Commercial-Property Assessed Clean Energy (C-PACE) financing is one of several very useful tools for providing liquidity or securing financing for hospitality assets, especially in the face of difficult conditions presented to the hotel industry, and market, over the past three years.
Contributed by Matt Raptosh, managing director, Berkadia Hotels & Hospitality
C-PACE is a financing vehicle adopted and approved in 38 states plus the District of Columbia by which developers of commercial real estate can secure attractive financing investments for improvements made to a property that provides a sustainable or “green-energy” benefit. The project is qualified by a standard energy audit and then funds are provided for sponsorship based on regulations and rules unique to each state. This debt instrument acts as a tax lien, and servicing payments are made at the property tax level. If a developer can do 30% to 40% of the capital stack at C-PACE, at what’s likely a really attractive rate, it can bring the overall rate down significantly.
C-PACE providers have even helped push C-PACE approval legislation at the state level. Pairing the providers with the right client is where the magic lies. The win-win of it all, is the developers who are able to incorporate energy efficiencies are also able to benefit from lower interest rates.
Berkadia Hotels & Hospitality has been extremely active in placing C-PACE, especially within construction deals over the past three years, as traditional debt markets have become unstable in terms of pricing, proceeds and availability of capital.
C-PACE may be non-recourse, with self-amortizing terms of 25 to 30 years. It features fixed interest rates at more attractive pricing than current senior mortgage rates. C-PACE loans are also fully assumable and transferable, and they cannot accelerate a foreclosure. Blending C-PACE with consenting senior mortgage providers can create structured products that secure liquidity, offset recourse risk and offer a more attractive, blended cost of capital.
Depending on the state, C-PACE can also be used retroactively to look back at qualifying improvements made to a project and then provide the same financing. Most states feature a two- to three-year lookback from the date a property received its Certificate of Occupancy, allowing developers to reduce the new debt needed to take out their construction financing. In the right situations, C-PACE liquidity can be secured despite challenges posed initially by the pandemic and now by the potential recession.
C-PACE has proven to be a very useful tool for development deals and distressed projects, and it can be paired with senior mortgages, mezzanine debt, other government lending products, and more.
Additionally, C-PACE continues to pick up momentum; new states are exploring adopting C-PACE legislation, and existing states are continually improving their programs to make this financing even more potent and sponsor– friendly.
An example of C-PACE financing success was the gut redevelopment of the Breakers Hotel & Spa in Long Beach, California, after the COVID-19 pandemic had interrupted the availability of construction financing for this future Fairmont hotel. A C-PACE loan was paired with a senior mortgage to finance 100% of total project costs, inclusive of work already completed. Because the two sources of C-PACE and senior debt were nearly identical in size, the sponsor enjoyed a well-priced blended cost of capital.
In summary, C-PACE has proven to be an advantageous product for hotel development, but it is just one of several. In tougher markets like today’s, sponsors should arm themselves with an array of both conventional and less mainstream executions.