- 15 hours ago
Sal Tarsia of Castle Green Finance joins Zeb to explain C-PACE, a financing tool that lets commercial developers fund energy-efficiency and resilience work without reopening the whole capital stack. He covers how it can make a deal pencil when conventional lending leaves a gap, where it fits in housing development and disaster rebuilding, and why long-term fixed-rate money matters in a market this unpredictable.
Related to the episode:
Zeb Lowe’s LinkedIn
https://www.linkedin.com/in/zebulon-lowe-a02353a4/
Sal Tarsia's LinkedIn
https://www.linkedin.com/in/sal-tarsia-41a00613/
Castle Green Finance
https://castlegreenfinance.com/
C-PACE Financing
https://castlegreenfinance.com/about-c-pace-financing/
Want more from Zeb? Don’t forget to subscribe to LendingLife.
The Power House podcast brings the biggest names in housing to answer hard-hitting questions about industry trends, operational and growth strategy, and leadership. Join HousingWire’s Zeb Lowe every Thursday morning for candid conversations with industry leaders to learn how they’re differentiating themselves from the competition. Hosted and produced by the HousingWire Content Studio.
Related to the episode:
Zeb Lowe’s LinkedIn
https://www.linkedin.com/in/zebulon-lowe-a02353a4/
Sal Tarsia's LinkedIn
https://www.linkedin.com/in/sal-tarsia-41a00613/
Castle Green Finance
https://castlegreenfinance.com/
C-PACE Financing
https://castlegreenfinance.com/about-c-pace-financing/
Want more from Zeb? Don’t forget to subscribe to LendingLife.
The Power House podcast brings the biggest names in housing to answer hard-hitting questions about industry trends, operational and growth strategy, and leadership. Join HousingWire’s Zeb Lowe every Thursday morning for candid conversations with industry leaders to learn how they’re differentiating themselves from the competition. Hosted and produced by the HousingWire Content Studio.
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NewsTranscript
00:00Welcome to Powerhouse. Today I'm sitting down with someone who has spent 30 years in commercial real estate finance, CMBS,
00:07structured lending, deals that most lenders would not touch, and who has spent the last several years building a financial
00:15tool that many people in the mortgage space have heard of, but that's about it.
00:18His name is Sal Tarsia. He is the founder and managing partner of Castle Green Finance, and the thing he
00:26does, CPACE financing, is starting to show up in conversations about housing supply, disaster rebuilding, and how developers get deals
00:34done when conventional lending falls short.
00:47All right, Sal, thank you for joining me.
00:50Zev, I appreciate you having me on the show.
00:52Yes, sir. It's a pleasure. I'm looking forward to our conversation. You got some stuff to talk about that I
00:58myself am only, I guess, tangentially aware of and have some peripheral knowledge of.
01:04But before we get into all that, can you tell me a bit about Castle Green and what you do
01:10there?
01:11Sure. So, Castle Green Finance is what's called a CPACE capital provider. CPACE is an acronym for Commercial Property Assessed
01:21Clean Energy.
01:22It's a public-private partnership that's designed to encourage capital to go into making buildings more energy efficient and more
01:32resilient.
01:33Okay. Okay. So, that leads into the very first thing that I wanted to address, CPACE financing.
01:39And I got to be honest, that's not a term that comes up.
01:42I mean, I've been in the industry for, I don't know, 15, 16 years.
01:46So, I'm still a licensed originator. I don't originate anymore.
01:52But CPACE is not a term that comes up a ton in the residential mortgage space.
01:57So, can you dive into that? Break that down a little bit more for me.
02:02You know, what it is. I know you kind of gave the acronym.
02:03But what is it and how does it work and who does it work for?
02:07So, there are two types of PACE programs.
02:10There is, you know, R-PACE, which is residential PACE, and then there's C-PACE, which is commercial PACE.
02:17Commercial PACE is what we do here at Castle Green.
02:21So, we're lending into, you know, virtually any type of commercial buildings from multifamily projects to hotels to sometimes very
02:33specialized projects, which can include entertainment centers, hospitals, you know, various other types of public buildings.
02:44Okay. And so, if I'm a, I don't know, if I'm a developer or a property owner and a more
02:53traditional lender, let's say, has told me, no, has turned me down, how does C-PACE change, C-PACE financing,
03:01how does that change that conversation?
03:03So, C-PACE is generally going to be used for what are called the eligible improvements of the project.
03:10So, you know, think of your HVAC systems, electrical work, anything that contributes to the insulating features of the building,
03:20which can include your roof, your windows, a lot of water conservation measures, such as low-flow faucets, toilets, LED
03:30lighting, and then there are certain areas that include resiliency.
03:34So, the most popular ones, think in California, anything that's associated with seismic strengthening to better withstand earthquakes.
