Owners and developers face a never-ending challenge of building or retrofitting properties to the greenest, most environmentally friendly standards when costs and financing often lead to “value engineering” to make things pencil. But an innovative, low-cost financing tool is gaining popularity for hotel properties. Called Commercial Property Assessed Clean Energy (C-PACE), this multi-billion-dollar sector of finance is already in use on hundreds of hospitality/mixed-use properties from Washington, D.C. to Washington state.
What is C-PACE?
Available in 37 states and growing, C-PACE is a low-cost, long-term financing vehicle that makes investing in energy efficiency, water efficiency, renewable energy, and resiliency projects more affordable for commercial property owners and developers—particularly in hotels/hospitality.
Kunal Mody, President and CEO of Blueprint Hospitality in Chicago has become a serial C-PACE user. “We utilize C-PACE wherever it makes sense because it’s cheaper than other debt and is a way to move out some of your more expensive debt and equity from a typical capital-stack arrangement,” said Mody to an audience of the Urban Land Institute Fall Meeting last year.
Mody said interest rates on C-PACE loans have run between 4.5 and 6.5 percent while his deals have been getting bigger for the hotels he owns. And while C-PACE is typically “a bit more complicated,” he said its upside benefits and flexibility have made it a first-choice option.
Key advantages of C-PACE over traditional financing are wide-ranging:
- Replace higher cost mezzanine and equity capital;
- Secure fixed-rate financing typically 20 to 30 years;
- Increase net operating income and property value;
- Recover as an operating expense;
- Quickly generates positive cash flow;
- Utilizes fully amortizing and nonaccelerating capital;
- Finances eligible project hard and soft costs with no out-of-pocket expenses;
- Transfers the payment obligation upon sale; and
- Lowers utility and maintenance costs.
How C-PACE is Structured, & What Systems are Eligible
C-PACE is not a traditional loan but is a financing repaid through a voluntary assessment on the property tax bill, similar to sewer and water bills. It can be used to finance new construction, building retrofits and gut rehabilitations with no upfront costs.
Many common energy and water efficiency upgrades along with renewable and resiliency measures qualify for C-PACE financing. In fact, most new buildings are already designed to meet minimum C-PACE requirements, which frequently don’t exceed the efficiency standards found in today’s building codes.
Some of the commonly eligible improvements include:
- Solar power systems;
- LED lighting and electrical systems;
- Building envelope and fenestration;
- HVAC and associated mechanical systems;
- Water resource-improvements such as low-flow plumbing; and
- Seismic improvements, in several states.
A $9.9 million C-PACE financing was put to work for the 261-key Marriott Syracuse Downtown. Improvements included building envelope, plumbing, HVAC, lighting, and electrical systems. The project also utilized an increasingly popular feature of C-PACE: Reach-back finance. It was able to apply C-PACE retroactively for previously installed eﬃciency measures, freeing up cash ﬂow for additional renovations to expand the property. Many states enable using C-PACE retroactively to three years.
A green-finance alternative like C-PACE provides a significant boost to owner/operators and to the planet, according to C-PACE provider Petros Pace. Said CEO Mansoor Ghori, “C-PACE is a more efficient way to capitalize energy and resiliency improvements while also aligning with broader energy efficiency and carbon reduction goals.”
About the Author:
Ron Heckmann has been helping companies in commercial real estate, finance and design communicate with and influence their constituents for more than 25 years. His image programs and campaigns are driven by a belief that every company has an interesting story and a competitive differentiation—they just need help defining it, making it compelling and infusing it into the marketplace. Go to www.heckmanncomms.com.