C-PACE and NNN leases: passing the assessment through to tenants
A C-PACE assessment is billed with the property taxes, so under many net leases it can flow to tenants with the rest of the tax bill. Whether it does depends on your lease wording, not on the programme. Here is how the answer changes under gross, modified-gross and triple-net leases, how base years and expense stops interact with it, what lease language can block it, and how to talk to tenants about it.
Published 2026-10-12 · last checked 2026-10-12
C-PACE is often pitched to landlords with one line: the assessment sits on the tax bill, and your tenants pay the tax bill. Sometimes that is exactly how it works. Sometimes the lease says otherwise, and the owner finds out after closing that the assessment is theirs alone.
This guide covers how pass-through works, how the answer changes by lease type, and what to look for in the lease before you sign a C-PACE term sheet. All sources were checked on 12 October 2026. It is not legal advice: lease recovery turns on the exact words in each lease, and on the law of your state. Get your own lease counsel to read them.
Why pass-through matters: the split incentive
The problem C-PACE is meant to solve in leased buildings has a name. Hodgson Russ, in a July 2024 client alert, describes it this way: in a triple-net lease, tenants pay their own energy and utility bills, so the savings from efficiency upgrades go to the tenants, while the owner pays for the improvements without a financial return. The firm calls this “the split incentive” and says it gives owners little motivation to invest — one reason, in its view, that leased commercial properties have historically lagged other properties in energy efficiency.
The same problem shows up in other lease types. A model lease packet published by New York City’s Mayor’s Office of Long Term Planning and Sustainability (OLTPS) in May 2011 describes it for the typical modified-gross lease: owners pay the capital cost of upgrades to the base building, but tenants get the financial benefit through a lower proportionate share of base-building operating expenses.
Pass-through is how C-PACE can close that gap: if the tenant both pays the assessment and keeps the savings, the person who benefits is the person who pays.
How the assessment is billed, and what that means for NNN recovery
C-PACE is repaid through the property tax bill, not to a lender directly. Hodgson Russ puts the mechanism plainly: in triple-net leases, tenants pay their share of property taxes, the property tax bill includes the C-PACE assessment, and so tenants end up covering the cost of the assessment. The law firm Otten Johnson says the same of the Colorado programme in a March 2024 alert: C-PACE assessments are special assessments on a property owner’s tax bill, payable with real estate taxes, and “therefore, landlords may pass through the C-PACE assessments as real estate taxes under their leases.” Otten Johnson also notes that the assessment includes not just the cost of the improvements but finance closing costs, programme administration fees and interest — so what a tenant would be asked to share is the whole assessment, not just the equipment.
The CRE Finance Council’s C-PACE Primer is more cautious: “Depending on lease drafting, C-PACE payments may be a pass through or capable of recapture as a tax escalation.” That “depending on lease drafting” is the whole issue. The programme puts the charge on the tax bill. Your lease decides who ends up paying it.
One practical point on mechanics. RealData notes that when an owner passes property taxes through, the usual practice is for the owner to pay the bill and then charge the tenant the reimbursable amount — not to let the tenant pay the tax authority directly. A C-PACE assessment on the tax bill follows the same path: you pay it, then recover it under the lease. The full cost picture, including fees and interest, is covered in what C-PACE actually costs.
Gross, modified-gross and NNN: who ends up paying
Triple net. RealData describes the net-lease ladder this way: a lease that passes through property tax alone is a net lease; taxes and insurance, a net-net lease; add repairs and maintenance and it is a triple-net lease. Hodgson Russ describes a triple-net lease as one where the tenant pays, in addition to base rent, essentially all of the owner’s operating expenses, including real estate taxes, insurance, maintenance and utilities. This is the case Hodgson Russ addresses: the tenant already pays its share of property taxes, which is how the assessment reaches it — subject to the exclusions discussed below.
Modified gross. The NYC OLTPS packet notes that many modified-gross leases already allow owners to recover capital costs that produce operating savings, but that recovery is typically spread over the useful life of the improvement — which the packet says is too long to encourage owners to invest.
Gross. If a lease is gross, ask your lease counsel whether any clause lets you recover the assessment from that tenant. If none does, run the business case on the owner’s own savings, rent premiums or value — not on tenant recovery.
In a multi-tenant building, RealData notes that recoverable expenses are most commonly allocated by each tenant’s pro-rata share of rentable square footage. If your leases differ, model recovery lease by lease.
Lease language that can block pass-through
Hodgson Russ flags the most direct problem: lease agreements “may explicitly exclude ‘PACE assessments’ from the definitions of ‘Taxes’ or ‘Operating Expenses.’” The firm says these exclusions “create financial ambiguities, which may lead to potential conflict.” If any of your leases contain that carve-out, assume recovery from that tenant is in doubt until your lease counsel says otherwise.
