Webinar: How is CPACE filling the gaps in the capital stack for real estate developers and owners.
Innovative Capital for Innovative Developers Description:
Commercial Property Assessed Clean Energy (CPACE) financing is a hot topic among developers as it has the capacity to replace expensive equity and mezzanine in the capital stack and improve developers’ WACC.
In this 30-minute webinar, CleanFund – the nation’s largest direct commercial PACE lender will explain:
• What is CPACE?
• CPACE terms, structure and how it improves the WACC
• Representative CPACE development projects and types of projects CPACE is best for
• How CPACE works with the senior lender and why lenders consent to CPACE
Innovative Capital for Innovative Developers
Description: Property Assessed Clean Energy (PACE) is a hot topic among developers as it has the capacity to replace expensive equity and mezz in the capital stack and improve developers’ WACC.
In this 30-minute webinar, CleanFund – the nation’s largest direct commercial PACE lender will explain:
• What is PACE?
• PACE terms, structure and how it improves the WACC
• Representative PACE development projects and types of projects PACE is best for
• How PACE works with the senior lender and why lenders are consenting to PACE
finance for ekn group jason has spent more than 25 years in commercial real estate he's a deal guy and an absolute expert
clean front clean fun we were founded in 2009 and from day one the only thing
Berkeley when Berkeley created me the nation's first pays program so deep DNA in pace we're a direct lender we're not
a broker we've we're the oldest standalone C pace company and we funded more than 80 projects which is more than
anyone in the country a couple months ago we fit we did the industry's first 144a
securitization of 120 million dollars of our projects we funded in the last year so as I said we're a direct lender were
backed by a very large private equity company a large insurance company a large asset management company so what
problems does IPE solve well our clients are telling us that we are in the later
stages of the cycle right now and projects are experiencing labor costs
increases and material costs increases and there's cost overruns and lend
senior lenders are unwilling to provide more debt than what was perhaps originally prescribed and so our clients
are faced with having to raise pref equity which can cost on the high teens or low 20s or mez which can be somewhere
in the sort of nine to fifteen percent range our clients are also telling us that allocations for things like eb-5
and and new market tax credits are either drying up or are being delayed so
there's gaps in the capital stack that need to be filled and that's perhaps where pace can come in so what is ce
pace and how does it potentially address these these problems so CPA stands for
commercial property assessed clean energy it's a financing mechanism that enables a borrower to source capital and in
return for this cap for a capital for energy efficiency water efficiency renewable energy or in California
seismic projects in Florida storm resiliency projects and in return for
this capita our clients agree to put a special assessment on their property taxes I should say that you know many of
our clients aren't trying to create the world's greenest buildings and ask us well will will they still qualify for
pace and it's very likely that in a development project you're gonna spend dollars on pace eligible items whether
you're aware of it or not things like windows and lights and the roof and mechanical equipment I'll kind of go
into that a bit later so as I said earlier our repayment occurs from from a
property assessment and this isn't actually really anything new for a hundred years in our country we've been
using property assessments to pay for infrastructure whether it's things like paving the sidewalk or the local fire
department building or the local book school or mosquito abatement pace is just another assessment that gets
recorded on the property tax there's a couple innovations here that kind of make it make it interesting from a
financing perspective the first is if our clients ever sell their buildings they never have to repay us because the
obligation stays with the property tax the second is if our clients have triple net leases they can potentially pass
this assessment on to their tenants and some of our hospitality clients have come to the conclusion that since pace
has repaid from property taxes that they can put a line item on the checkout bill of their lodgers that says energy
assessment tax and past some of the page repayment on to their lodgers a third
innovation is that since this is repayment from property taxes this is a very secure form of lending for clean
fund and we can do things that traditional lenders can't do like 30
year terms that are fixed-rate and fully non recourse so where does pace exist
pace has to be enabled at the state level a state government has to create
an abling legislation and then counties and cities opt into it thus far 35
states in the District of Columbia have passed enabling legislation and 20 states have up and running programs I
should say that pace is rolling out across the whole country so in the last
couple months Delaware Pennsylvania Illinois Nevada etc have all passed the naming legislation in the coming months
we expect New Jersey to pass it in 2019 we expect Chicago Manhattan
Massachusetts etc to launch their pace programs so what is pace eligible what
type of assets are eligible and what were the measures that are eligible so in general clean fund can finance any
type of commercial building and it's you know hotels its office retail it's kind
of the main food groups as well as kind of more specialty assets what we can't finance is government buildings and the
reason being that governments don't pay property taxes we can do multifamily as long as it's five units or more we can't
do buildings that major environmental issues like a gas station or a mine so what are the
eligible improvements well as I alluded to earlier the buckets are energy efficiency water efficiency renewable
energy storm strengthening in Florida seismic retrofits in California and
Portland so energy efficiency could be lights windows envelope insulation
mechanical equipment electrical equipment elevators roof etc water
