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Why the Hospitality Industry Should Be Embracing PACE

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Hugh A. Smith

In January 2014, Jonathan Pickering wrote in this column about Property Assessed Clean Energy, or PACE, as a way for hotels and resorts (and other commercial and, in some cases, residential properties) to obtain innovative financing. Unfortunately, it does not appear that the hospitality industry in general has been (excuse the pun) keeping PACE with the program. PACE is now enabled in 31 states and the District of Columbia, and provides for the financing of energy efficiency improvements, water conservation projects, renewable energy installations and upgrades, and—in Florida, where we live, work, and play—for wind resistance projects (i.e., hurricane hardening).

Lawrence (Larry) Clark

What makes PACE unique is that the financing is provided by a local governmental authority—with the funds generally coming from private lenders—and is repaid on the annual property tax bill, which serves as the security and repayment mechanism, as a non-ad valorem assessment. Truly a public-private partnership, the program can finance 100 percent of the qualifying improvements with a repayment term of up to 20 years. Although generally intended for the improvement of existing buildings, it can be used to finance a portion of a major renovation/addition to an existing hotel. And, if funds are not available in the replacement reserves (formerly known as furniture, fixtures, and equipment, or FF&E), PACE funded projects can be used to extend the useful life of the physical plant and decrease energy and water consumption. Perhaps most importantly, from a marketing and PR perspective, these improvements also lead to higher levels of guest comfort and satisfaction.

PACE financing is repaid as a property tax, with the loan tied to the building and not the owner. It is essentially off-book financing for the owner, with no requirement for personal guarantees or evidence of individual credit worthiness. So it fits well into the common goals of both owners and asset managers: to preserve and enhance the value of the property. As we all know, the condition of the physical assets and utility efficiency are some of the greatest contributors to increased asset value. In Florida, where wind resistance projects can qualify for PACE financing, wind mitigation often results in substantial insurance premium reductions. PACE projects can also provide improvements that contribute to green building certifications, such as LEED and Green Globes. Of course, in order to use PACE, the property cannot have delinquent taxes or mortgage payments. The advantages to the owner are clear and the benefit to the local government is that property values rise, local business revenue increases, and the governmental entity generally has no liability or expense in the process.

Requirements Vary by State

There are varying requirements, by PACE-enabled states and by the individual programs within each of those states, which will determine a project’s eligibility. For example, here in Florida we have PACE programs that employ both lender notification and lender approval models. In the lender notification model, the mortgage holder (if any) is simply notified that the loan is being executed and, because it’s secured by a property tax lien, it automatically is senior to the mortgage lien. In the lender consent model, the lender must sign an estoppel and consent, agreeing to the levy of the PACE assessment and creation of the PACE assessment lien and agreeing that accepting the PACE financing will not constitute an event of default or trigger the exercise of any remedies under the owner’s mortgage loan.

Most or all of the programs will require sufficient equity in the property to cover the project costs and the property must be clear of construction, judgment, or tax liens. Although the owner does not generally have to provide proof of creditworthiness or sign a personal guarantee, the property cannot be part of a bankruptcy filing. There is also going to be a test to determine if the contemplated improvements qualify for PACE financing. Criteria can include such factors as specific energy reduction targets; a simple payback period, based on avoided energy spending, of less than the life of the improvement; and assurance that the improvement constitutes a permanent installation to the property.

Two California Examples

As of this writing, the two largest projects accomplished under PACE were hotels in Southern California: the Hilton Los Angeles-Universal City ($7 million) and the New Constance Hotel ($6.8 million), in Pasadena. The Hilton, a nearly half-million square foot, 23-story, 30-year old building, recognized that it must upgrade in order to stay competitive in its market. The project consisted of HVAC, lighting, water conservation, and building envelope improvements. These improvements included replacing HVAC fan motors in all of the guestrooms, new 450-ton chillers and HVAC controls, and LED lighting retrofit, window tinting, replacing showerheads, washers and dryers, and installation of electric vehicle charging stations. PACE financing in the amount of $7 million with 20-year repayment terms was provided. The ROI on the project was 78 percent and the value of the property was increased more than $30 million. The New Constance was a major renovation of a landmark hotel built in 1926. PACE-financed improvements to that property were similar to those for the Hilton—HVAC, lighting, plumbing fixtures, and controls—and constituted approximately 10 percent of the total project cost.

The bottom line is that hotels need to keep PACE with this opportunity!

Lawrence (Larry) Clark, QCxP, GGP, LEED AP+, is Principal, Sustainable Performance Solutions, and Hugh A. Smith, CHA, GGP, LEED GA, is Hospitality/Institutional Specialist, Sustainable Performance Solutions.

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