03:44By the same token, in Florida, there's wind mitigation to better handle any kind of hurricanes or, you know, or
03:55even flooding in a lot of cases.
03:56Okay. What is the structure? And like I said, I'm kind of only aware of C-PACE financing, excuse me,
04:08just being on the periphery of it.
04:11But there is an element of property tax assessment. How does that factor into or why is that important to
04:22C-PACE?
04:22So, that's the primary benefit that we get from the public sector.
04:28And that's, you know, what the public sector offers us as part of the public-private partnership.
04:34There are a lot of more traditional lending platforms like HUD or, you know, USDA lending that benefit more from
04:44guarantees provided by the government.
04:46By contrast, we don't use any tax-paying money. We don't get any guarantees from the government.
04:53What we get is being treated like a special assessment or very much like real estate tax, which puts us
05:02in a priority position, which allows us to be able to offer lower rates and, in a lot of cases,
05:09shrink the equity gap for developers.
05:13Okay. Okay. That actually leads into what was going to be my next question for you.
05:18It's like, you know, I was curious as to why that structure, and it's tied into property tax assessment, why
05:23that structure matters so much.
05:25And what does it, what all does it allow you to do? I mean, you touched on lower rates, but
05:30what does it allow you to do that a conventional lender can't do?
05:34So, what it, what it's going to do, generally, we're going to work together with a more conventional lender.
05:41So, pace is generally on any kind of development.
05:47If it's ground up, good rule of thumb is most of the country, we're going to be able to finance
05:5325 to 30% of the costs.
05:57And, you know, if it's places like California that allow for seismic work, we can often get up to, you
06:04know, 40% or even a little bit higher.
06:06If it's a renovation project, it's a slightly different animal we're going based upon what they're actually doing in the
06:14project.
06:14So, if somebody is doing a full HVAC replacement, including electrical work and replacing all of the windows and the
06:23lighting, we can potentially do 100% of their budget without disrupting the rest of the capital stack.
06:31So, there could be a project, you know, a hotel is a good example.
06:35You know, after a while, they come up for a PIP.
06:38There may already be a lender that's in place.
06:42The borrower doesn't want to have to refinance the entire stack.
06:46They may come to us and say, you know, hey, we're just doing a lot of, you know, electrical and,
06:52you know, an exterior window and structural changes.
06:56What can you do for us?
06:58And then we would work with the first mortgage lender.
07:01We're always coordinating with the first mortgage lender.
07:04And we get what's called from them a lender consent so that they understand that we're going to be part
07:11of the capital stack and what our role is in how we function.
07:14Yeah, I keep hearing, and this is a recurring conversation really that I'm a part of, that one of the
07:22biggest problems in housing right now is that developers specifically can't, they can't get deals to pencil in at current
07:29construction costs and with the rates.
07:32How do you see CPACE being that financing model, that product, as being a part of the solution to a
07:44pretty serious problem that we're at with, again, costs and rates?
07:48Yeah, we've actually seen over the last year and a half quite the influx of developers that are coming to
07:56us for townhome or condo developments.
08:02Now, even though those are inherently residential properties, we can enter those transactions as long as the ownership of the
08:14units stays with the developer.
08:16It's still considered commercial.
08:18And then as they finish the project, get their CFOs and start to sell the individual units, we'll give individual
08:26releases on every unit.
08:29That's the best way we can really help on the housing stock side.
08:33We also do quite a bit of multifamily projects.
08:37And the real benefits are generally lower costs than typical construction financing.
08:43So we can work with a construction lender where we bring the overall cost of capital down.
08:50PACE is also a long-term fixed rate instrument.
08:53So it provides a natural hedge to, you know, the environment that we're clearly in right now with rising interest
09:02rates.
09:03People that did PACE deals with us a couple of years ago, you know, are sitting on 6% rates,
09:09you know, in a market, you know, where prevailing rates are well into the upper single digits.
09:14You know, and some of our initial correspondence disaster relief for disaster rebuilding came up, which is something I wanted
09:25to ask you about, which is really interesting.
09:27And I think, you know, timely, we're seeing more and more, you know, more and more of a pressing need
09:36for financial instruments that are, I guess, being developed or there's definitely a gap between addressing the current reality that
09:48we are in, where you have, you know, in California.
09:50I live in Southeast Texas, and so right on the Louisiana border on the Gulf Coast, I have a, we
09:57just had a podcast that was released yesterday with Paul Gelati.
09:59He's the head of the CNBA, and he was talking about his efforts post-California wildfires and what they're doing
10:09over there with kind of reassessing what forbearance means, as opposed to like a once-in-a-lifetime or once
10:18-in-a-mortgage, a bit of relief.
10:20You know, how do you factor, you know, how does that work for people that live in parts of the
10:24United States where natural disasters are a more regular, you know, cyclical part of life and home ownership?
