Sponsored: C-PACE gives hospitality investors options in today’s tight credit market

Hospitality investors need every capitalization tool at their disposal to get deals done in today’s constrained lending environment. For many smart developers, help has arrived in the form of Commercial Property Assessed Clean Energy (C-PACE) lending, which provides real estate developers and property owners with an innovative tool to finance renovations, conversions or new construction.

C-PACE financing allows commercial property owners to obtain low-cost, long-term financing for energy efficiency and renewable energy upgrades to commercial buildings. The borrowed capital is repaid as a surcharge on the project’s property taxes for up to 30 years.

“C-PACE allows lenders to issue loans on certain line items and get repaid through property taxes,” said Jared Schlosser, head of originations at Stonehill, a lender specializing in this form of financing. “Currently, this program has been approved in 37 states, but since it is essentially a legislative product, some elements differ from state to state, and those differences can impact both the lending and borrowing sides of the equation.”

Schlosser explained that the terms for these private loans are typically 20 to 30 years, fixed rate and non-recourse. “If a C-PACE loan is in your capital stack, given that it's 7.5% to 8.5% fixed, it will lower your cost of capital significantly in today's environment and provide a good source of liquidity, replacing more expensive financing sources.”

Getting deals done

Developers have taken notice. This year Stonehill’s C-PACE group has closed or is under contract with approximately $225 million in C-PACE financing across 23 transactions that span most real estate sectors, including hotels, multifamily, industrial and mixed-use. In addition, the C-PACE group expects to deploy up to $400 million in 2023 for renewable energy and energy-efficient components and seismic retrofitting. This fast-track growth builds on continued momentum, with 65 deal closings in the last four years.

He credited the aggressive uptick in C-PACE volume since 2018-2019 to increased buy-in from the lending community.  “A lot of different senior lenders have consented. Generally, this group doesn’t want to be the first one to do anything. So, the more lenders that consent to C-PACE, the greater the adoption, which will lead to more deals and more acceptance,” he said.

Jared Schlosser

Schlosser explained that the impetus for the launch of Stonehill’s C-PACE group evolved from its effort to find ways to reduce the cost of capital on the company’s construction lending side. Stonehill started offering the product to marry up with its construction loans and make it more cost effective for borrowers.  Identifying broader demand, the group saw opportunities to offer its expertise externally and work with other lenders, fueling higher volume and a larger growth engine.

“It works well for ground-up construction in today's environment, and it works really well for refinancing a project that's been built in the last 36 month,” Schlosser said. “This is 7.5% to 8% money and most of the states now allow for retroactive C-PACE. The borrower’s ability to get a portion of stacked refinance through retroactive C-PACE in addition to refinance proceeds might be the best way to refinance a project now.”

Mastering the process

The advantages of C-PACE funding are numerous. It’s a non-recourse guarantee that's fully assumable, with a fixed rate, which is a plus in this volatile rate environment. It's also a static payment, which is important for underwriting.  The challenges are primarily how the other parts of the capital stack play along, according to Schlosser.

“Not every bank, construction lender, mezzanine lender or preferred equity lender is going to consent to C-PACE,” Schlosser cautioned. “You've got to be aware of how the other players you're putting out in that capital stack will interact.”

Those concerns aside, the process is otherwise straightforward. After determining whether the state the project is being done in allows C-PACE lending, the developer submits a budget and summary of their project to Stonehill. Schlosser’s team reviews that application, then informs them of how much C-PACE funding they qualify for and provides help with sourcing the remainder of the capital stack.

Terms vary state by state, but generally developers can qualify for 30% to 35% of cost. The loan is fully funded at close and drawn into the deal as line items that are collateralized or invoiced into the project, and then paid back through property taxes. Stonehill generally capitalizes from two to three years of interest and then starts repayment after there’s a certificate of occupancy or some level of cash flow at the hotel.

Optimizing the underwriting essentials

“Once you have that figured out, it's a very attractive part. It all comes down to borrower strength; this is a pure underwriting solution,” Schlosser said. “If your borrower’s strong and they have a strong business plan and you have ample cash flow coverage to service the payments, then it's really not a difficult thing to underwrite.”

The proof is in the projects. Stonehill’s C-PACE group has been busier than ever, showing excellent year-over year-growth. This year the group is on target to surpass more than $400 million in deployed financing. The lender believes use of this financing mechanism will only accelerate over time and as familiarity grows. “The more support the hotel community gives in terms of talking to legislators and their local groups about being involved and pushing for legislation the better, because it's a cost-free incentive for the state,” Schlosser said. “States have no reason not to allow C-PACE, and for hotel owners, it could be the difference between getting a deal done or not in that particular state.”

Brendan Manley is a writer, editor and digital marketer specializing in hospitality content creation based in Warrensburg, New York

The views and opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.