Peachtree Group shares top tips on leveraging look-back provisions into lower financing costs on completed newbuilds, renovations and conversions.
In the ever-evolving U.S. economy, commercial real estate owners and developers continually seek innovative financing mechanisms to navigate the challenges of securing capital for their properties. Both current and prospective hospitality investors are no exception.
Traditional capital sources remain volatile, unpredictable and restrictive, making securing funding for new developments or renovations a daunting challenge.
Jared Schlosser, Peachtree Group
But that challenge is not insurmountable. Commercial Property-Assessed Clean Energy (CPACE) continues to gain momentum amid this financial turbulence, particularly for construction and bridge financing. CPACE is a state-legislated program allowing owners and developers to finance construction improvements through a property tax assessment. Only 38 states have passed legislation to permit CPACE financing, but the growth rate will accelerate as new states adopt this popular program. Forecasts project that the market will surpass $10 billion within the next few years.
A new way to play CPACE
Yet, an aspect less known is its capability for retroactive financing.
Certain states have adopted provisions that enable building owners to apply for CPACE financing during “look-back” periods. Not all states that have approved CPACE legislation allow for a look-back period. In those that do, the look-back period varies. For example, Connecticut and Minnesota limit it to one year, while Florida extends it to 3.5 years. Typically, the look-back provisions cover two to three years, but Washington, D.C. follows a case-by-case approach, Missouri sets the limit at three years “at the discretion of the program” and New Jersey makes it subject to program guidelines.
Even with these variations, retroactive CPACE is emerging as a lifeline for property owners seeking favorable loan terms or aiming to manage cash flow better for previously completed projects. If, for instance, a developer initially secured a different kind of loan for its project, retroactive CPACE financing provides much-needed liquidity to property owners at substantially lower rates than conventional means.
Both traditional and retroactive CPACE financing options serve the purpose of enabling property owners to implement energy-efficient upgrades, whether planned or completed, by providing long-term financing. The distinction lies only in the timing: traditional CPACE financing is secured before making energy-efficient upgrades, while retroactive CPACE is applied after the completion of these improvements.
…retroactive CPACE is emerging as a lifeline for property owners seeking favorable loan terms or aiming to manage cash flow better for previously completed projects.
Jared Schlosser
This growing demand is attributed to its fixed-rate nature, competitive rates and ability to lower the project's overall cost of capital. It has proven instrumental in making various developments financially feasible, from new construction to renovations.
Peachtree Group, a nationally ranked commercial real estate lender and a key player in this arena, has closed roughly $600 million in CPACE financing since 2019, with hospitality as the largest segment it serves.
The upside
In addition to its environmental merits, CPACE financing offers a range of practical advantages. It stands out as a long-term financing solution, typically spanning up to 30 years, which allows for manageable repayment terms. This extended timeframe aligns with the realities of real estate development, where returns on investment may take several years to materialize.
With shorter loan terms and higher interest rates, traditional lending models create significant financial stress for developers. CPACE financing, with its extended repayment horizon, eases this burden and supports implementation of more sustainable property development practices.
Securing CPACE financing may involve a more intricate and time-consuming process compared to conventional lending approaches. Fortunately, certain lenders, such as Peachtree Group, are available to review construction improvements to find eligible hard and soft costs. While securing CPACE financing might pose certain challenges, the advantages far surpass these hurdles. CPACE financing offers a low-cost, long-term and reliable path to financial support in today's unpredictable financial landscape.
As traditional capital markets continue to experience volatility and uncertainty, CPACE financing and, in particular, retroactive CPACE, provide hope, guiding property owners and developers toward a more sustainable and secure future. It's a testament to the fact that innovation with sustainability is a pathway to success for those willing to embrace it.
Jared Schlosser is senior vice president originations & CPACE, credit at Peachtree Group, Atlanta.
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.