10:32And that's something a lot of people, like I said, in the mortgage and housing world, they're thinking about differently
10:37after we've, over the past, I don't know, like 10, 15 years, seeing these recurring wildfires, hurricanes, flooding.
10:44And I believe that, you know, PACE has a place in that conversation.
10:48Can you expand upon that and kind of make that case?
10:53Yeah, absolutely.
10:55So, you know, one of the resiliency measures specific, well, very specific to California, and then when the fires happened
11:02in Maui, Hawaii actually added it as well, is that we can apply CPACE to wildfire, both wildfire prevention, as
11:13well as to be able to come in if, you know, disaster does strike.
11:17One of the biggest issues in both the residential and commercial worlds is, you know, the borrower negotiating with insurance
11:27companies when disaster does hit them and waiting very extended periods before those insurance companies actually pay out, which puts
11:36the projects under more and more stress.
11:39We can potentially come in, work with them to stretch out, work with them, work with them to stretch out
11:45the payments to repair those properties.
11:48And then when the insurance company money comes in later, they can utilize it to, you know, pay us off,
11:54pay us down, or just for operating deficiencies.
11:57Because we are spread, our payments are spread out over such a long period of time, you know, typically in
12:04California and Hawaii as much as 30 years.
12:07Okay.
12:08And I think there's a sustainability angle to all of this, I believe, as well, right?
12:16Like, you know, energy efficiency, clean energy, carbon reduction.
12:19How do you talk about that with developers and lenders that may be a bit skeptical of anything with, I
12:27don't know, the green label attached to it?
12:31Yeah, so the, you know, the borrowers, you know, are generally very open to it.
12:36Their skepticism is generally like, okay, what do I have to do?
12:40Do I have to make real material changes to my budget to qualify for this?
12:44And, you know, ironically enough, in most cases, the borrower's budget is already going to be sufficient to allow us
12:56to apply a very substantial amount of pace.
13:01Places like California are a great example.
13:04California building codes are already so stringent in terms of, you know, green energy initiatives, carbon reductions, that, you know,
13:15anything that they're doing there already qualifies under pace.
13:20There are some other areas around the country that we might have to be a certain percentage above energy codes.
13:28And then there are the resiliency measures like hurricanes and wildfires, seismic, where the states that are most prone to
13:39that already have building standards in that are, you know, very, very high.
13:46And people are just trying to find better ways to pay for it.
13:49And pace is a great answer for that.
13:51Yeah, we kind of blew through this in the introduction, but how did you get into this world?
14:00It's a great question.
14:01I was involved in commercial mortgage lending for about 25 years.
14:08And, you know, particularly on the CMBS side, the business got very commoditized, really stripped a lot of lending of
14:18any of its creativity.
14:20And I was looking for a change where I can still use my existing skills and my current Rolodex.
14:29And I was introduced to a gentleman who started one of the first pace platforms and worked there for about
14:37three and a half years, really fell in love with the product.
14:41And, you know, after three and a half years, I just felt that there was enormous opportunity in this space.
14:48And it wasn't being taken advantage of in my former shop and decided I put my money where my mouth
14:54was and and go out and do it myself.
14:57But I'll give an old an old example of a deal that I did probably way back in 2006 before
15:06Pace was even like on anybody's mind, much less a real program.
15:12We did a forward rate lock on a large office building in Newark, New Jersey.
15:18And, you know, part of the forward rate lock is that once we were ready to actually fund the deal
15:25after nine months of being rate locked, we re-underwrite the deal to make sure that there's no negative changes.
15:33And the underwriter who was working on it for me came into my office and said, you know, not only
15:42is it not negative, but their NOI jumped one million dollars.
15:48And I was like, well, wait a second, like, how did how on earth did their NOI jump a million
15:53dollars?
15:54And he said, well, you know, so I'm still trying to figure it out.
15:56But nine hundred thousand of it was on the utilities.
15:59And he went back and double checked it twice, came back to me, said, yeah, it's it's real.
16:04It's right. And so I called up the borrower and I said, you know, you mind me telling you that
16:09telling me how how you did this?
16:12And he said, yeah, he said, I spent a million dollars.
16:16I went floor by floor into every office and every hallway and every bathroom and I installed motion sensors.
16:25Now, back in 2006, they weren't nearly as mainstream as they are now.
16:30But by putting in simple motion detectors that shut off the lights when people left for the weekend, left for
16:37the night, left for lunch.
16:39On a building, you know, which is pretty large at the time, they saved a million dollars in, you know,
16:46combined energy costs and some other maintenance.
16:49And, you know, I always look back on that, that that was like the poster child for doing a Pace
16:54deal, except long before Pace existed.
16:58Well, so for someone listening to this, that, you know, has spent their career in residential lending, let's say, and
17:06has never really thought about, you know, Pace finance before.
