MEREDA – Blog

by Michael Doty | Mar 20, 2023 | Blog, Market Growth, News, Thought Leadership

Efficient financing mechanism will enable property owners and developers to fund sustainability measures in commercial real estate projects

Commercial Property Assessed Clean Energy (C-PACE), a financing mechanism for property owners and developers to access capital for new construction developments and substantial rehabilitation projects, C-PACE – a public-private financing program enabled by Maine state legislation – can help fund new construction and retrofit projects, as well as recapitalize ongoing or recently completed projects across the state and in metro areas, such as Portland, Biddeford, and Augusta for up to 12 months.

C-PACE works by providing commercial property owners and developers access to low-cost, long-term, fixed-rate financing for sustainability measures that impact the energy and water performance of a commercial property. The program is enabled by a state statute that classifies clean energy upgrades as a public benefit – the same way in which other public benefits like new roads, streetlights, and water mains are paid – allowing these measures to be financed with no money down and then repaid as a benefit assessment on the property tax bill.

The term and amortization of the financing match the expected useful life of the improvements or new construction infrastructure, which is typically around 20-30 years. The assessment transfers upon the sale of the property, and it can be passed through to tenants where appropriate.

While facilitating sustainability efforts, the program reduces property owners’ annual costs and provides significantly better financing terms than the available alternatives to fund construction projects. And during these volatile economic times, C-PACE provides reliable and flexible bridge financing options.

Project eligibility
In Maine, C-PACE capital can be used for any non-residential property – this includes commercial office, industrial, retail, hotels, private schools, health care facilities, agriculture, nonprofits and multifamily properties that consist of five or more units.

Another benefit of C-PACE is that it can be layered in with other forms of economic development financing, like historic and new market tax credits. C-PACE financing is a very flexible financing tool and can be used toward almost any measure that impacts the energy or water performance of a property. This includes hard, soft, and any associated costs connected to mechanical, electrical, plumbing, building envelope improvements and renewable energy sources. Examples of C-PACE eligible measures include HVAC, LED lighting, facility controls, heat pumps, low flow water fixtures, insulation, roofing, windows, doors, solar and much more.

In the case of new development and gut rehab projects, C-PACE can improve developer internal rate of return by up to 50%. C-PACE is accretive to financial returns because it can provide developers with capital at rates that are less than half the cost of traditional mezzanine debt or equity. In addition, it provides fixed rate construction through term, is non-recourse, and the obligation transfers upon the sale of the property, or it can be prepaid at any time.

Retrofit projects
For retrofit projects, C-PACE financing can be used to fund capital expenditures by providing upfront capital to replace aging equipment. C-PACE can provide up to 35% of the as-stabilized or as-complete property value for retrofits. Replacing aging equipment saves energy and results in lower operating expenses, thereby increasing net operating income (NOI) and the value of the property. C-PACE financing can fund 100% of eligible expenses of these projects as long as the financial benefit of the project outweighs the cost over the entire useful life.

Recapitalization projects
In Maine, C-PACE also allows property owners and developers to recapitalize ongoing, stalled, or recently completed construction projects. Through C-PACE recapitalization, property owners and developers can access low-cost, long-term, fixed-rate and non-recourse financing with no payment for 24 months to fund cost overruns, replenish operating reserves and pay down existing leverage.

New Construction Projects
New construction projects with primary heating systems designed to perform above state code requirements are eligible to receive 14% of all construction costs in C-PACE financing. Further funding is available for other energy related construction costs to the extent those improvements produce energy savings that exceed the incremental cost of the investment. The combination of HVAC, envelope, domestic hot water, and lighting measures will yield C-PACE funding for 15-25% of a new development capital stack.

To learn more about C-PACE financing, contact Nuveen Green Capital’s Director of Originations, Mike Doty at: Michael.Doty@Nuveen.com or visit Nuveen.com/greencapital.

Nuveen Green Capital is a national leader in sustainable CRE financing solutions and an affiliate of Nuveen, the $1 trillion+ asset manager and wholly owned subsidiary of TIAA. Nuveen Green Capital is a private capital provider dedicated to making sustainable commercial real estate a smart financial decision for commercial property owners.

Original article published on March 20, 2023 can be found here:  https://greencapital.nuveen.com/c-pace-commercial-property-assessed-clean-energy-financing-now-available-in-maine/ 

USI Insurance Services’ 2023 Commercial P&C Market Outlook

by: USI and its National Team

PROPERT Y

Anticipated Market Trends for 2023

Challenges will continue in 2023 for risks with significant exposure to wildfire, named storm, convective storm and flood. Certain occupancies like food, habitational, wood products, recycling and frame builder’s risk projects will continue to face pressure to improve risk quality while experiencing rate increases, limited capacity and increased deductibles.

Reinsurance treaty renewals on January 1, 2023, are expected to finalize at rate increases of 20% or more with a limited supply available due to losses, increased exposure basis from raw material costs and supply-chain disruptions along with increased demand from insurers. Renewals effective in the second half of 2023 may experience limited supply of necessary capacity from their incumbents as portfolio catastrophic event (CAT) aggregates are depleted with little to no opportunity to replace it. Insureds will continue to face difficult decisions balancing risk tolerance, third- party insurance requirements and budgetary restrictions.