efficiency could relate to pumps low-flow fixtures irrigation
renewables solar storage etc and we can
help you go through a budget and identify what might be pace eligible but I'll come to that later so when should
owners or developers consider C pace well there's a lot of different applications for our capital one of them
could be a simple retrofit for instance we closed a project last month in Denver at the petroleum building which was in
downtown Denver and our client had was facing end of use end of life of a million dollar of a chiller that needed
a million bucks to replace it with a new one and that was a simple retrofit that we were able to finance we do value at
acquisition projects for instance we we closed a project a couple years ago and in San Francisco with Cypress developers
where it's called 644 Broadway where our client was taking a three-story office
building and transitioning and transforming it into basically the chinese-food version of Eataly it's
called the China Live building now our capital is being used for 10 improvement
projects as well as for new construction and redevelopment and we're going to go
into a couple state case studies are on that and with that I will turn it over to Jason bass Thank You Joshua and I
appreciate the opportunity to speak today we just closed on our first pace
loan now I think it's been about a month over a month and Rochester Minnesota by
the Mayo Clinic and very excited about the prospects for patient are looking at
several of our other development deals to do CPAs financing with with clean fund on
the Holiday Inn project specifically in Rochester is the one that I'm going to speak to today again we closed a two and
a half million dollar C pace loan on that deal we acquired the property back in March of this year it's pretty pretty
rundown tired Holliday in 173 rooms and we are in the process of converting that
hotel to a Hotel Indigo we closed the doors of the property in early September
of this year and we're looking about a ten month timeline to to get to the doors open for the Indigo but the pace
really came in handy on this deal it was a complicated deal the hotel itself is
within a larger HOA in the building there's some residences above the hotel there's some ground floor office
occupancies that are separate from the hotel and there were a lot of issues
with the ability in terms of the energy efficiency in terms of the various systems etc so there were a lot of
elements that are coming into play with the redevelopment associated with with
you know energy efficiency water efficiency etc and trying to get that
the right leverage with our senior lender was proving very tricky so being able to layer behind
well technically in front of but effectively behind that senior loan that
two and a half million dollar C pace financing really made the economic summoned you know deal pop for us and
took a lot of pressure off of us on the equity side so everything that Joshua said earlier
in terms of how Hays can be used to bring down your way to cost a capital how paise can be used to avoid expensive
you know prep equity or mess debt it often is really hard to work with the
senior lender on pace is a nice non-recourse you know vehicle and the
beauty of it being on the property tax bill is that the senior lender does not give up any kind of subordination so the
senior lender remains in a senior position even though effectively the pace loan is paid out of the property tax bill as part of your you know
through your assessment the pace lender in this case clean fund doesn't have any direct
ability or claim to attach to the property if for non-payment of the of
the property tax bill it can only make a claim on the current property tax bill so education of senior lenders I know
has proven a process and now there are a lot of senior lenders out there to understand pace and are comfortable with
bringing it in because they don't feel that it puts them in a subordinate position but it was it was a great
process working with with clean fund going through all the elements there's a lot to know about each state's specific
pace legislation and rules that's something that I learned going through the process Minnesota has
its own set of regs and processes California has very different ones so it's very important as the borrower to
work very closely with clean fund and really understand the nuances on a state-by-state basis we have projects in
California Minnesota up in Washington State we're actually exploring a project in Alaska now and they just approved C
pace about a year ago and we're trying to figure out how we do it there as well but but so far I haven't really seen any
issues or challenges with bringing the finance union and it's a great way especially in this challenging senior
lending environment to really you know increase leverage and in a very constructive way and on a non-recourse
basis so it's been great thank you so much Jason really appreciate the
overview and your partnership it's been awesome working with you and looking forward to doing more projects together
absolutely great so I'm going to turn it over to one other quick project because
I think this also exemplifies the power pace it's a different application of pace on this one our client al Tara
international they purchased an old historic warehouse building in in Dallas
and it was a five hundred thousand square foot building and they wanted to reposition it into 270 key hotel and 250
apartments and they needed 120 million dollars of capital and it was it was kind of a complicated capital stack that
was debt equity mez historic tax credits new markets tax credits eb-5 I'm sure
some of you on this call have done these kind of deals before and we we looked through the construction budget and we
were able to find twenty four million dollars of pace eligible items the the windows the roof the LEDs etc and we
were able to write a check for twenty four million dollars at six point one four six point one five percent repaid
over 20 years and the result of that is we took out 15% mez money and in doing
so we brought our clients weighted average cost of capital from nine point three percent to seven point four six
percent we brought it down 160 basis points and is gonna literally save our
client more than a million dollars a year this this is the power of pace
right here so you might be asking yourself well how do I determine if my
