Prepayment penalties in C-PACE financing can significantly impact the overall cost of borrowing for several reasons:
- Financial Burden: C-PACE loans typically come with prepayment penalties ranging from 1 percent to 5 percent, and in some instances, these penalties can extend up to 10 years. This means that if a borrower decides to refinance or sell the property early, they must pay these penalties, which can be substantial.
- Long-term Commitment: C-PACE loans are structured as long-term financing options, often lasting 25 to 30 years. The presence of prepayment penalties discourages borrowers from repaying the loan early, effectively locking them into the agreement for a longer period.
- Refinancing Considerations: When refinancing stabilized properties, borrowers often need to pay off the C-PACE loan early to access better terms from other lenders. This triggers the prepayment penalties, adding to the overall cost of using C-PACE financing initially.
- Capital Stack Implications: While C-PACE can help reduce the cost of capital by supplementing traditional debt and equity, the need to consider prepayment penalties complicates the capital stack management. It may lead to the use of more expensive senior lenders to facilitate deals that include C-PACE.
- Negotiation: Although prepayment penalties can be negotiated during the initial loan setup, they remain an essential factor to consider when evaluating the total cost of C-PACE financing.
In summary, prepayment penalties increase the financial burden and complexity of C-PACE financing, impacting borrowers’ decisions regarding loan repayment or property sale.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-prepayment-penalties-impact-the-overall-cost-of-c-pace-financing/
