by: Adam Horowitz

Many developers understand construction loans. Many have also heard of C-PACE financing. The harder question is whether combining the two actually creates a better capital stack.

In today’s market, construction lenders are more selective, proceeds are tighter, and sponsor equity is expensive. That has pushed more developers to evaluate alternative financing layers that can reduce the amount of common equity required to close. C-PACE can be one of those options, but it is not automatically the right fit for every project.

The key question is not simply whether C-PACE is available. The better question is whether C-PACE improves the construction capital stack without creating new execution, refinance, or sale issues later.

What Is C-PACE in a Construction Financing Context?

C-PACE stands for Commercial Property Assessed Clean Energy. It can finance eligible improvements related to energy efficiency, water efficiency, resiliency, renewable energy, seismic upgrades, or other qualifying project costs, depending on the state and local program.

In a new construction project, C-PACE may apply to eligible components already included in the development budget. These can include HVAC systems, lighting, building envelope improvements, water systems, renewable energy features, or resiliency-related work.

Unlike a traditional loan, C-PACE is typically repaid through a property tax assessment. Because of that repayment structure, the senior construction lender usually needs to be comfortable with the C-PACE layer before it is added to the capital stack.

That is why C-PACE should not be viewed only as an incentive or add-on product. In the right project, it can become a meaningful part of the construction financing strategy.

Why Developers Consider Pairing C-PACE With Construction Loans

Developers are usually not looking at C-PACE because they want another financing product. They are looking at C-PACE because the construction capital stack has a gap.

Senior construction loan proceeds may not cover as much of the project cost as expected. Common equity may be expensive or dilutive. Preferred equity and mezzanine debt may be available, but at a higher cost. If the project has meaningful eligible improvements, C-PACE may help finance part of the budget with a potentially more efficient capital source.

For example, if a project has $50 million of total cost and $8 million of eligible C-PACE improvements, the developer may be able to finance a portion of those costs through C-PACE instead of raising the same amount as additional equity or more expensive gap capital.

This is where C-PACE becomes most relevant. It is not just about whether the project qualifies. It is about whether the financing helps the deal pencil.

Where C-PACE Fits in the Capital Stack

A construction capital stack may include a senior construction loan, C-PACE financing for eligible costs, sponsor equity, and in some cases preferred equity, mezzanine debt, or joint venture equity.

C-PACE does not replace the need for a senior construction lender. Instead, it may sit alongside the senior loan and reduce the amount of equity or other gap capital needed.

However, its position in the capital stack matters. Because C-PACE is repaid through a property tax assessment, senior lenders will want to understand how it affects their collateral, repayment priority, debt service coverage, and future takeout strategy.

That is why C-PACE should be evaluated as part of the full capital stack, not as a separate financing decision.

When Construction Loans + C-PACE Actually Makes Sense

C-PACE can make sense when the project has meaningful eligible costs. If the eligible amount is too small, the benefit may not outweigh the added complexity.

It can also make sense when the senior construction lender is aligned early. This is one of the most important factors. Not all construction lenders are comfortable with C-PACE, especially because the repayment is tied to a property tax assessment. If lender consent is uncertain, the structure should be tested before the deal is too far along.

C-PACE is most useful when it reduces the need for more expensive capital. If it can replace a portion of common equity, preferred equity, mezzanine debt, or other gap capital, it may improve the weighted average cost of capital.

The repayment structure also needs to match the business plan. Developers should understand how the assessment affects cash flow, debt service, refinancing, and sale options. A structure that helps at closing but creates issues at stabilization may not be worth it.

The timeline matters as well. C-PACE may require documentation, eligibility review, program approval, and coordination with the senior lender. It works best when there is enough time to structure it properly before the construction loan closes.

When C-PACE May Not Be the Right Fit

C-PACE should solve a real financing problem. It should not be added just because it is available.

It may not be the right fit if eligible costs are limited, the senior lender will not consent, or the project timeline is too compressed. It may also create issues if the assessment complicates takeout financing, future sale negotiations, or buyer assumptions.

Developers also need to be careful when the project is already highly leveraged. Adding another capital layer may help close the immediate gap, but it should not create a capital stack that becomes difficult to refinance or support after stabilization.

C-PACE may also be less useful if it does not meaningfully reduce the sponsor’s equity need. If the cost savings are limited or the approval process adds too much execution risk, another source of capital may be more practical.

How Developers Should Evaluate the Decision

Before adding C-PACE to a construction financing strategy, developers should ask several practical questions.

How much of the project budget is actually C-PACE eligible? Will the senior construction lender allow it? What is the all-in cost compared with preferred equity, mezzanine debt, or additional sponsor equity? Does it reduce the common equity requirement enough to justify the process?

Developers should also evaluate how the assessment affects cash flow during and after stabilization. They should consider whether the takeout lender or future buyer will accept the structure. They should also confirm whether the timeline allows for proper approval, underwriting, and documentation.

The right answer depends on cost, speed, lender consent, repayment structure, and the project’s exit plan.

Construction Loan + C-PACE vs. Other Gap Capital Options

C-PACE should also be compared against other financing options.

Compared with preferred equity, C-PACE may offer a more efficient cost of capital in certain cases. However, preferred equity may provide more flexibility, especially if the project has limited eligible costs or if the senior lender is not comfortable with C-PACE.

Compared with mezzanine debt, C-PACE may be attractive because it is tied to eligible improvements and may offer longer-term repayment. But mezzanine debt may be faster or more familiar to certain lenders and sponsors.

Compared with additional sponsor equity, C-PACE may reduce dilution and preserve sponsor returns. But sponsor equity is usually simpler and does not require the same level of program approval or lender consent.

The point is not that C-PACE is always better. The point is that developers should compare each option based on the full project economics.

Why Early Capital Stack Planning Matters

The best time to evaluate C-PACE is not when the capital stack is already broken. It is when the developer still has flexibility.

Senior lender consent should be tested early. Eligible costs should be reviewed before the budget is finalized. C-PACE providers need time to underwrite the opportunity. The assessment should also be modeled into refinance and sale scenarios before the developer commits to the structure.

If C-PACE is introduced too late, it may create friction with the senior lender or delay closing. If it is evaluated early, it can be compared properly against other capital sources and incorporated into the project’s financing strategy.

How Lever Helps Developers Evaluate C-PACE Financing

Lever helps developers evaluate whether C-PACE belongs in the capital stack, compare it against other sources of gap capital, and identify providers that understand construction-stage execution.

For some projects, C-PACE can be a useful financing layer that reduces equity pressure and improves the overall capital stack. For others, preferred equity, mezzanine debt, or additional sponsor equity may be more appropriate.

Lever can help developers review the capital stack, test lender appetite, compare financing options, and determine whether C-PACE creates a stronger path to closing.

Conclusion

Construction loans and C-PACE can work well together, but only when the structure solves a real capital stack problem.

C-PACE may make sense when the project has meaningful eligible costs, the senior lender is aligned, the cost of capital is competitive, and the repayment structure supports the developer’s business plan.

It may not make sense when the eligible amount is too small, the lender will not consent, the project timeline is too compressed, or the assessment creates future refinance or sale issues.

For developers evaluating construction financing, the key is not simply asking whether C-PACE is available. The better question is whether C-PACE creates a stronger, more financeable capital stack.

If you are evaluating a construction loan and want to understand whether C-PACE belongs in the capital stack, Lever can help compare the options and identify capital providers that understand construction-stage execution.