Over the last decade, TX-PACE has proven itself as one of the most powerful tools available to commercial property owners and developers, delivering long-term, fixed-rate capital that fills critical gaps in the capital stack while advancing energy efficiency and resilience goals.

As the market has matured, so have financing structures. One of the most significant recent evolutions in TX-PACE is the introduction of tranching models that allow capital to be drawn as construction progresses, rather than fully funding at closing.

This shift represents a meaningful improvement for both developers and capital providers, and signals how TX-PACE continues to adapt to real-world development needs.

How TX-PACE Traditionally Worked

Historically, most TX-PACE transactions funded 100% of the approved assessment amount at closing. Those proceeds were typically held in escrow and disbursed as eligible improvements were completed.

While effective, this structure had an important drawback:

• Interest began accruing on the full PACE balance immediately at closing, even though much of the capital had not yet been deployed.

For large, multi-phase or ground-up developments, this created unnecessary carry costs during construction, particularly when TX-PACE was intended to support later-stage systems such as HVAC, envelope, or water efficiency measures.

Tranching Is Designed for Larger, More Complex Projects

While tranching represents an important advancement in TX-PACE financing, it is not intended to replace traditional funding structures for smaller or straightforward transactions. For simple retrofits or limited-scope renovations, full funding at closing remains an efficient and effective approach.

Tranching is purpose-built for larger, more complex developments, including ground-up construction, multi-phase projects, mixed-use environments, and projects with layered or highly structured capital stacks. In these cases, PACE-eligible systems, such as central plant infrastructure, building envelope, or water efficiency measures, are often installed well into the construction timeline.

By allowing TX-PACE capital to be drawn only as those systems are built, tranching ensures that financing aligns with construction sequencing rather than sitting idle in escrow. This structure supports sophisticated development strategies while preserving disciplined capital deployment and strong project controls.

In short, tranching reflects the growing role of TX-PACE in institutional-scale development, where flexibility, timing, and capital efficiency matter most.

Introducing Tranching: Capital That Moves With Construction

New TX-PACE tranching structures solve this challenge by aligning funding with construction milestones.

Under a tranching model:

• TX-PACE proceeds are disbursed in defined tranches based on project progress and eligible costs incurred
• Interest accrues only on the amount that has actually been funded into the project or into escrow, not on the total approved assessment
• Capitalized interest is calculated on a tranche-by-tranche basis

This approach mirrors how construction loans are administered, bringing TX-PACE into tighter alignment with conventional development finance.

Benefits for Developers, Property Owners and Capital Providers

1. Reduced Interest Carry During Construction

By avoiding full funding at closing, developers significantly reduce interest expense during the construction period. Capital is deployed only when needed, improving overall project economics.

2. Improved Cash Flow and Capital Efficiency 

Tranching keeps capital working elsewhere until it is required on site. This is especially valuable for:

• Large-scale developments
• Multi-phase projects
• Projects with layered capital stacks

3. Better Alignment With Construction Lenders

Tranching allows TX-PACE to disburse no earlier than pro-rata with construction debt, helping maintain balanced sources and uses and supporting smoother lender  coordination.

4. Scalability for Complex Projects

As TX-PACE expands into mixed-use, condominium, and master-planned developments, tranche-based funding provides the flexibility these projects demand.

Benefits for Capital Providers and the TX-PACE Market

1. Stronger Risk Management

The full PACE assessment is vetted and approved upfront by capital providers. Funding is then broken down and tranched disbursements are made based on pre-arranged dates or project milestones and incurred costs, providing enhanced visibility into project progress and budget balance.

2. Alignment With Construction Controls

Capital providers benefit from:

• Ongoing project monitoring
• Certification that sufficient funds remain to complete construction
• Clear sequencing behind equity and incentive capital

“By combining asset-level insight with disciplined, strategic structuring, we’re able to align our capital with the timeline of the project,” said Kevin Porter, Chief Investment Officer at Petros PACE Finance. “This allows us to deliver a resilient, cost-effective capital solution for development and retrofit projects”. 

 This structure reinforces prudent underwriting while preserving TX-PACE’s long-term, low-cost capital advantages.

3. Market Credibility and Program Longevity

As TX-PACE is used on increasingly sophisticated projects, tranche-based structures help ensure the program remains compatible with construction lenders, municipalities, and institutional capital providers alike.

What This Means for TX-PACE in Texas

Tranching is more than a technical adjustment, it reflects the continued evolution of TX-PACE from a niche retrofit tool into a core component of complex development capital stacks.

By:

• Reducing unnecessary interest carry
• Matching funding to construction reality
• Supporting larger and more diverse projects

TX-PACE remains competitive, relevant, and responsive to the needs of today’s developers and funders. At Texas PACE Authority, we see this evolution as a positive signal of program maturity, and a clear example of how TX-PACE continues to innovate while staying grounded in sound financial principles.

As financing structures advance, our focus remains the same: ensuring TX-PACE works effectively for property owners, capital providers, and Texas communities alike.

About Texas PACE Authority (TPA)
Texas PACE Authority (TPA) is the nonprofit administrator for more than 100 local TX-PACE programs across Texas. TPA helps commercial, industrial, and multifamily property owners access long-term, fixed-rate financing for energy, water, and resiliency upgrades that reduce costs, improve building performance, and strengthen communities. Working alongside cities, counties, lenders, and contractors, TPA has facilitated more than $600 million dollars in new private investment statewide.