CREJ

Page 38 - December 15, 2021-January 4, 2022 www.crej.com Law & Accounting A n increasing number of Colorado property owners are taking advantage of the Colorado Commercial Property Assessed Clean Ener- gy program. Once the C-PACE financing documents are final- ized with a capital provider, what happens next? Owners should take the following steps to operate their C-PACE proj- ects effectively: 1. Update the construc- tion contract. The first step, of course, is to construct the C-PACE improvements. The owner will need to hire a con- tractor who is registered with the Colorado C-PACE pro- gram. The owner and the con- tractor will enter into a direct construction contract, which will incorporate the various obligations under the applica- ble construction funding and disbursement agreement. Simi- lar to a traditional construction loan, C-PACE funds are dis- bursed in installments during the construction process. The capital provider may elect to pay the contractor directly or reimburse the owner for paid construction costs. In either case, the owner should include contract language that requires the contractor to satisfy the d i s b u r s e - ment condi- tions before receiving any p a ym e n t s . In addition, if there is a senior loan e n c umb e r - ing the prop- erty, the senior lender may require C - P A C E funds to be held in a separate escrow account. In such circumstanc- es, the construction contract should incorporate the addi- tional escrow-related require- ments. The capital provider and senior lender (if applica- ble) also will need to approve any changes to the construc- tion contract, plans and budget during the construction pro- cess. 2. Update the leases. Most C-PACE projects will have tenants that benefit from the new improvements. Generally, C-PACEassessments arepassed through to the tenants under the leases. Although C-PACE improvements constitute capi- tal expenditures (which gener- ally are not considered reim- bursable operating costs), the C-PACE-related costs should be included in operating costs because the improvements provide continued energy sav- ings and reduce the overall operating costs for the project. The owner should update any triple-net or base-year leases so that amortized C-PACE costs (including finance clos- ing costs, the program admin- istration fee and interest) are part of operating costs. For projects with base-year leases, the leases also should clear- ly state that C-PACE costs are included in the base-year operating costs. Alternative- ly, C-PACE payments can be passed through to tenants as a real estate tax. C-PACE assess- ments are included as a spe- cial assessment on an owner’s tax bill and payable with other real estate taxes. The owner should confirm that the real estate tax provision contem- plates special assessments and that the spirit of the operating cost provision does not conflict with the owner’s ability to pass through capital expenditures funded through special assess- ments. After completing the C-PACE process, owners may be inclined to implement addi- tional sustainability practices into their newly improved, greener projects. Such owners should incorporate any desired sustainability-related tenant requirements into the leases. 3. Update the loan docu- ments. C-PACE financing is fre- quently combined with other forms of traditional financing, and the other lender will need to approve the C-PACE loan. For existing loans, the owner will obtain the senior lender’s consent during the C-PACE approval process. For future financing, the new lender will need to be comfortable with the existence of the C-PACE assessment lien. Some lenders may be nervous about a senior priority lien on their collateral. However, if it is characterized as a nonaccelerating assess- ment, similar to a sewer assess- ment, the lender may be more comfortable with the idea. It may be helpful to point out that C-PACE payments cannot be accelerated and a capital provider cannot foreclose on the project. If another lender forecloses, the successor owner will be obligated to pay the C-PACE assessment like any other standard county assess- ment. 4. Update the purchase and sale agreement. An owner may not sell its project dur- ing the construction of the C-PACE improvements. Once the improvements are com- plete, however, the owner may be interested in selling the project, thanks to its enhanced value. The purchase and sale agreement should disclose the C-PACE assessment on the project so that the buyer and its prospective lender are aware of its existence. Upon the sale, the future owner will be respon- sible for subsequent C-PACE payments. Prepayments of the C-PACE loan are permit- ted with a prepayment penalty, but C-PACE liens are designed to run with the land and be binding on future owners of the project. A selling owner may need to explain to a buyer that the C-PACE assessment remains on the project because the related improvements con- tinue to provide cost savings to the project and appeal to new tenants seeking sustain- able space. With the growing number of C-PACE projects across Colorado, more buyers will understand and appreciate the advantages of owning and operating a C-PACE project. s Building blocks of C-PACE projects: A document checklist Heather Park Meek Attorney, Otten Johnson Robinson Neff + Ragonetti PC

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