Filling the gap in your stack!

By: J. David Chapman/September 16, 2021

If you hang around real estate folks long enough, you will hear them talk about their “capital stack.” The capital stack is one of the most important concepts for investors interested in evaluating real estate risk and projected rate of return. Understanding the capital stack to assess trade-offs can protect your investment from undue risk or insufficient gains. There are many ways to evaluate a potential investment in a commercial real estate deal, and the capital stack is among the most valuable – it lets you know who gets paid, in what order, and how much risk they carry. Each is incredibly important when it comes to determining the risk and reward of a given investment.

In simple terms, the capital stack represents the underlying financial structure of a commercial real estate deal. Often, the capital stack is presented as a graphic that shows the different types of capital in a deal stacked above each other, like a cake with many layers. The two main components of the capital stack are debt and equity. There is a new and innovative way to build your capital stack in Oklahoma.

There is a new program in Oklahoma that helps building owners, developers, investors or anyone looking to finance a project but also looking to do things better. A new funding source called Property Assessed Clean Energy financing, or PACE financing, is private capital available to building projects at a low cost using utility, water, or operations energy efficiencies. PACE is a program legislated at the state and then municipal level that allows private investments to fund energy loans for improvements to buildings through a tax assessment lasting 20 to 30 years.

This innovative financing approach reaches across multiple building types and can fund hospitality, multifamily, office, industrial, retail and special use, and the projects can be new construction or renovated projects. The financing incentivizes innovation and quality in HVAC, plumbing, lighting, windows, building insulation, roofing, solar, or elevators.

Many investors looking to fill gaps in their capital stack are doing so with PACE. PACE-funded projects are secured by a special assessment on the property, building owners can access long-term, fixed-rate, non-recourse low-cost capital. With this security, PACE can pair with almost any kind of capital stack to provide funding when there is a gap.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).