Sustainability is a major goal for many properties in California, a state with significant sustainability requirements and a “green” reputation that sets high expectations for properties in the eyes of many guests.
However, investing to create more energy efficiency, use renewable energy like solar, or conserve water, can require significant capital. That can be a challenge for properties recovering from the effects of the pandemic, at a time when the cost of capital and materials are on the rise.
Over the past decade, an alternative approach to financing sustainability improvements has gained popularity with commercial property owners. The property assessed financing model, also referred to as C-PACE, relies on the ability to use an assessment on the property to finance the improvements. C-PACE financing for commercial properties is available in some three dozen states, including California.
While C-PACE works differently in each state, property owners use a funding mechanism similar to a special assessment district a local government might use to fund infrastructure improvements like sewers or undergrounding of power lines. In the C-PACE model, the property is effectively the special assessment district, and the debt is attached to the property itself. The cost of the project is paid back through an assessment on the property, over periods from 5 to 30 or more years, depending on the program.
Rather than a traditional loan made to the property owner by a bank, and thus based on the owner’s financial situation and other criteria, C-PACE funding is tied to the value of the property and the amount of available equity with standardized, objective underwriting criteria.
“It’s a more competitive cost of capital for small to large renovations and new construction projects that qualify,” said Emily Ramey, Director, Middle Markets with Ygrene, one of the nation’s leading property improvement financing companies, which has provided this type of financing for roughly 2,000 commercial projects over the last decade. “It can be used for energy and water efficiency, disaster preparedness, renewable energy, and other sustainability projects.”
“Hotel owners have used Ygrene’s commercial offering to finance a wide range of projects,” Ms. Ramey said. These can cover single-measure projects, such as a core energy efficiency upgrade (HVAC or roof replacement for example), or even the installation of solar panels and battery storage. The increasing cost of electric power is the main driving force for owners considering this alternative to credit-based financing; over a third of the projects Ygrene finances in the hospitality industry are for electrical and mechanical upgrades for energy savings, and another 30% is for solar or solar/battery projects in California.
But the model also can be applied to a significant part of the work of a “gut rehab” to a building involving energy-efficient upgrades to electrical, mechanical, water, and seismic—even to the installation of EV charging stations.
“C-PACE can finance simply upgrading HVAC, installing LED lighting or dual paned windows,” she said. “Or C-PACE can be a resource for new construction as if it were a gut rehab.”
Another advantage of C-PACE financing is that the qualification process is streamlined. Rather than a traditional loan made to the property owner by a bank, and thus based on the owner’s financial situation and other criteria, C-PACE funding is tied to the value of the property and the amount of available equity with standardized, objective underwriting criteria. That “removes the red tape” from the application, approval, and funding process, making the borrower’s experience simplier and more straightforward.
“C-PACE doesn’t generally impact one’s ability to borrow elsewhere,” Ramey said. “There’s a fixed rate, fully amortized over longer terms with no balloon payment, among other value-add components of the financing compared to traditional debt.”
“Ygrene’s financing has been a very useful tool during the pandemic for hospitality property owners, even for refinancing construction that has already been completed,” she said. “In California, Ygrene can look back several years and refinance a wide scope of work allowing the property owner access to critical capital.”