17:10Where would you say this intersects with their world the most or in the most obvious way?
17:18On the housing side, you know, these, a lot of what Pace has been used for on the residential side
17:25is solar panel installations.
17:29You know, I look, I just had this in my house a few weeks ago, you know, in the middle
17:33of a heat wave, my HVAC system went.
17:36You know, it's, it's, you know, it's a pretty sizable check you got to write in some cases to, you
17:43know, replace your entire HVAC system.
17:45You know, things like upgrading your lighting is, you know, those are, those are huge dollar savings that you notice
17:53in your, you know, in your bills almost immediately.
17:55Yeah. Well, so at Casting, what does your pipeline look like now at Casting really?
17:59Where are you guys seeing the, the biggest opportunity, you know, right now we were just in the, we, these,
18:08these episodes are kind of really sometimes on a bit of a delay.
18:12So I don't know exactly when this is coming out, but we're walking into, you know, 7% rates now
18:17recently with conversations into the, I mean, even extraordinary headlines, possibly 9% ceiling on rates.
18:24Right. So for, for, for you and your world, where you know, what is the next quarter, the next year
18:32look like for you guys?
18:34So we, you know, typically we see a lot of hospitality on the, on the commercial pay side.
18:42We expect to keep seeing that, you know, I think the real benefit of pace in an uncertain rate environment
18:51that we're in right now is the fact that,
18:55we're a long-term fixed rate instrument, but we do allow for some prepayment flexibility.
19:01So it creates a little bit of a, you know, hedge you win, tells you win situation for the, for
19:08the borrowers.
19:09You know, if rates stay persistently high, then, you know, they don't have to worry about replacing their debt for,
19:17for a very long time and it's fixed. It doesn't change. It's predictable.
19:22And by contrast, if you get a period of time, you know, after they finish their project where rates drop
19:29down,
19:30then they're poised to be able to, you know, execute more permanent, a more permanent capital stack
19:36so that they can enjoy that low rate environment without much resistance.
19:42Well, as you had spoken to, I don't know, a few minutes ago, you've been in the industry for, for
19:49a minute or two.
19:50So, and, and like I said, we're kind of at, at every part of the industry, everybody's really going through
19:56it.
19:56There's, you know, the, the, the way that, the, the way that I see it.
20:01And I know a lot of people do that we're, we're going through really two things at the same time.
20:07One, we're going through a fairly normal, every 10, 15, 20 years of, you know, cyclical recorrection of the market,
20:16which obviously has its extremes, right?
20:20And manifests a little bit differently from one correction to the next.
20:22It's just not all the same, but the, the reconnection is, a recorrection is, is anticipated and just the way
20:32that it manifests is different from time to time.
20:34But on top, but that's kind of happening on the surface and below that we have a, a fundamental restructuring
20:40of the, of the industry.
20:42I believe with the, the, the, the integration of AI, you have a lot of the, the M&A activity
20:49that's taking place.
20:50And a lot of things run the, the, the servicing wars and different recapturing strategies, redefining what a customer for
20:56life means.
20:57So, you know, two, two, two things happening on top of one another.
21:03And I'm curious from your perspective, not just, you know, from, from where you sit at Castle Marine, but, but
21:09just from your time in the industry,
21:11what does this market look like to you now compared to the previous cycles that you've lived through?
21:19Yeah. I mean, I think, you know, as somebody who has lived long enough to go from no computers to,
21:28you know, computers to, you know, phones in our hand that can do more than computers we're able to do,
21:36you know, you know, 20 years ago, you know, fairly easy to now we've got, you know, artificial intelligence that,
21:45you know, can process things in, you know, in a minute that used to take people probably half a day
21:52when, when computers first came out.
21:56You know, you know, I think there's, you know, to your point, there's a little bit of a push and
22:00pull, you know, everything that's going on with artificial intelligence is contributing to inflationary pressures and rising rates at the
22:11same time.
22:12And, you know, and, you know, some of this is still a promise, but some of it is very realized
22:17is it's increased efficiency dramatically.
22:22And, you know, while we might not be necessarily seeing it right away, that is going to start to have
22:28a very positive impact on the supply side of things, which should ultimately start to bring prices back down.
22:38Gotcha.
22:39You know, again, that's my, that's my closet economist, you know, view of the world.
22:43No, that's a good, that's a good answer. I appreciate your perspective. And I think that we're about it at
22:48our time.
22:48So I really appreciate you coming on and, and teaching me primarily and our audience by proxy a little bit
22:56more about what you're doing over at Castle Green and C-Pace product.
23:01Absolutely. It was a, it was a pleasure speaking to you and, you know, always happy to answer any more
23:06questions. It's something I live every day.
23:09Yes, sir. We'll be in touch.
23:10All right. Very good. Thank you.