project will qualify for pace and the way to do it is you know it's pretty
simple send me an email Joshua dot Kagan at clean fund with the following information let us know the
property address so we can determine is in a pace eligible area or as pace gonna
be there in the coming months we have relationships with every single pace program administrator in the United
States we have a good sense of where pace is being adopted and as I said earlier it's rolling out across the
whole country let us know is it a new construction or a retrofit project what kind of asset class is it kind of
what are your sources and uses in a construction budget and what you think the value at completion is from there
we'll turn around with a term sheet and assuming we come to agreement on terms
we will move to an LOI so upon execution the LOI what are the steps to closing well it's
pretty simple there's there's pretty much three steps the first is we're gonna work with a construction lender to
get their consent Jason Jason alluded to to this step since pace is an assessment
we are paid with probably where we paid from property taxes and one implication is that in a work out situation property
taxes get paid ahead of debt and by statute we have to get the consent of the senior lender and many of you might
have heard that this is a challenge with working with pace and this isn't in tot this topic is an important one and I'm
gonna address it in more detail in a few slides around the specific mechanics of how we get consent and why we're getting
consent as often as we are so just hold that for now but know that as soon as we
issue an LOI our next step is to get lender consent we're gonna get C pace program approval and then I should say
that there's these pace admin the pay's administrators who are there who are an outsource function of the government
they're there to prevent abuses they're there to make sure that we're financing you know windows and lights and not
tables and rugs and again we have a great relationship with all over around the country we know how to do it the
third thing we do is we underwrite the transaction and we understand that you
know we're repaid from property taxes and that's what we need to underwrite to so we need on a right to the property
and we're not we're less concerned about the net worth our borrowers and more about the fundamentals of the actual
property and then we close and closing consists of our funds being wired into
an escrow account and getting dispersed based upon milestone payments usually para pursue with the senior lender I
should say you know upfront that pace dollars can only be used on pace eligible items and those items tend to
occur when a building as after buildings finished its horizontal work and it's
gone vertical things like you know the window the lights and the envelope etc what are
our typical terms you know we can sort of strike zone is somewhere between
500,000 and 200 million we can go below 500 thousand although those projects
tend to get expensive for our borrowers because of some of the fixed fees involved and we can go above 200 million
other 200 million is the largest term sheet we've ever put out our terms are
10 to 30 years fixed-rate fully non-recourse there's no covenants or
guarantees required at all we can do in general 20 percent of the as complete
value which tends to correspond to 20 percent of the soft and hard costs and we can do a combined 95 percent pace
plus debt leans value although on a new construction project you know senior lenders aren't gonna go
up to 95 percent the maximum I think we've seen is eighty percent combined lean-to value we we really look at
ourselves as the quarterback of the pace process we're here to make this simple easy and efficient for everyone involved
and that's why we we like to handle the lender consent process as well as the pace program approval process so as I as
I mentioned earlier getting lender consent is one of the steps in the process so you might ask yourself you
know how will my lender view pace and the reality is that pace is an assessment it's an assessment that gets
repaid from property taxes and like any other assessment and this is this is a
very very important point if there's kind of one thing to take away from this this webinar it might be this and that
is paced like any other assessment that goes on a property tax bill for 30 years or 50 years or even 70 years in a
workout situation under no circumstances can accelerate the amount that's ever
ahead of the senior debt is really this year's property taxes so consent
ultimately comes down to the project specific cash flows in the NOI and debt service coverage once the
lender understands that see pace does not accelerate so I'll give you an example we're
working on a project in the Bay Area right now it's a very large multifamily project and our client needs 180 million
dollars of capital they have a lender who's going to give a hundred and ten million dollars a day which is like 60
to 61 percent LTV they wanted thirty million dollars at pace their current
without pays their current debt service coverage is a 1.5 3 with 30 million of
pace-it brought down the debt service coverage below 1 and the senior lender said they won't go below 1.2 so we right
size the project and got it down to 20 million which has brought the combined lien devalue pays plus debt to value at
272 percent so we worked with the lender to get them comfortable and right-sized
it from 30 million to 20 million and replacing 20 million of pref equity with
a you know 20% return threshold with 6.25% pace is going to save our client
more than 2 million dollars a year so occasionally our clients come across
borrowers who are completely ops are Iike lenders who are completely obstinate or ideologically opposed to
pace that that happens and that can you know that can happen and that's why it's my pleasure today to announce for the
first time the launch of clean funds debt service sorry debt Capital Markets Group or the only CPAs team with
full-time employees actively partnering with peace friendly lenders should be noted that two of clean funds largest
investors are two of the seven largest construction lenders the United States and we have an active network of local
regional and national lenders who were bringing deals to you so if you come
