Although LHA is not a financial advisor, after working with some of our clients who have obtained C-PACE funding, we wanted to share some information about these loans as, from what we’ve found, it can be a viable financing solution for hotel developers and investors.
(Plus, I enjoy reading about the latest financing trends in my spare time… no I’m not joking and yes I have other hobbies)
Having gained popularity over the last couple of years, C-PACE represents an interesting financing option for hotel developers and investors looking for low-cost, long-term funding for energy efficient and renewable energy projects.
First, the basics
But before we dive into how these loans work, let’s first look at the basics…
Commercial-Property Assessed Clean Energy (C-PACE) financing originated as a local program in Berkeley, California in 2008 and has since gained traction across the country. C-PACE programs are adopted at the state level, and there are currently 39 states that have passed PACE legislation.
C-PACE is a public-private funding program that allows owners/developers to access fixed-rate, low-cost and long-term financing to fund sustainability measures.
PACE is similar to real estate property taxes in that it’s secured and repaid by a special assessment attached to the property. C-PACE is non-recourse, non-accelerating, can be prepaid at any time, and the loan can be transferred upon resale.
How can C-PACE financing be used?
The economic environment combined with the pullback in bank lending has shifted the market towards private capital and has increased interest in C-PACE, especially for hotel developers involved in sustainable, environmentally-conscious projects.
Commercial property owners can use C-PACE loans for a wide array of qualifying improvements, which vary from state to state. Broadly speaking, C-PACE can be used to finance new construction, gut rehab, retrofit properties, and to retroactively finance projects that are ongoing or have already been completed. More specifically, eligible improvements include things like HVAC upgrades, water conservation, high efficiency lighting, seismic retrofitting, roof replacements, and other environmentally-friendly measures that vary by state.
A few other helpful notes about C-PACE:
• Acts as hybrid equity
• Originated at a fraction of the cost of mezzanine debt and/or equity
• Structured as a tax payment and can be passed through as an operating expense on net leases
• Generally contributes 20-30% of a property’s value or project cost
• Rates are typically around 7% and funds 100% of the hard and soft costs for eligible improvements on a property
• Can reduce expensive senior debt and eliminate mezzanine debt from your capital stack
• In this market, C-PACE is commonly being used to bring down the WACC
Retroactive C-PACE funding, on the other hand, works much the same as normal pre-project funding, but one of the main differences is that 100% of the loan proceeds go directly to reimbursing the property owner for costs already spent. This is extremely beneficial for hotel owners involved in resort and residences development projects, who can sometimes face cash flow issues after the development of the residences portion of the project.
Retroactive PACE loans allow owners to inject liquidity in the property to improve cash flow, set aside reserves, or recapitalize equity.
Requirements for C-PACE
Generally speaking, these are the basic requirements for PACE financing:
• No liens or unpaid property taxes
• The project will help save more money than the cost of the loan
• The value of the project should last longer than the loan term (10-30 years)
Due to the current lending environment, the market for C-PACE financing has seen several milestones this year – a record number of transactions, the first-ever dedicated fund (by Nuveen Green Capital [tag]), and several deals that topped $100 million. Just from 2021 to 2022, for example, C-PACE loan closings increased by 16%. A key driver of this growth is the ability to access significantly lower cost of capital for a part of the capital stack during a time of extreme dislocation of capital markets. Currently, non-bank lenders, private debt funds and investment managers dominate the space.
C-PACE momentum is expected to continue as additional states enact or expand PACE-enabling legislation to address climate and resiliency initiatives.
With our Principals bringing 100+ years of combined experience in the luxury hospitality space, Luxury Hotel Advisors works with our clients to uncover the best course of action for their hotel investments and/or developments. Reach out directly to get in touch about your hospitality project – we look forward to hearing from you.
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