C-PACE Financing – Now an Accepted Tool for Hotel Lenders and Borrowers – Blog Law Hotel – February 20, 2021
February 20, 2021
Hotel finance lawyer: C-PACE financing is now mainstream
About five years ago, my partner David Sudeck, a senior member of JMBM’s Global Hospitality Group®, spoke at a hospitality industry conference about the attractive features of commercial PACE (or C-PACE) financing as a innovative financing technique. David has extensive experience in virtually all types of real estate financing, from senior debt to joint ventures. At the time, he had just finished working on a hotel financing that included elements of a senior construction loan from a private lender, Mello Roos Community Facilities District financing, EB-5 financing and the C-PACE funding. Few in the conference audience had heard of PACE trade finance, and there were many questions about its characteristics.
Over the past five years, C-PACE funding has grown in popularity and has evolved from an innovative or creative technique to a practical, widely accepted funding solution. It has gained ground with lenders and borrowers. But its gradual increasing use has been accelerated by the COVID pandemic and resulting lockdowns, and the near collapse of many segments of the hospitality industry. The accompanying deficit in construction and other funding since March 2020 has reinforced the importance and use of C-PACE funding. In the last few months alone, David Sudeck and his team have worked, both lender and borrower side of transactions, on more than ten Commercial PACE financing transactions. The biggest we’ve worked on, over $ 40 million in C-PACE funding, was closed just a few weeks ago.
At this point, most homeowners and developers are considering financing C-PACE as part of their development, renovation, and salvage capital (more details below). And more and more lenders have endorsed C-PACE as part of the capital stack. Why do you ask?
Why C-PACE funding can be interesting:
C-PACE funding takes the form of a voluntary property tax assessment, having the same characteristics and priority as an ad valorem property tax (usually paid only twice a year, when property taxes are paid). Here are some of the features that can be negotiated that can make this financing attractive:
- Rates significantly lower than those of traditional mezzanine debt and equity
- Term up to 30 years with fixed rate financing
- No personal recourse guarantee (although a completion guarantee is often required)
- Ideal for renovation / PIP financing
- The capitalized interest component allows years without any payments due
- Interest period only
- A growing number of cities, counties and states have active C-PACE funding programs
- Fully assumable financing (no component due to the sale)
- Prepayable (often with declining prepayment charges)
- Significant part of the capital stack (often 20% + of the building’s value)
- Fast and efficient process (C-PACE financing documents are less complex than typical real estate loan documents, and the due diligence process is generally much faster and less exhaustive)
- Limited default triggers (most important being development failure and failure to make a payment – no financial commitments or tests apply)
- No Acceleration on Default – if the property owner misses one or more payments, the default can be remedied by the property owner or the lender with the late payment or payments including penalties and interest; the full amount of the C-PACE funding does not become due as a result of a default
C-PACE retroactive financing may be available for completed properties
Commercial PACE financing has generally been viewed as a type of construction financing, but it may also be available for certain completed or operating properties. This is called “retroactive financing” which can be used to refinance qualified improvements such as the costs of HVAC systems, electricity and water efficiency, building envelopes, foundations and seismic improvements, and associated ancillary costs. The retroactive funding calculation may include costs related to improvements made up to 36 months before closing, in some jurisdictions.
The C-PACE proceeds from such retroactive financing can be used for working capital, the repayment or repayment of existing loan obligations, or the payment of PIPs or improvements.
Why has C-PACE funding become so popular?
During this COVID-induced slowdown, despite the abundance of capital being left out, traditional sources of capital have shrunk dramatically. Some think the hospitality industry is too volatile and want to see how long the downturn will last. Some have more stringent underwriting requirements or have reduced funding due to lower values derived from lower distressed sales pay, reduced NOI, lower loan-to-value requirements and / or higher prices. high for more prudent funding.
Yet many hotels need an injection of capital in today’s market to avoid default and foreclosure. C-PACE financing has become a popular solution for providing capital to fund senior loan debt service, repay senior loan principal balances, fund renovations and brand conversions, and in certain circumstances, when the owner has substantial equity capital to finance new constructions. . A number of leading lenders previously did not accept C-PACE into the capital stack, due to the super-senior nature of C-PACE financing. However, recently many of these lenders have determined that C-PACE financing is a good – and perhaps the only – source of financing available, in the absence of additional financing from the primary lender, to stabilize their assets in guarantee.
How We Can Help You With Commercial PACE Financing (C-PACE)
C-PACE loans have become an important and rapidly growing sub-specialty in our hotel finance capabilities. We work with C-PACE suppliers / lenders and borrowers. In fact, we have been fortunate enough to work with one of the leading C-PACE funding providers as they expand their national platform.
We welcome inquiries to see if we can help you assess potential PACE funding opportunities.
Webinar and more on C-PACE Funding
To learn more about C-PACE, see our upcoming webinar, “Why So Many Are Considering Commercial PACE Financing (C-PACE) Now. “
Some of our offerings: C-PACE Financing on a Roll!
David Sudeck is a senior member of JMBM’s Global Hospitality Group® and JMBM’s real estate department. His practice is primarily concerned with complex issues associated with hotels, resorts, vacation properties (including shared ownership, destination clubs, timeshares, fractions and private residence clubs), restaurants (including agreements advice with chefs), golf courses and spas.
A seasoned real estate lawyer, David has extensive legal experience involving all types of residential and commercial properties. He represents owners – including hospitality clients – in the buying and selling, development, construction, financing, rental and leaseback of properties, and advises them on their operating contracts. and management, including hotel management contracts. Contact David Sudeck at 310.201.3518 or [email protected]
This is Jim butler, author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators and investors. This advice covers critical hotel issues such as buying, selling, development, financing, franchising, management, ADA, and intellectual property issues. We also have compelling experience in hotel litigation, union avoidance and union negotiations, as well as cybersecurity and data privacy.
JMBM’s Global Hospitality Group® has helped customers around the world with more than 4,300 hotel properties valued at over $ 104.7 billion. contact me at + 1-310-201-3526 or [email protected] to discuss how we can help you.