C-PACE Financing Can Be a Useful Part of a Data Center’s Capital Stack

The data center boom faces a financing challenge: Developers must fund not only the buildings themselves, but also the power, cooling and other infrastructure required to support increasingly energy-intensive computing.

The International Energy Agency estimates that data centers consumed approximately 415 terawatt hours of electricity globally in 2024, and it projects that consumption will more than double to approximately 945 terawatt hours by 2030, with artificial intelligence the most important driver of that growth.

A $100 million Commercial Property Assessed Clean Energy (C-PACE) financing for Patmos Hosting’s AI data center campus in Kansas City, Mo., illustrates one potential source of capital for that infrastructure.

Glenn Miller (left) and Abraham Salandar. PHOTOS: Courtesy Katten Muchin Rosenman

The loan, originated by PACE Loan Group through Missouri’s Show Me PACE program, was structured to fund equipment, HVAC and plumbing improvements supporting the cooling and electrical load of the 421,112-square-foot, 35-megawatt facility in the former Kansas City Star building. The transaction was the largest C-PACE deal in Missouri history, and was described as one of the first C-PACE loans in the country for a data center. According to the lender, many of the conversion costs were eligible, and the long-duration capital was well aligned with the sponsor’s business plan.

Another example is the $40 million C-PACE financing, arranged through Texas’ Lone Star PACE program with capital from Nuveen Green Capital, for the conversion of a 774,000-square-foot facility at ViVa Center into a data center. (VivaVa Center is VivaVerse Solutions’ 2.3 million-square-foot technology hub on the former Compaq and Hewlett-Packard Enterprise campus in Houston.) The financing represents a 24 percent loan-to-value ratio and will fund energy-efficient windows, LED lighting, advanced HVAC systems and high-efficiency plumbing.

These transactions illustrate the potential intersection between C-PACE and data center development, particularly as cooling and other infrastructure are projected to account for approximately 20 percent of the net increase in global data center electricity consumption through 2030.

C-PACE allows commercial property owners to finance qualifying energy, water, renewable-energy and resilience improvements through an assessment on the property. The financing is repaid through the property tax bill, typically over 10 to 20 years. Plus, the assessment generally remains with the property if it is sold. Programs and eligibility requirements vary by jurisdiction, so the applicable program will govern what can be financed and how.

For data center developers, certain building systems and infrastructure supporting these facilities may qualify, including energy and water efficiency measures, renewable-energy systems and resilience improvements.

C-PACE also can be relevant at the development stage. U.S. Department of Energy (DOE) Better Buildings materials identify new construction, adaptive reuse and major renovations as potential C-PACE applications and note that financing can cover certain design and installation costs, including engineering, permitting and related professional services. Under certain programs, C-PACE can be considered as part of initial project capitalization and design rather than solely as a retrofit financing tool.

C-PACE is not, however, a general-purpose source of financing for every component of a data center. The opportunity is generally to finance a portion of the physical infrastructure supporting the facility, rather than the entire technology investment.

Scale may also matter. The administrator of Missouri’s program has said that massive hyperscale data centers likely will not qualify, while predicting that C-PACE will become more common for smaller data centers. An important question, therefore, is which infrastructure components qualify under the applicable program.

That distinction gives C-PACE a potentially useful place in the data center capital stack. DOE Better Buildings materials describe C-PACE as long-term capital that can “slot into” a capital stack, potentially replacing or minimizing more expensive gap financing such as mezzanine debt and reducing a project’s modeled weighted average cost of capital.

The structure also requires coordination with, and often the consent of, existing mortgage lenders because the C-PACE assessment is secured by a lien on the property, which may have priority over the mortgage under applicable law.

The long repayment period is another potential attraction. C-PACE terms generally do not exceed the useful life of the installed equipment, allowing qualifying improvements to be amortized over a long period. The Patmos loan, for example, was reported to carry a 20-year term.

The Patmos and ViVa transactions show that the structure can be applied to conversions of different existing properties — in these cases, a former newspaper building and a former corporate headquarters campus — into data centers.

As infrastructure supporting AI and other high-density computing becomes increasingly capital-intensive, C-PACE provides another financing tool for qualifying improvements.

For owners, sponsors and capital markets participants, the practical takeaway is to map cooling, electrical and other building systems against the applicable program’s eligibility rules early in design, and to engage mortgage lenders early. That way, C-PACE can be sized as a distinct layer of long-term capital rather than considered after the capital stack is set.

Glenn Miller is co-chair of the affordable housing and community development practice at Katten Muchin Rosenman. Abraham Salander is a counsel in the law firm’s real estate practice.

Source: commercialobserver.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.