Best Practices: New Rule Clarifying SBA Loan Participation with C-PACE Financing

On December 6, 2024, the SBA issued Procedural Notice 5000-862692, clarifying that its 7(a) and 504 loan programs can be used in conjunction with Commercial Property Assessed Clean Energy (C-PACE) loans.  C-PACE loans are specifically designed to finance improvements such as energy efficiency, renewable energy, and, in some states like Florida, wind resistance for commercial properties. While C-PACE is not a federal program, its implementation requires state legislative authorization and additional approval from local governments. As of late 2024, enabling legislation for C-PACE loans had been adopted in 37 states and the District of Columbia.

The primary purpose of the C-PACE program is to help businesses finance projects that promote energy conservation and efficiency, as well as renewable energy initiatives. Borrowers voluntarily enter into C-PACE agreements, which are secured by their commercial properties and repaid through property tax bills. These payments are treated similarly to other property tax assessments. Importantly, C-PACE liens carry a “super priority” status, meaning they take precedence over traditional mortgage or deed of trust liens on the improved property. While some state and local governments may fund C-PACE projects, private lenders often step in to provide financing when public resources are limited.

Businesses typically seek C-PACE financing after securing initial funding, such as a loan to acquire the commercial property. A standard requirement for C-PACE financing is obtaining consent from existing lienholders to subordinate their liens to the C-PACE lender, due to the super-priority status of the C-PACE lien. For properties with existing SBA loans, the subordination process must adhere to the requirements outlined in the SBA’s Standard Operating Procedures (SOP 50 57 for 7(a) loans and SOP 50 55 for 504 loans).

For 7(a) loans, lenders may approve subordination requests under their delegated authority, as long as the action aligns with prudent servicing practices. Lenders must ensure that the proposed C-PACE financing will not impair the value or marketability of the property, particularly in cases where liquidation might be necessary. Supporting documentation of this determination must be kept in the lender’s files. Lenders are also required to evaluate several factors, including the borrower’s credit history, their ability to repay all obligations after the proposed subordination, and whether the property retains sufficient equity to secure the SBA loan after the C-PACE financing. Subordination must be limited to a specific amount and exclude future advances. Additionally, the subordination agreement must be documented and signed by all parties.

Lenders are advised to subordinate an SBA 7(a) loan lien only if the subordination satisfies a legitimate business need, such as funding property improvements that preserve or enhance its value, and if other potential funding options have been exhausted.

For 504 loans, the process differs and is beyond the scope of this article.  By way of summary, CDCs, except for Premier Certified Lenders Program (PCLP) CDCs and Authorized CDC Liquidators (ACLs), must obtain formal SBA approval to subordinate SBA’s lien position to C-PACE financing. Consent requests must be submitted to the SBA Commercial Loan Service Center (CLSC) for review and approval, in accordance with SOP 50 55 guidelines, and further specific guidance promulgated in Procedural Notice 5000-862692.

By integrating C-PACE financing with 7(a) and 504 loan programs, the SBA supports sustainable energy and efficiency improvements for businesses while ensuring prudent loan servicing and safeguarding its financial interests.  For more information regarding projects involving SBA and C-PACE loans, contact the attorneys at Starfield & Smith at info@starfieldsmith.com or 215.542.7070.