30 April 2021
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Commercial PACE (C-PACE) financing guidelines are finally available for New York City, and while the program has not officially launched yet, hotel owners and developers in the area should start planning how to use these loans to retrofit their properties. My Partner David Sudeck discusses the program requirements, below.
New York City Releases Commercial PACE Program Guidelines :
A Big Step Toward Opening a Big Market for C-PACE Financing
by
David A. Sudeck, Partner & Senior Member of
JMBM’s Global Hospitality Group®
The NYC Commercial PACE Financing Program has finally released its program guidelines! Prospective qualified C-PACE lenders are now carefully reviewing the guidelines, applying for approval to be a C-PACE lender in New York City, and seeking projects that may benefit from C-PACE financing. It is time to get ready, but the official launch date for the program is being delayed a bit and has not yet been set. We expect the launch soon.
New York’s Law Will Motivate Building Owners to Reduce Greenhouse Gas Emissions
While C-PACE financing has been available throughout the country for years, the C-PACE program for New York State was enacted in 2019 as part of the Climate Mobilization Act. As part of that law, Local Law 97 (which has been subsequently amended by Local Law 147 and Local Law 95), established greenhouse gas emission limitations for certain large buildings in New York City. Buildings covered by the law will be required to report greenhouse gas emissions commencing in 2024, and penalties will be assessed for exceeding the established limitations. The legislature enacted the law with the expectation that it will be more expensive to pay the penalties than to renovate the building to reduce emissions.
New York’s C-PACE Program Will Provide the Financing to Retrofit Buildings
The State’s Commercial PACE Program was then concurrently implemented to provide building owners with a low-interest (usually around 6+/-%), long-term (usually 20-30 year amortization) financing option to support the required energy efficiency retrofits and to support renewable energy projects generally. It is also a form of financing that will result in significant mortgage tax savings (there is not mortgage recorded with C-PACE Financing) and other benefits.
NYC C-PACE Program Loan Requirements:
The NYC C-PACE Program Loan Requirements (directly from the Program Guidelines) provide:
- The subject property must be an Eligible Site (as defined below).
- The C-PACE loan must fund Energy Efficient Improvements or Renewable Energy Systems (as defined below).
- All Energy Efficiency Improvements must be recommended by an Energy Audit; all Renewable Energy Systems must be recommended by a Feasibility Study.
- The project must have a Savings-to-Investment Ratio (SIR) of 1.0 or greater [this means that the present value of all savings must equal to or greater than the cost].
- The C-PACE loan term must be less than or equal to the weighted average useful life of the measures financed.
- All holders of mortgages or deeds of trust on the subject property must provide consent to the C-PACE loan and the terms thereof.
- All required C-PACE loan application materials must be submitted to the Administrator by the Lender through the Online Application System.
Among other things, an “Eligible Site” must be an “existing building,” so at this point, the program is not available for new construction (which is inconsistent with the Commercial PACE programs in most other states – we expect the guidelines will be further amended to allow new construction). In general, such existing building may be commercial, industrial, office, multifamily (three or more units), or residential condominiums currently owned in common by a commercial entity.
“Energy Efficient Improvements,” in general, cover any renovation or retrofit “intended to reduce energy consumption.” “Renewable Energy Systems” essentially means an energy generation system that generates electricity through various means, including, for example, solar, fuel cell technologies, or other renewable energy technology.
Retroactive C-PACE Financing is Approved and Contemplated:
Though the NYC Commercial PACE Program guidelines do not currently allow the financing of new construction at this time (again, we expect the guidelines will at some point be amended to allow new construction), it does specifically allow retroactive C-PACE Financing. This is great news for property owners that recently completed a qualifying project/new construction of a building. Qualifying projects must have been completed “after the later of: May 19, 2019 or 3 years prior to the date on which the C-PACE financing agreement between the borrower and lender is signed.”
The Value of Retroactive C-PACE Financing
We have found retroactive financing to be in greatest demand, and the majority of the financing we are handling, in the current distressed market. C-PACE Financing has been the lifeline for many property owners seeking to refinance, to pay down their existing loan balances, or to establish much-needed reserves and working capital.
