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C-PACE stands for Commercial Property Assessed Clean Energy. Perhaps apparent from the title, it is a financial instrument that emphasizes long-term loans for energy-efficiency components of commercial building projects such as hotels. For many reasons, C-PACE is growing in popularity each year.

“The origin of PACE is that it started back in the early 2010s as a way to incentivize owners to upgrade older buildings and make them more energy efficient. It has since grown to be a fairly large financing source in the market,” said Jared Schlosser, head of credit organizations and commercial PACE with Peachtree Group.

“There are certain line items that are PACE-eligible that can be found in any hotel you’re building or renovating. Those can qualify for long term fixed rate financing on top of the capital stack,” Schlosser added. “The easiest way to explain it is it is for anything besides FF&E.”

How C-PACE Financing Differs from Traditional Capital

Though C-PACE is supported by the U.S. Department of Energy, it is not technically a federal program; each state that participates implements its own rules. Still, there are some shared core metrics across the board. First, the eligible use must be for upgrades that reduce energy or water consumption.

“The things we can finance are anything that has an energy usage or savings effect that is affixed to the building,” said Jason Clouet, senior VP at Petros PACE Finance. “It comes down to electrical systems, like lights, sconces, chandeliers, HVAC, mechanical systems, elevator systems, water, in most markets, and water usage and transportation systems. Then it gets into things that are energy savings—exterior windows, insulation, front doors and roof are 100 percent PACE-eligible.”

C-PACE repayments are structured as a special tax assessment, showing up as part of the property tax bill once or twice a year versus a traditional debt service paid monthly via a lender. This is advantageous due to the seasonality of the hotel business, said Clouet, with revenue periods fluctuating; this enables hoteliers to put money in reserve to ensure availability.

For hotels specifically, Ryan Bosch, principal with Arriba Capital, said that as C-PACE financing is tied to U.S. Treasury rates, the loans are cheaper than private capital, so it “really shines” for ground-up projects. He added that PACE financing has become more relevant to hotels because traditional bank lending has become harder to obtain and has become more expensive in the years after COVID. The hospitality industry was hit hard, so banks became more cautious about making hotel loans. That trend got even worse after the collapse of Silicon Valley Bank, which made lenders more risk-averse overall. “With the higher cost of capital and private credit, people looked at C-PACE as an alternative to blend into the capital stack to bring down the cost of capital.”

Another difference is that the financing is tied to the property, and not the owner, so it can stay in place if ownership is transferred.

Significantly, C-PACE provides long-term, fixed rate financing and the rates, said Schlosser, are in the high 6s to mid 7s. In most markets, Clouet added, these are 25–30-year terms. “It is an annual or bi-annual payment, not like a typical mortgage like you’d pay monthly. There is a special assessment to the property taxes; payment will show up in a property tax bill,” Clouet said.

 

Peachtree Group closed a $176.5 million retroactive CPACE loan for Dreamscape Companies’ recently renovated 2,520-room Rio Hotel & Casino in Las Vegas. (Peachtree Group)

How Hotels Know if They Qualify

Eligibility for C-PACE financing is based on a number of factors. As mentioned, the primary purpose is to finance energy efficient components of commercial property.

One important distinction, Clouet said, is not to confuse C-PACE financing for LEED certification financing. “PACE doesn’t have the qualifications from a green perspective like LEED. As long as you’re meeting current local code and putting in equipment that meets that code, it is going to qualify for PACE; that is the biggest misconception,” Clouet noted.

Schlosser echoed that, noting that it’s usually applied when building to code. “If you’re building a new build, you’re automatically going to qualify for PACE. If you’re renovating it, you’re usually renovating it to a higher code today, which will qualify as renovations with PACE.”

Another misconception is that the loan process is one managed by the government or that it will take months and months to process, a myth that Schlosser debunked.

PACE is applicable to any type of hotel and can be used not just for new construction but for the life cycle of the hotel: renovations, retrofits, rehabs, etc. Clouet said that PACE can be retroactive, three years from when the last improvement was put into place, so it is very useful for major renovations. However, Schlosser said PACE is more common when you’re building a hotel versus buying a hotel, but you can definitely look into this type of capital when you’re redoing the elevators and things like HVAC and plumbing, for example.

Hotel assets from boutiques to independents to brands are taking advantage of PACE. The most important factor is whether the hotel will be built in a state in which PACE is available.

The first step is to consult with an expert in this type of capital, and they will walk you through all of the necessary steps. For example, Clouet said, a firm like his handles everything from the required reported to the energy audit and even filling out the application.

Schlossberg echoed the idea of talking to a professional, advising to break down your capital stack needs and talking to industry insiders.

For a hotel owner considering PACE for the first time, Bosch has this piece of advice: “If you haven’t utilized it before and are not familiar with, really dig in and understand the nitty gritty of the structure and the detail of it. The biggest thing is not every lender will allow you to have C-PACE in the capital stack. Make sure you have conversations with the other components of the capital stack, the senior lender on the deal, early and up front, making sure they’re comfortable having C-PACE in. It’s a complex, structured product.”

Relevance to Hospitality/C-PACE’s Future Role

Currently, PACE is available in over 40 states, a big leap from even five or seven years ago, and more states are considering making this tool available.

It is not appropriate for all situations, though, particularly if you are in a situation when you have affordable senior bank financing and do not need extra leverage or when private credit would otherwise be too expensive, Bosch noted.

PACE financing has become more relevant to hotels in recent years because hotels tend to have many elements of the building that qualify for PACE, making it a beneficial and cost-effective tool in its capital stack, Clouet pointed out. It is also growing in acceptance by senior lenders.

Most experts believe that PACE will eventually become a common instrument in hotel capital planning. “I think it will become a much more standardized tool in the toolbox for anyone looking to finance and will become much more mainstream. In general, it will be more flexible and useful for owners to use in every type of hotel asset,” said Clouet.

Schlosser agreed, noting, “I think it is going to be a mainstay moving forward. It is more mainstream than it has ever been and it will continue to be this way, particularly in the hospitality side. Traditionally, hospitality is more liquid from a financing standpoint, so you need more creative financing tools.” He added that his company has closed an increasing number of PACE loans in recent years.

Clouet said one evolution of C-PACE will be that banks are becoming more accepting of it. Also, historically, C-PACE was used for smaller projects, but now it is being applied to larger deals encompassing institutional spaces. He predicts it will grow 10-30 billion annually due to this broader acceptance.

This article was originally published in the February/March edition of Hotel Management magazine. Subscribe here.