PACE: A Tool For Financing Green Energy Improvements For Hotels And Motels
PACE is a financing tool which has a green halo around it. Its purpose is to promote energy efficiency and the use of renewable energy. PACE, an acronym for Property Assessed Clean Energy, was passed by the Nebraska Unicameral in 2016. By comparison, it has existed in California since 2007.
Owners and property developers of course are already able to finance these types of improvements, but this gives them a tool so that the loan term is longer (as much as 25 years) since the loan is repaid through a voluntary “tax” assessment on the improved property that runs with the land. This super-priority of the lien allows for a lower interest rate. This, and the long loan term, allows borrowers to finance improvements that ordinarily would not be economical. To date, over $60 million has been lent pursuant to PACE loans in Omaha.
Beyond the Twice-Used Towel
It is no secret that the hospitality industry uses a tremendous amount of energy, water and other resources to serve guests. The industry as a whole has taken steps to be more energy and resource efficient. We are all familiar with the placards found in most hotel rooms asking guests to indicate whether they want their sheets and towels changed on a daily basis or whether they will use them again. Many hotels will now leave sheets and towels unchanged by default. Notwithstanding the changes that hotels have implemented to become more efficient in their use of energy and other resources, hotels still are huge consumers of energy. For these reasons, hotel owners and operators have focused on implementing building improvements that increase energy efficiency since those improvements generate significant cost savings. But there have been significant obstacles to the development of these energy efficiency and water conservation measures. The most obvious obstacle is simply the significant up-front capital investment required from a hotel owner. Additionally, the hotel owner may have concerns regarding its ability to recoup its investment within an acceptable time frame.
PACE financing is specifically designed to incentivize property owners to make energy efficiency, renewable energy and water conservation improvements to their properties for the purpose of lowering emissions and utility bills.
Pace Loans in Omaha So Far
The purpose of PACE loans in Omaha show how valuable this product is to hotels and motels. The chart below shows the type of PACE loans that have already been made in Omaha. As you can see, this is very heavily weighted in favor of hotels. PACE loans work well for hotels because the hotel can “pass through” the PACE special assessment to a guest on top of the actual hotel bill. When making a hotel reservation, the PACE special assessment (as well as sales tax) is not included in the suggested rate. But when it comes time to check out, the customer gets the bill.
In fact, I handled a PACE loan for a hotel in Omaha in May 2021.
Voluntary Tax Assessment
PACE financing takes the form of a voluntary tax assessment on real property, having the same features and priority as an ad valorem real property tax, typically paid only twice per year.
Here are some of the features that may be negotiated which can make it attractive financing:
- Lower interest rates than traditional mezzanine debt.
- Payment terms up to 25 years with fixed–rate financing.
- No personal recourse guaranty.
- Ideal for renovation/”PIP” financing.
- Fully assumable financing (no due on sale component).
- Meaningful portion of the capital stack.
- Fast and efficient process (PACE financing documents are less complex than typical real property-secured loan documents, and the due diligence process is usually faster and less exhaustive).
Benefits of Pace Financing
The most obvious benefit of PACE financing is the reduction in utility bills that should result from the improvements. With a significant overhaul of the HVAC system, lighting, roofing, insulation, etc., a hotel owner can expect to see a significant reduction in its energy costs.
Even more so than other commercial property types, hotels often incorporate a “sustainability mission” into their branding, which could potentially make a “green” hotel a more desirable destination for guests that are increasingly concerned about the condition of our environment. As such, a hotel which can point to concrete energy efficiency features can potentially command higher room rates, resulting in increased property value.
Assuming that the property is already encumbered by a mortgage, a property owner is likely to have trouble taking out additional debt for the construction of energy improvements. Typically, such an owner would have to turn to equity or mezzanine financing to secure additional capital. With PACE, rather than obtaining a mezzanine loan at a high interest rate, a property owner is often able to access additional financing, effectively allowing PACE to take the place of equity in the capital stack, generally at a much lower interest rate.
What Pace Loans Can Be Used For
The definition of improvements that can be made with a PACE loan is very broadly written. They would include any acquisition, installation or modification benefiting property that is designed to reduce the utility demand or consumption in existing buildings or new construction.
A PACE loan can finance the costs of materials and labor, and can also finance the costs for permit fees, inspection fees, application and administrative fees, bank fees and other fees incurred by the owner/borrower for the installation of the project.
Long Repayment Terms
Earlier I mentioned that these loans could have long payment terms beneficial to borrowers. The term of the annual assessments (loan payments) for repaying the loan may not exceed the “weighted average useful life” of the energy project. The calculation of the weighted average useful life would follow this simple example: Say there are two separate energy reduction projects being installed, each with different useful lives. This includes a chiller with a 30-year useful life and LED lighting with a 20-year useful life. Assume that both the chiller and the lights cost the same. Then the “weighted average useful life”, or the term of the loan, would be the average useful life of the two separate projects. That is: (30+20) ÷ 2 = 25 years.
As you can see from the above chart, PACE loans have been a very popular financing tools for hotels. This tool can be used in Omaha and several other cities in Nebraska, including Bellevue, La Vista, Norfolk, Lincoln, Grand Island, North Platte, Hastings and many other Nebraska cities. If you want to know how to arrange a PACE loan for your hotel, please give me a call.