Ground lease agreements form the basis for some of a country's most valuable commercial properties. They are widespread in high-priced markets such as Manhattan and are frequently used when land is owned by a university, public authority, institution, or large corporation. Such agreements also allow for long-term site control for projects utilising New Market Tax Credits or historic tax credits, while the landowner retains ownership.
Despite their widespread use, ground lease agreements are often seen as an impediment to efficient property financing. Lease provisions regarding assignments, subleases, mortgages, and transfers of ownership can complicate transactions. Mortgagees must also consider what happens to their collateral if the lease expires or is terminated. These concerns are legitimate but should not prevent an otherwise viable project from being realised.
C-PACE as an effective financing solution
C-PACE (Commercial Property Assessed Clean Energy) financing can offer an effective solution here. Ground-leased projects often pursue similar financing goals to properties with full ownership. Investors wish to preserve equity, reduce the weighted average cost of capital, improve project cash flow, fund energy-related improvements over their useful life, and reduce refinancing risk through long-term, fixed-rate capital.
C-PACE financings are typically fully amortising with fixed interest rates over a long term, often up to 30 years. They can supplement construction and permanent financing, improving the efficiency of the overall capital stack. Ground-leased properties face additional obstacles to mortgage financing that C-PACE may overcome. C-PACE does not include financing clauses that require explicit consent or approvals restricting assignments, subleases, pledges, or transfers of ownership.
A mortgagee could risk losing their collateral if the ground lease is terminated. The obligations from the C-PACE assessment do not end with the termination of the lease but pass to the subsequent owner. As C-PACE payment obligations are tied to the property, an expiring lease represents a lower risk for the C-PACE capital provider than for a mortgagee. Since C-PACE is not highly standardised nationally, capital providers consider specialised legal due diligence a routine part of all PACE transactions, with a strong focus on reducing legal costs.
Case studies and public ownership
The consent of the ground lessor and ownership structure remain crucial. The owner of the land typically must consent, and many programmes require the recorded owners to sign transaction documents. CounterpointeSRE works with ground lessees, legal counsel, senior lenders, programme administrators, and ground lessors to meet these requirements and ensure an efficient transaction process. Public ownership can add an additional layer of complexity.
State laws and local programme rules vary in their treatment of publicly owned land. Eligibility may depend on how the assessment is calculated and collected, how liens are handled, and what happens if the lease ends and ownership reverts to a tax-exempt owner. Some states explicitly allow C-PACE on public land, while others restrict or exclude it. The ground lease may also need to cover the entire eligible property or tax parcel, be properly recorded or recordable, and remain in effect for at least the term of the C-PACE financing. Specific requirements depend on state law, local programme rules, and the terms of the lease.
An example of this is a developer of a 504-unit multi-family property on land leased from a local university in Washington, D.C., who faced high interest rates for a leasehold construction loan. With the ground lessor's consent, C-PACE offered the solution: CounterpointeSRE provided $90 million in C-PACE financing to reduce the blended cost of capital, complementing a $214 million senior loan for full financing. The repayment of the C-PACE financing was structured to begin after the three-year construction phase to minimise development risks.
The project included an all-electric HVAC system with rooftop units (RTUs), dedicated outside air systems, and variable refrigerant flow heat pumps, as well as an almost 26,000 square foot green roof for stormwater management. The above-norm ECMs (Energy Conservation Measures) were expected to reduce annual energy consumption by almost 1.3 megawatt-hours. C-PACE can also be used in conjunction with tax credits. A former Zenith television factory in Chicago was converted into a 113,000 square foot facility with 64 commercial kitchens for food manufacturers. The ground lease structure was created for investors utilising tax credits.
CounterpointeSRE provided $4.6 million in C-PACE financing as part of a source loan, which fitted well into the ground lease structure and was made with the consent of a consortium of New Market Tax Credit investors. The project included a new HVAC system with packaged RTUs, extractor hoods, water heaters, and indirect-fired gas furnaces, as well as LED lighting. The U.S. Green Building Council later selected the project for a presentation at the international Greenbuild conference. A ground-leased property should be evaluated for C-PACE early in the financing process. The lease structure, remaining term, owner agreement, programme requirements, and proposed improvements can all influence eligibility. Despite the added complexity, ground leases will continue to play an important role in institutional development, adaptive reuse, and projects with public or tax-exempt ownership. With careful consideration and the consent of the necessary stakeholders, C-PACE can provide long-term capital for new construction and building improvements for these properties.
