As the availability of new-construction financing continues to tighten, an increasing number of hotel owners and developers are turning to commercial property assessed clean energy loans.
Also known as C-PACE loans, these fixed-rate loans targeted at adding sustainable elements in building design and construction have become a lifeline for many hoteliers trying to get a deal done. More state and local governments are enacting legislation to allow C-PACE lending, and many different lender types are exploring the space now, further opening up lending opportunities.
The growth in popularity of C-PACE lending opened the opportunity for Petros PACE Financing to make the largest C-PACE deal to date, a $153 million loan as part of the $820 million Black Desert Resort Project in Utah. The loan will be used for different energy-efficient and resiliency elements in the resort’s design, including LED lighting, low-voltage wiring, the heating, ventilation and air conditioning systems and seismic strengthening.
Petros has closed on many C-PACE loans with an average deal size of about $25 million, Petros CEO Mansoor Ghori said. It’s worked with multifamily, industrial and office developers, and hospitality represents about 35% of its business, making it the largest segment.
“It's an area where we have a lot of experience doing these kinds of transactions, and it seems to be a very good fit for hospitality property owners because, as you know, finding money for hotels in this kind of environment it is not the easiest thing,” he said.
A few years ago, many owners and developers weren’t familiar with C-PACE lending, but now it’s become a tried-and-true mechanism for them to help finance deals, Ghori said. Though there’s the potential for at least some kind of slowdown for a few months as markets stabilize, next year should be a big year for C-PACE lending.
Overall, he said the C-PACE market could reach $3 billion to $4 billion in size, something of which he expects his company could capture a significant portion.
Growing Availability
Over the past 10 years, C-PACE lending has had to work through two main obstacles, said Jim Butler, founding partner and chairman of the Global Hospitality Group at Jeffer Mangels Butler & Mitchell. The first is that each state’s government had to pass legislation to enable it as a source of financing. Though not government-funded, C-PACE programs need the legislation to create liens on property to pay back the loans through property taxes.
Currently, there are 37 states with the legislation passed with several more in the works, Butler said.
The second problem is that C-PACE loans must also take the senior position in the capital stack, requiring senior lenders to agree to subordination, he said. That has been an issue over the years, but as C-PACE loans have proven themselves over time, more senior lenders, including recently Bank of America, have become more comfortable with the practice.
Another factor at play is that providers of C-PACE loans are providing more capital across the entire stack, Butler said. Though still in the early stages, there are C-PACE lenders offering mortgages and mezzanine loans. Some are other types of lenders who are entering the C-PACE space.
C-PACE will be an important player providing new sources of capital for developers with new-construction projects for hotels and other types of real estate, he said. It’s come a long way from its start, he added.
“This year, it really reached a point where virtually every developer will be considering C-PACE,” Butler said. “They will not all use it, but they will consider it and they will evaluate it. It’s become something everyone is looking at. C-PACE is going through a major transformation right now.”
Attractive Source of Funding
So far this month, Stonehill’s C-PACE division has closed on about $35 million in loans for hotel projects, said Jared Schlosser, senior vice president and head of Stonehill PACE. It’s on track to close on another $10 million to $15 million by the end of the month.
Stonehill PACE closed last week on its first C-PACE loan for a non-hotel property in the state of Washington, where C-PACE lending wasn’t available 12 months ago, he said. States such as Tennessee, New Jersey and Hawaii have passed new legislation, opening up new markets of demand because developers there previously didn’t have access.
C-PACE continues to be heavily in demand because it’s a fixed-rate product, he said. For construction projects, it’s difficult to move forward without C-PACE unless the developers put in a great deal of equity. Interest rates continue to widen as the Federal Reserve raises rates to quell inflation, making the cost of capital a challenge for hotel developers.
“Any level of PACE being a fixed-rate product in today’s environment is going to lower the overall cost of capital when you look at it comparatively to [mezzanine], equity or even in a lot of senior loans,” he said. “That’s ultimately going to help more projects pencil.”
At the moment, any liquidity for hotels is good liquidity, especially if it’s at a fixed rate, Schlosser said.
“The ability to get fixed-rate financing and reduce your cost of capital, whether you’re building a construction project or doing a renovation, is huge in today’s rising interest rate environment,” he said.
The use of C-PACE loans was growing at a nominal rate before the pandemic, but it greatly accelerated during the pandemic as capital markets froze, Ghori said. Developers had to find alternative sources of capital to fund their projects, and that growth in awareness and understanding during the pandemic has led to greater adoption since.
When it started out, people didn’t really understand what it was or how to use it, he said. The number of C-PACE loans grows every day as developers learn more about it.
“It is now a normal part of the capital stack versus a couple years ago,” Ghori said.
Developers in the hospitality space have been the most open to using C-PACE because of how well it fits into their projects, he said. They work on large projects and can charge a premium for more energy-efficient properties. Plus, their capital stack is typically more difficult to fill compared to other real estate classes.
For senior lenders, having a C-PACE loan become part of the capital stack works in their favor as well, Schlosser said. When looking at the last dollar exposure for a senior lender, if they can reduce their loan amount and have the capital stack structured for C-PACE, that benefits them.
If a senior lender typically loans at 65% loan to value but can introduce C-PACE for 25% of the stack, it has become a 40% lender, lessening its capital risk, he said.
“I’ve gotten to the LTV that I wanted to get to as opposed to just lending the full 65%,” he said. “When you look at the deals that we’re closing, that’s a lot of the makeup right now, what senior lenders are utilizing PACE for.”