CPACE lending, a newer form of financing that places an assessment on a hotel’s property tax bill, opens up options for hotel owners looking to make energy-efficient improvements to their properties.
REPORT FROM THE U.S.—Traditionally, owners seeking to make environmentally friendly and sustainable improvements to their hotels have had to take out a bank loan or raise the capital themselves. Now there’s another option as commercial property assessed clean energy, or CPACE, lending grows in popularity among hoteliers.
CPACE is a newer form of financing, but the foundation it grew from isn’t new at all, said Joseph Euphrat, managing director at Cleanfund. It’s basically a property assessment, he said, something that’s been in practice for more than 100 years in most U.S. states where governments sell bonds to finance infrastructure projects, such as roads and sewers.
With CPACE lending, he said, “property owners would pay an assessment on their property taxes to pay off prorate to finance those improvements.”
The assessment stays with the property and doesn’t follow the seller in transactions, he said. The property owner can prepay the assessment at any time, fully or partially.*
Eight years ago, officials in Berkeley, California, came up with the non-commercial form of PACE lending to help homeowners pay for energy-efficient improvements on their homes, Euphrat said. The city took the existing state statute on assessments and tweaked it to allow single-property owners to borrow private capital to make improvements in water and energy efficiency, he said. They pay it back through an assessment on their property tax bill.
Since then, California and many other states have passed similar legislation to open up this type of financing, he said, and PACE lending is up and running in all or parts of 15 states.
How it works
For the owner of an existing hotel who wants to make energy-efficient improvements to a property, CPACE financing is a new tool in the capital stack, Euphrat said.
“Before, capital could come from debt or equity, maybe mezzanine or cash or a combination,” he said. “This is now a complimentary tool that is available to compare and contrast to those other options.”
The types of improvements eligible for CPACE lending generally include any that would increase the efficiency of the consumption of water or energy, he said.
Greenworks Lending CEO Jessica Bailey said those improvements can come through HVAC, insulation, solar panels, windows, hurricane resiliency and water-conservation measures. CPACE can also cover the engineering cost of an audit, as well as the architectural cost of inside facade work.
“It’s a nice tool that finances a wide range of measures,” she said. “Building owners with punch-lists they’ve had for years and years can punch things off.”
The investment through CPACE financing pays for itself after two to three years, Euphrat said. While it’s an annual addition to a hotel’s property tax, the savings from reducing energy costs could exceed the assessment fairly quickly.
Having a long-term amortization schedule of 20 years allows owners to capture energy savings on their utility bill in excess of the property tax increase, Bailey said.
“We always talk to business owners about day-one payback, seeing savings right away. They can have an infinite rate of return,” she said.
Once a state passes the enabling legislation, the CPACE programs are run through city governments or nonprofits on the behalf of municipalities, Euphrat said. This process includes review of the items to be financed and facilitation of the filing of the tax assessment agreement.
There may be variations to the process based on the type of project. For example, he said, “certain programs say PACE is OK with being part of the capital stack for ground-up development; others say you need an existing structure, even if you tear down and rebuild.”
Cleanfund can finance 100% of eligible items, up to the limit of 20% of total property value, Euphrat said. As a direct lender, his company’s underwriting is property-specific, and not based on the credit of the sponsor because the security is the assessment lien on the property, he said.
“That really introduced a new dynamic to underwriting,” he said.
The interest rate can vary based on the length of the loan, Bailey said. Currently, her company offers fixed interest rates at a little more than 6% for 20 years with no money down, which is about as competitive as this loan can get, she said. Most borrowers take the 20-year loan, she said, but her company’s loan portfolio shows a weighted average of 17.9 years.
“Owners are liking the longer payment terms,” she said. “That said, we do have some owners going with measures with a shorter shelf life. For a lighting project that’s only seven years, I wouldn’t encourage a 20-year loan. I would attach it to the useful life of the equipment.”
CPACE financing will not replace lower-cost senior debt, Euphrat said. Instead, it can replace or reduce higher-cost mezzanine loans, higher-cost equity or a combination of that.
Cleanfund requires the property’s senior lender to acknowledge the new assessment, he said.
“We want to make sure they’re OK with it,” he said. “We call it lender acknowledgement. We require that prior to close.”
Bob Eisinger, principal and managing member at Promark Real Estate Services, said his company was planning a top-to-bottom renovation of its Comfort Inn Shady Grove in Gaithersburg, Maryland, which was built in 1985. He learned about CPACE lending from a sister company that has done energy refits for its buildings.
“We’ve been into renovating buildings energy-wise for a number of years,” he said. CPACE allowed owners to finance improvements without having “to mess with their first trust loan,” he said. “That was very beneficial.”
Promark wanted to use CPACE lending for the Comfort Inn as well as the neighboring office building it owned. The company decided to put between $1.5 million and $2 million into the projects, but it didn’t want to use its existing capital, Eisinger said. Both buildings had existing loans with prepayment penalties.
First, the company had to reach out to its first trust lender to explain that the CPACE lending wouldn’t affect it, Eisinger said. Once Promark received approval from its lender, it was ready to move forward on the loan with Greenworks Lending.
During the renovation, crews replaced the mechanical systems and controls in the guestrooms, automating everything, he said. They also put a sealant on the outside of the building and tightened up the air structure.
“We’ve financed many projects, many deals,” Eisinger said. “This was the first time we’ve seen one that fits so perfectly with the retrofit of environmental elements.”
The company should see return on its investment in the first year, he said, and the projection for payback is three years.
“That’s unbelievable,” he said.
*Correction, 16 October 2017: The story has been updated to remove an incorrect statement regarding a prepayment penalty.