Part 4 of the Breaking Through the Maturity Wall series

Developers face a constant balancing act: delivering projects that meet performance expectations while maintaining returns that satisfy investors and lenders. In today's financing environment, that challenge has become even more difficult as interest rates remain elevated and traditional lenders continue to scrutinize leverage, debt service coverage, and refinance risk.

When capital costs rise, projects often face difficult choices: reduce scope, defer building improvements, inject additional equity, or accept lower returns.

TX-PACE offers another option.

By introducing long-term, fixed-rate capital for eligible building improvements, TX-PACE can reduce a project's blended cost of capital while improving cash flow and preserving equity. For many projects, it is not simply another financing source, it is a capital stack optimization tool.

Understanding Blended Cost of Capital

Most commercial real estate projects are financed using multiple sources of capital, each with its own cost:

• Senior construction debt
• Mezzanine financing or preferred equity
• Sponsor equity
• Incentive programs or grants
• Specialized financing tools like TX-PACE

The weighted average cost of these sources determines the project's overall cost of capital.

When projects encounter funding gaps, sponsors often turn to additional equity or higher-cost subordinate debt. While effective, these sources can be expensive and may dilute investor returns.

TX-PACE provides an alternative source of long-term capital that can replace a portion of more expensive capital sources.

The result is often a lower blended cost of capital and improved project economics.

Why the Term of Capital Matters

One of the challenges facing today's market is a mismatch between the life of a building asset and the maturity of its financing.

Energy and water improvements such as HVAC systems, building controls, lighting, water conservation measures, or resiliency improvements often provide value for 20 to 30 years or more. Yet many of these investments are financed with shorter-term debt.

TX-PACE aligns financing with asset life.

Because TX-PACE assessments may extend up to the useful life of the improvements, often 20 to 30 years, annual debt service can be substantially lower than shorter-term alternatives.

This creates a fundamental shift in project economics:

• Lower annual payments
• Improved debt service coverage
• Enhanced project cash flow
• Greater flexibility for traditional lenders

In many cases, the operational savings generated by the improvements help offset or exceed the assessment payments.

Preserving Equity and Enhancing Returns

Equity is often the most expensive capital in a transaction.

Every additional dollar of sponsor equity tied up in a project is capital that cannot be deployed elsewhere.

By financing eligible improvements through TX-PACE, developers may reduce required equity contributions while maintaining ownership and preserving liquidity for future investments.

For developers managing multiple projects, preserving equity can create significant strategic value:

• Pursue additional acquisitions
• Fund future development opportunities
• Increase portfolio diversification
• Improve overall return on invested capital

Rather than viewing TX-PACE solely as project financing, many sophisticated sponsors view it as portfolio-level capital optimization.

Beyond Construction: Long-Term Value Creation

The benefits of TX-PACE extend beyond the construction phase.

Projects financed with high-performance building systems may experience:

• Reduced operating expenses
• Improved tenant satisfaction
• Enhanced resiliency
• Greater competitiveness in the marketplace
• Stronger long-term asset performance

These improvements can contribute to higher net operating income, which may ultimately support increased asset value.

In other words, TX-PACE not only helps finance efficient buildings, it can help create stronger-performing assets.

TX-PACE as a Strategic Capital Tool

As developers confront refinancing challenges, higher borrowing costs, and increased pressure on returns, capital stack optimization has become more important than ever.

TX-PACE was designed to finance qualifying building improvements, but its impact extends far beyond sustainability goals. By introducing long-term, fixed-rate capital into the stack, TX-PACE can help projects lower their blended cost of capital, preserve equity, and improve financial performance over time.

In an environment where every basis point matters, the structure of capital can be just as important as the amount of capital itself.

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Coming Next in the Series

Part 5: TX-PACE Beyond New Construction: Unlocking Capital in Existing Buildings

Many owners associate TX-PACE with new development, but some of the most compelling opportunities exist in existing assets through refinancing eligible improvements and funding modernization projects.

About Texas PACE Authority

Texas PACE Authority (TPA) is a nonprofit organization and the leading administrator of TX-PACE programs serving 113 cities and counties across Texas, at the time this article was written. TPA works with local governments, property owners, and capital providers to facilitate financing for energy and water efficiency, resiliency, and distributed generation improvements in commercial properties. Through its program administration and market leadership, TPA helps ensure that high-performance building solutions are accessible, scalable, and aligned with the long-term needs of Texas communities. 

www.texaspaceauthority.org