Value

 $ 20,000,000

Developer Margin

25%

CPACE % of Completed Value

35%

CPACE Amount

 $ 7,000,000

CPACE % of Total Cost

47%

CPACE Interest Rate

8%

Construction Debt

 $ 5,000,000

Construction Debt % of Total Cost

33%

Construction Debt Interest Rate

10%

Total CPACE and Construction Debt LTC

80%

Total Combined Debt Amount

 $ 12,000,000

Combined Cost of Debt

8.8%

In addition to providing a lower cost of capital CPACE is non-recourse so developers would not have to provide a personal guarantee in exchange for lower cost construction debt.

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Nathan Whigham
President
CA DRE Broker License: 01793655

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