Read the definitions of Taxes and Operating Expenses in every lease, and the exclusions that follow them, before you rely on tenant recovery in a C-PACE business case. Otten Johnson’s alert is also a reminder that leases treat capital costs differently from day-to-day expenses: it notes that operating expenses that can be passed through typically do not include capital repairs and improvements, other than those (1) required to conform to applicable laws or (2) incurred with the intent to reduce operating expenses, and that such costs are amortised over a specific period with interest. The firm makes that point about retrofit costs generally; for C-PACE it says the assessment may be passed through as real estate taxes.
Do not treat any of this as settled law in your state. Your lease counsel should read your leases against your state’s law.
Base years and expense stops
A lease may pass through only part of an expense rather than the whole bill. RealData explains two ways this is done. Under a fixed expense stop, the tenant pays the excess over a set amount: in its example, with property taxes of $12,000 and a $4,000 stop, the tenant pays $8,000. Under a base-year expense stop, the landlord pays the full recoverable expenses for the first year and the tenant pays any increase over that base in later years.
For C-PACE, that makes timing a question to put to your lease counsel, lease by lease: when does the first assessment payment land on the tax bill, relative to each tenant’s base year, expense stop and renewal date? Our own view, not a source’s: how much of the assessment reaches each tenant can turn on these mechanics, so map it before you sign a term sheet.
Talking to tenants: sharing the savings
Hodgson Russ warns that tenants may not know they are paying the assessment through their tax share, and if the savings are delayed they may feel “blindsided” by the charges. Its point is that C-PACE fixes the split incentive only if the lease is transparent and tenants understand the cost and benefit.
The firm also makes the case to tenants: most C-PACE programmes require energy-efficiency improvements to have a savings-to-investment ratio greater than one, so tenants should be able to cover each repayment from lower energy bills and have money left over. That is the firm’s general statement, not a promise for your building — projected savings are only projections.
One model for sharing savings explicitly comes from the NYC OLTPS packet. It is model lease language for energy-efficiency capital improvements in modified-gross leases, not a C-PACE clause, but its logic carries over. Under it, the owner may include in operating expenses an amount equal to 80% of projected annual savings, as estimated by an independent engineer, so the cost is fully recovered over 125% of the simple payback period. The tenant keeps the other 20% of projected savings as a buffer against underperformance. The packet says the first lease based on this language was signed on 5 April 2011, between Silverstein Properties and WilmerHale for a floor of 7 World Trade Center.
Otten Johnson describes a different approach: some landlords pay for the improvement themselves and charge tenants for the cost savings, and the firm says that needs explicit language in the lease.
Whatever structure you use, tell tenants before closing what is going on the tax bill, what it pays for and what savings the engineer projects. A tenant who learns about the assessment from a reconciliation statement is a tenant who calls a lawyer.
The honest answer
If your leases are gross, carve PACE assessments out of Taxes, or leave you unsure how a base year will treat the assessment, do not count on tenant pass-through to make C-PACE look free. C-PACE may still make sense on its own numbers — so run them without tenant recovery too. Whether the assessment counts as debt is covered in Is C-PACE a loan?, and programme availability by state is on the C-PACE overview.
If you want a second read on whether your rent roll supports recovery before you commit to a term sheet, talk to us. We will tell you if the numbers only work on an assumption your leases do not support.
Questions people actually ask
Can a landlord pass a C-PACE assessment through to tenants under a triple-net lease?
It depends on the lease wording. Hodgson Russ wrote in July 2024 that because the C-PACE assessment is included in the property tax bill, triple-net tenants who pay their share of property taxes end up covering it — but that lease agreements may explicitly exclude PACE assessments from the definitions of Taxes or Operating Expenses. The CRE Finance Council's C-PACE Primer says that, depending on lease drafting, C-PACE payments may be a pass through or capable of recapture as a tax escalation. Have lease counsel read your specific leases.
Does C-PACE solve the split incentive between landlord and tenant?
It can, where the lease lets the assessment pass through. Hodgson Russ (July 2024) describes the split incentive as owners paying for efficiency upgrades while net-lease tenants, who pay their own utility bills, receive the savings, and says C-PACE addresses it because the assessment is billed with property taxes that triple-net tenants already pay. The firm adds that the effect depends on how transparent the lease terms are and on tenants understanding the costs and benefits.
What lease language can stop a C-PACE assessment from being passed through?
The clearest problem is a definition that carves PACE assessments out. Hodgson Russ (July 2024) warns that lease agreements may explicitly exclude 'PACE assessments' from the definitions of 'Taxes' or 'Operating Expenses', and says such exclusions create financial ambiguities that may lead to conflict. Under a base-year expense stop, the tenant pays only increases over the first-year base, so how the base year is set also matters. Read the Taxes, Operating Expenses, exclusions and capital-improvement clauses of every lease before you assume recovery.
Is the NYC energy-aligned lease a C-PACE lease clause?
No. The NYC Mayor's Office of Long Term Planning and Sustainability published its model energy-aligned lease language in 2011 for capital improvements that improve energy efficiency in modified-gross leases; it is not written for C-PACE. Under it, the owner may include costs equal to 80% of projected annual savings in operating expenses, so the cost is recovered over 125% of the simple payback period. It is a useful model for sharing savings, not a C-PACE pass-through clause.