Hotels Groups Are Leveraging PACE Financing to Optimize Capital Structure
New construction and renovation projects within the last 36-months are primed for property assessed clean energy (pace) financing.
Hotel development projects require a lot of capital. Savvy hoteliers are the latest crowd to discover the valuable benefits of C-PACE. Property assessed clean energy financing is beneficial because it enables hotel groups to
Retire mezzanine debt,
Fortify operating capital fund,
Pay dividends to owners,
And ease pressure from a senior loan.
For these reasons, it can be a favorable, low-cost component of your capital stack. Senior debt usually comes with relatively high-interest rates and shorter terms during construction. PACE is a great way to bridge gaps and secure more capital to finish your hotel development project.
Hotels are choosing PACE to assist with the costs of construction or renovation.
In addition to saving money, PACE-financed upgrades and amenities are great for marketing and can bring a new genre of guests to your hotel.
What is C-PACE?
Commercial Property Assessed Clean Energy (C-PACE, or simply PACE) is a financing mechanism that enables low-cost, long-term funding for energy efficiency, renewable energy, and water conservation projects. PACE financing is repaid as an assessment on the property's regular tax bill, which generates benefits that aren't available through conventional financing solutions. PACE-enabled legislation has been passed in more than 40 states.
Think of PACE as a third layer of capital, next to debt and equity, that every business should consider. PACE funds 100% of an energy project's hard and soft costs, so property owners don't have to cover any up-front or out-of-pocket expenses.
Property owners can reallocate funds previously reserved for energy projects to be used on other capital projects or budgetary items. This is especially important for properties with limited expenditure budgets, like hotels!
What projects qualify for PACE financing?
New construction and renovation projects alike are allowed under PACE financing. You can even retroactively fund projects up to 36 months old! If your projects fall under these categories, your hotel is a good candidate for C-PACE funding.
Benefits of PACE Financing
PACE allows for financing terms of up to 30 years, not exceeding the improvements' average useful life. This often generates positive cash flow and enables deep retrofit projects with paybacks of up to 30 years rather than only projects with quick paybacks.
Allows comprehensive projects with deeper impacts on energy usage and significant impacts on the bottom line, including increased net operating income (NOI)
30-year amortization makes it possible for annual energy savings to exceed annual PACE payments (but you can opt for a shorter term if desired)
PACE financing is attached to a building through a tax assessment; it's not attached to an individual or business.
Therefore, if the building is sold before the PACE assessment is paid off, it seamlessly transfers to the new owner as a part of the taxes. The savings from the energy project transfer to the new owner too.
Learn more about how three new hotels owned by one California developer in Rochester, NY recently hit efficiency targets by using PACE to pay for improvements to these properties