CPACE: An Affordable Solution for Mid-Construction Capital
CPACE financing is an innovative solution offering low-cost, long-term capital that can also be retrofitted.
CPACE financing (Commercial Property Assessed Clean Energy) sometimes referred to as PACE loans, is gaining traction as a viable option for hotel developers looking to optimize their capital stack. We spoke with Jared Schlosser, EVP of Hotel Lending and Head of CPACE at Peachtree Group to demystify CPACE financing and address common misconceptions.
Q: What specific advantages does C-PACE financing offer to hotel developers?
Jared Schlosser: C-PACE provides an attractive cost of capital today. Most of the deals we're handling are in the high seven percent range with fixed rates, which is cheaper than most other interest rates on the market. Whether you’re looking at senior loans, mezzanine debt, or preferred equity, C-PACE can often be a more affordable option. When you use C-PACE to replace a higher-cost source of capital, it can help make a deal work financially where it otherwise might not.
Q: What are some of the common misconceptions that hotel developers have about CPACE financing?
JS: The biggest misconception is that no one consents to it. I often hear from developers who are interested in CPACE but believe that senior lenders won’t consent to it. I get five or six calls a day from people saying, "This CPACE thing sounds interesting, but nobody consents to it." That’s simply not true. We’ve closed 90 of these deals, so obviously, so somebody's consented to it!
We’ve worked with major banks, insurance companies, and debt funds to secure consents. We’re not asking anyone to do something we haven’t successfully done ourselves. For the right deal and with the right underwriting, senior lenders are more open to PACE financing today than they were five years ago.
Q: Why should people come to Peachtree Group for their CPACE Financing?
JS: We have a strong track record of getting difficult deals done across the country, particularly in the hotel sector. Our team has deep expertise in hotel financing, which can be crucial when navigating the underwriting and consent process. Because senior lenders and other players in the capital stack trust our advice and trust what we're pitching to them.
Peachtree Group is a direct balance sheet lender focused on funding first mortgage bridge loans, mezzanine loans, preferred equity investments, and commercial property assessed clean energy (CPACE) financing, lending to all commercial real estate asset classes with a specialty in hotel financing. The Peachtree Group team has executed more than 297 transactions, originating more than $4.5 billion for projects seeking capital to complete acquisitions, recapitalizations, refinancing and renovations
Looking for more on CPACE Financing? Check out Jared's appearance on the On the Edge Podcast.
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Commercial Property Assessed Clean Energy (C-PACE) is an innovative financing program that is gaining popularity across the U.S., as it offers a low-cost, long-term capital solution that doesn't require upfront equity from the property owners. The central appeal for using this program for energy-efficient upgrades and retrofits is that any level of C-PACE used will lower the overall cost of capital compared to mezzanine, third-party equity or even many senior loans. This is impactful for commercial property developers.
In the current market, the cost of capital has increased significantly, along with higher interest rates and wider spreads from lenders. In addition, higher financing costs put pressure on loan-to-value (LTV), loan-to-cost (LTC) ratios, and the amount of capital lenders are willing to provide, reducing liquidity for new developments. Construction costs have also increased significantly with back-to-back years of double-digit increases, with further increases in 2023 as CBRE expects a growth of 5.4% for construction costs.
Low-Cost, Fixed-Rate Capital
C-PACE is in heavy demand because it's a fixed-rate product, starting in the mid-single digits. It also can be up to 35% of the capital stack. With a typical senior loan at 65% loan-to-value, providing C-PACE at 30% of the stack, the lender becomes below 40%, lessening its capital risk. As a result, it is helping development projects across all real estate sectors pencil to start construction and those in mid-construction reach get completed.
Mid-Construction Case Studies
Today we see more requests for this financing as budgets are blowing out with cost overruns. C-PACE provides the needed capital when the developer cannot offer additional equity or banks are unwilling. The following are examples of mid-construction projects that utilized C-PACE funding from Peachtree to bring projects across the finish line.
- C-PACE for Cost Overruns. A developer faced roughly $2 million in cost overruns for a five-story, 58-key hotel in Florida that was 65% complete. Peachtree provided the developer $4.5 million in C-PACE financing with a 30-year term of 6.82%.C-PACE.
- Can be Utilized Retroactively. One of the benefits of C-PACE for mid-construction projects is it can be used retroactively. Similar financing was utilized to construct a $32 million multifamily and retail project in Rehoboth, Delaware. Construction on the project began in January 2021 and was 40% completed. Peachtree provided the developer $4.8 million in C-PACE financing with a 25-year term at 7.25%. Most of the funds were used retroactively for the building envelope, HVAC, lighting, plumbing, elevator, seismic and other qualifying soft costs.