$1)$ Can Property Assessed Clean Energy $($PACE$)$ financing, which can advance debt proceeds up to $90\%$ LTC $/$ LTV as a supplement to a first mortgage, at a non$-$recourse, fixed$-$rate, long$-$term, prepayable price of $20$ yr UST$+350-375$ bps per annum, act as a substitute for mezzanine debt $($which typically prices between $12-15\%)?$

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a$)$ No$,$ PACE is a tax assessment, so it is technically more secure in lien priority than mezzanine debt, which is secured via UCC Lien to the equity interest in a property. Because it is a different security interest, it can never be a substitute for mezzanine debt.

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b$)$ Yes. Functionally so$,$ putting aside the legal mechanism that secures the debt. As long as you or your debt broker can convince a first mortgage lender to allow $/$ recognize PACE into the capital structure, any additional dollars of PACE that exceed the first mortgage are, in effect, additional leverage that precludes the need for mezzanine debt and equity, for that matter.$$ In addition, because PACE is long term, fixed rate, can have capitalized interest reserves up to five years and can only accelerate current payment defaults, not the entire indebtedness, PACE is a safer, more sponsor$-$friendly high leverage financing tool.

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c$)$ In some cases it can be a substitute for mezzanine debt, but not always. PACE only applies to energy$-$efficient upgrades or measures installed in a retrofit or when a building is built ground$-$up that meets local code.$$ However, if you buy a stabilized property and don$$t improve things like the HVAC, electrical systems, storm and flood resiliency, etc, PACE can$$t be used. Therefore, PACE isn$$t universally applicable as a substitute for mezzanine debt.

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d$)$ All of the above are basically true, in various degrees, because PACE regulations vary state$-$by$-$state and because different banks and first mortgage lenders don$$t agree on whether PACE is senior to the mortgage, pari$-$passu in terms of lien priority, or non$-$threatening because it cannot be accelerated.$$ To the extent PACE can replace mezzanine capital in the debt stack, it$$s highly accretive to levered returns on equity to a sponsor. D is the best answer.