As these challenges continue, there are some additional trends starting to impact insureds across the spectrum, regardless of occupancy or risk profile.

REAL ESTATE

Anticipated Market Trends for 2023

Cyber: This prolonged macro trend remains top of mind as hackers continue to infiltrate systems and cause financial damage to their victims. Real estate companies have traditionally not purchased cyber coverage, but the take-up rate for coverage has increased significantly over the past few years. Climate Related Risk: Ian was categorized as the fourth strongest storm to ever hit Florida, and caused considerable damage. Since
2017, the U.S. has been impacted by 17 hurricanes/tropical storms, and insurance carriers have continued to reduce needed capacity in hard-hit areas. There will be prolonged pressure on pricing, deductibles and a strain on capacity with the frequency and severity of these storms.

Environmental, Social and Governance (ESG): The above- mentioned trends, including climate risk and data security risks, combined with increased regulatory pressures and shifts in social principles, represent increasing risks for real estate investors. The current economic environment has affected real estate companies’ exposure to ESG risks and their ability to manage them, as they face increasing and complicated investor scrutiny.

Deferred Maintenance: With many real estate owners and managers facing lower post-pandemic occupancy levels, there may be less maintenance needed. Deferred maintenance may lead to asset deterioration and losses related to infrastructure such as HVAC, electrical, and plumbing. This especially holds true for older assets
and can also impact the “health” of the building. Carriers are closely reviewing and monitoring maintenance plans and procedures to ensure adequate money and resources are prioritized to reduce potential losses.

CONSTRUCTION

Anticipated Market Trends for 2023

The following coverage updates go beyond those listed in USI’s 2022 Commercial P&C Market Outlook Mid-Year Addendum and may not include all lines of business.

General Liability

The skilled labor shortage in all industry segments remains the single most challenging issue for contractors, according to the Associated General Contractors of America, Inc. (AGC) and FMI Consulting in their annually published “Risk Management Survey.” Exacerbating the issue, injury rates for employees within the first year of work account for 48% of the injuries and 52% of the costs, according to Travelers Injury Impact report which tracked 1.5 million workers’ compensation claims submitted from 2015 through 2019.

As the industry tries to navigate this challenge while hiring an unprecedented number of new workers, additional emphasis on safety and risk mitigation strategies will be key. Medical costs due to continued inflationary pressures continue to rise, and loss trends mean employers, now more than ever, need to create, implement, and execute effective and innovative safety/risk control programs to keep workers’ compensation and experience modification rates from getting out of control. Deterioration in workers’ compensation portfolios are starting to make carriers nervous, giving rise to potential rate increases in the future.

Umbrella/Excess

Price increases continue to stabilize for the general construction market depending on scope of work and geographic location. InsureTech options are becoming more attractive to clients because of better pricing for adoption technology tools to manage risk. 2023 will continue to see more supported umbrellas as a solution versus unsupported. Buffer layers and higher underlying limits are still creative options to keep costs under control.

Cyber

Cyber threats continue to increase against contractors of all shapes and sizes. As with the last outlook, an emphasis on cyber hygiene, which includes a detailed outline of a company’s workplace cyber policies, incident response planning, employee training, and security software capabilities, is paramount for risk mitigation as well as access to appropriate cyber coverage.

Owner-/Contractor-Controlled Insurance Programs
(OCIPs/CCIPs)

Because of supply chain delays, labor shortage and volatility in material costs, project durations are extending beyond what treaty or carriers can afford. This situation is creating challenges with carrier availability and capacity for certain types of projects.

Builder’s Risk/Course of Construction

Risk mitigation protocols like water sensors, site security, fire mitigation and other technologies are now a part of a standard operating procedure for a builder’s risk submission regardless of construction type or geographic location. Capacity continues to be strained for coastal or wildfire exposed projects and rates continue to increase for wood frame projects. Cross laminate timber/mass timber projects continue to rise due to supply chain woes and material cost increases, and carriers are starting to embrace and adopt these technologies with offerings for this type of work. Project delays persist and reinsurance costs are expected to continue to increase due to the number or large insured natural disasters.

Surety

As with the last outlook, the surety industry was profitable this year and backlogs as healthy as pre-pandemic lengths, but loss activity is starting to increase. The hidden underlying financial issues of contractors who took PPP loans are now exposing themselves. Projects are continually being delayed coupled with cost escalations and supply chain issues are leading to profit fade. We are expecting the surety market to tighten with underwriting attention focused on profitability, cash flow and debt service.

Original article can be accessed here: https://www.usi.com/market-outlook-2023–pc/2023-commercial-pc-market-outlook/

For questions: Chris.abboud@usi.com or pcinquiries@usi.com.

This material is for informational purposes and is not intended to be exhaustive nor should any discussions or opinions be construed as legal advice. Contact your broker for insurance advice, tax professional for tax advice, or legal counsel for legal advice regarding your particular situation. USI does not accept any responsibility for the content of the information provided or for consequences of any actions taken on the basis of the information provided. ©2023 USI Insurance Services. All rights reserved.