Mortgage Holder Consent Required
While it is common practice to seek the consent of the secured lender before closing a C-PACE Financing (even in jurisdictions where this is not a specific requirement), the NYC Commercial PACE Program specifically requires securing this consent. There have been a fast-growing number of local and national secured lenders that have consented to C-PACE, and we expect that C-PACE will be widely accepted by local NYC-based lenders once they understand the features of the C-PACE financing.
Fee Simple Ownership
The definition of “Eligible Site” above indicates that the subject property must be “owned in fee simple by the C-PACE applicant.” While this is not unusual (for example, in California, the fee simple property owner must agree to the voluntary tax assessment), it will be interesting to see if and how this may limit the number of C-PACE financings, as so many New York City properties are on leased land. A long-term ground lessee will need the fee simple owner of the property (the ground lessor) to serve as the applicant for purposes of the requested C-PACE financing.
The Fundamentals
As described in our prior postings, Commercial PACE financing (an acronym for Property Assessed Clean Energy) allows property owners to place a voluntary tax assessment (as opposed to a mortgage or deed of trust) on their real property to fund qualified improvements (e.g., those that would reduce energy consumption).
Free on demand webinar program on C-PACE Financing by industry leaders
WHAT: Free online program “Why so many are looking at Commercial PACE (C-PACE) financing now”
WHEN: This webinar took place on June 22, 2021. To access the recording, sign up at the link below.
WHO: Panel moderated by Jim Butler, featuring two of the most experienced leaders in PACE Financing in the United States
- Jared Schlosser, Senior VP and Head of Stonehill PACE
- David Sudeck, Partner, Senior Member of JMBM’s Global Hospitality Group® and leader of PACE Financing team at JMBM.
VIEW THE PROGRAM: Click here to access this webinar on demand.
How we can help with Commercial PACE (C-PACE) financing
You can find more information on this topic on the Hotel Law Blog under the topic C-PACE Financing. Here are a few select articles and some representative transactions we have handled.
Is C-PACE the “new EB-5″ financing?
Retroactive C-PACE frees hotel investment capital
C-PACE Financing – Now an accepted tool for hotel lenders and borrowers
Should you be looking at Commercial PACE (C-PACE) financing now?
C-PACE Financing Lawyer: New York opening Commercial PACE – a big opportunity!
Some of our deals: C-PACE Financing on a roll!
- $10+ million C-PACE for TETRA and AC Hotel Sunnyvale
- $6 million C-PACE for Kimpton La Peer West Hollywood
- $2.3 million C-PACE for the Tapestry Suncoast Anaheim
- $23.8 million C-PACE loan for the Vista Collina Resort Napa
- $5.8 million C-PACE loan for Fairfield Suites Camarillo
- $42 million C-PACE loan for citizenM Los Angeles
David Sudeck is a senior member of JMBM’s Global Hospitality Group® and JMBM’s real estate department. His practice primarily involves the complex issues associated with hotels, resorts, vacation ownership properties (including shared ownership, destination clubs, timeshares, fractionals and private residence clubs), restaurants (including chef consulting agreements), golf courses and spas.
A seasoned real estate attorney, David has extensive legal experience involving all types of residential and commercial properties. He represents owners – including hospitality clients – in the purchase and sale, development, construction, financing, leasing, and sale-leaseback of properties, and advises them on their operations and management agreements, including hotel management agreements. Contact David Sudeck at 310.201.3518 or dsudeck@jmbm.com.
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 hotel purchase, sale, development, financing, franchise, management, ADA, and IP matters. We also have compelling experience in hotel litigation, union avoidance and union negotiations, and cybersecurity & data privacy.
JMBM’s Global Hospitality Group® has helped clients around the world with more than 4,300 hospitality properties worth more than $104.7 billion. Contact me at +1-310-201-3526 or jbutler@jmbm.com to discuss how we can help.