AUSTIN, TX—Hotel owners have the ability to finance construction and renovations on their properties that offer sustainable benefits with Commercial Property Assessed Clean Energy (C-PACE) financing.
“Historically, property owners were not inclined to do energy-efficiency upgrades to their properties because they didn’t have appropriate financing and it was too costly for them to use their own equity capital,” said Mansoor Ghori, CEO, Petros PACE Finance, a firm that specializes in PACE financing. “The rates of return were not there.”
C-PACE is a relatively new financing tool for energy- and water-efficiency projects that has grown quickly in recent years. A low-cost, long-term financing product secured as a property tax assessment, it solves many problems that have historically prevented commercial building owners from investing in energy efficiency or renewable energy, such as high upfront costs, according to Ghori.
Many times, an owner or developer would go to a bank to get a three-year loan for the amount to cover energy-efficiency upgrades, but the paybacks those upgrades would provide would not be realized until 10 to 20 years later. “They are completely upside down,” said Ghori. “They weren’t going to utilize their bank loan or their own personal capital to go do these projects. What C-PACE does is allow people like us to help those property owners out now by providing financing that is equal to the weighted average useful life of those measures being put in. If the useful life of these measures is 20 years, we can do a loan for 20 years. All of a sudden, we are turning the economics upside down for these borrowers, so it becomes accretive from day one, versus being underwater throughout the process.”
He continued, “If the loan was a three-year loan, the amount of savings you would get from the items you put in place [wouldn’t] offset the amount of the cost. But if you do it over 20 years, which is the useful life of what is being put in, all of a sudden, you have now flipped it and you are positive from day one.”
C-PACE financing is regulated on the state level and implemented at the local level. “That can be the county level, that can be at the city level, or the township level. Each of those municipalities opt into this program,” he said.
No government or public money is used to finance the projects. “All of the money that is being used to finance these projects is private money,” said Ghori. “The only part of this where the government is involved is passing the bill at the state level and then allowing for the mechanism, since this is considered a property tax assessment. In some states, it is actually billed by the municipality on the normal tax bill. Other states allow lenders to bill directly. The borrower’s taxes are going to go up by the amount of the incremental assessment, but they are also getting the benefit of putting those upgrades in. The reduction in the energy costs should go down more than the costs that the property tax went up.”
The only way a local government may get involved is if there is a delinquency or a non-payment of one of these assessments. “The lenders then notify the tax authority of that particular municipality and say they did not make their payment and now this is considered a delinquent property tax,” he said. “Now the tax authority has to go about collecting as they would a normal delinquent property tax.”
The areas that C-PACE financing can cover are decided on the state level. “In some states, water conservation is part of it,” said Ghori. “In other states, there is windstorm resistance, like in Florida and California. Even though windstorm resistance doesn’t provide any energy savings, it is still a mandated upgrade by the state. In California, they have the same thing, but it is seismic. There is no energy savings, but it is a mandate because it strengthens the buildings and provides more values to those buildings.”
Each project that receives C-PACE financing is required to have an energy audit done. “That energy audit will tell you that if you do this project and you put these things in, you will save this much over what you currently have in that building right now,” he said. “There is always an energy component. The other aspect is, at the end of the project, we go back and we look at the project to make sure that all of those different pieces are put in and they are put in correctly.”
Petros recently provided C-PACE financing for $8 million with Pedersen Development Company, a Colorado-based developer, to finance energy-efficiency measures in the construction of a 13-story Hyatt House in downtown Kansas City, MO.
Pedersen will use the funds to incorporate sustainable design measures, including the efficient building envelope components of roofing, walls and windows, HVAC equipment, hot water heaters, LED lighting and elevators, in the construction of a 153-room hotel. “On this KC deal, over the 20 years of this loan to them, we are going to save more than $7 million in utilities and maintenance costs,” he said. “The carbon dioxide reduction is about 1,159 metric tons. That is good.”
Ghori said the C-PACE financing was a “perfect fit” for the project’s capital stack. “We are late in the cycle,” he said. “You have banks that are getting a little bit tighter with what they are willing to lend on a percentage of cost basis. A couple of years ago, they were lending all the way up to 80% of cost. That was a pretty large number. Now, it is down to the 60s and I have even seen some in the 50s.”
He continued, “That difference between 80% of costs and 55% of cost is now a big gap in the cap stack that property owners and developers have to find a capital source for. If they use their own equity—equity is very expensive dollars—all of a sudden, it doesn’t pencil very well for the investors in the project. They have to find another source. Well, what are the other sources? Well, there is mezzanine financing, which is typically two times as expensive as PACE financing.”
The other type is EB5 money. “EB5 has become much more difficult because of the political environment that we are in right now and the issues we are having with China,” he said. “Some of that has dried up. As these developers are looking at the cap stacks and finding out that there is a big gap to fill, C-PACE is a perfect fit for that cap stack.” HB