across a lender who seems just completely difficult to work with let us help you find one who is more pace
friendly so in conclusion clean fund we were founded in 2009 we funded more
commercial pace projects than anyone in the country we had 40% market share in 2017 our financial technology see pace
can replace pref equity mez or expensive debt if you give debt from debt fund in the capital stack and
in doing so we can improve lack or weighted average cost of capital and sponsor returns by between 100 and 200
basis points and potentially increasing your returns by millions of dollars and
with that I will turn it over to your questions and I see that there are some questions that already been posted and
if you have questions feel free to type them in and the first question asked you
mentioned you can't do pace on government buildings so how can you do pace on other tax exempt entities so how
does a hospital who's a tax-exempt pay pay this so how does this occur and this
individual might be referencing the Seton medical project we did so you can see Medical Center project we did last
year which was the largest project in pace history was a 40 million dollar seismic retrofit of a hospital in San
Bruno San Bruno California so you're right governments don't pay property
taxes they can't qualify for pace but not-for-profits they don't pay property
taxes but they can and are able to pay property assessments so that's how we're able to do hospitals and community
centers and all kinds of other not-for-profits another question is does
si pace only work when the capital stack is being reset as a new construction or an acquisition financing or do you have
success working with existing lenders so we absolutely you know pace can be used
for stabilized assets as well as for new construction and we have a great track
record of getting consent from existing lenders there's there's a number of reasons why lenders give consent they
want to maintain good relations existing lenders want to maintain good relationships with their borrowers
oftentimes on a retrofit project we're bringing down operating costs we're reducing with pace we're reducing energy
costs and potentially maintenance costs which can offset the increased payment that's sure that's clearly the case on a
lot of solar projects we're working so great record in terms of getting the consent of existing mortgage holders one
challenge is around CMBS servicers although we have gotten consent from Ellen R and C W and some others there's
just a lot of time and energy that goes into finding the right servicer and
explaining to them and etc so those tend to be more of a challenge than than existing then you know bank lenders or
private lenders or things like that let's see another question how do you
work with finance brokers we work with brokers every day and we there's a lot
of ways we can work with them we can you know honor on our fees brokerage fees
that are in place etc so when you contact me afterwards we can go and more
granularity all right a lot of questions coming in at once so let me just pause
so one question is prepayment allowed and if so under what terms partial and
full prepayment is allowed at any time and it's a percentage of outstanding principle I should say that our Terms
are flexible and intended to match the business plan of our clients so for instance if our clients are planning on
selling their ass to the pond stabilization you know we can get aggressive on prepay and return for a
slight increase in rate see what other questions we're doing opportunity where
do you Opportunity Zones fit in so I should say that we we've done deals you
know the Dallas Butler project is an example where we've done deals at the eb-5 and new market tax credits and
historic tax credits and we've invested in the largest credit team in the industry so they probably don't want me
to say this but you know highly structured deals are specialty and additionally with opportunities on
projects you know those have a requirement around substantial renovation and rehabilitation and pace
can be a great tool for paying for this rehab especially if the assessment can be passed on the tenants because then
the true cost of capital gets close to zero so what is the typical timings start to
finish that question okay so in general you know as I said earlier the steps to
closing a project is you know we issue a letter of intent once we've kind of scoped gone through the construction
budget and determine what space eligible and of agreed terms we issue a LOI we get consent we get pays program approval
and we underwrite typically it's 45 to 90 days yeah it's it's sort of dependent
upon what our clients relationship is with with the borrower and how much education is sorry with a senior lender
and how much education is required to get it involved to get them consent so
I'm reading another question that just popped up hey Josh this is yes Jason Jason real quick um one thing to bring
up is as part of that borrowing process is the energy assessment that needs to
be performed that proved to be kind of the big work piece of the process for us
all of it it all the rest of it was just administrative and you know paint bring
the deal like a typical loan but we did have to do that energy assessment analysis and we'll have to Ferrar other
projects in order to demonstrate the payback so that may be something you want to mention yeah that's a great
point Jason thank you for bringing up that's that's a really kind of a state specific requirement so for instance
miss Minnesota Missouri Colorado Texas have requirements of savings to
investment ratio and that's that's part of the process around you know after we get consent getting pace program
approval in addition to making sure that we're actually financing qualifying measures some states require an energy
study as Jason is alluded to demonstrating that over the life of the assessment that there's going to be
energy savings involved and we helped quarterback that process as well and work with your engineers to make that
happen see what other questions arising
what is the typical percentage of new construction costs that are eligible for pace
in general we find that more than 20% of the construction budget it's going to qualify and that we
we are going to be limited by our own underwriting requirement or statute
depending on which stayed around of 20% as complete value or loan to cost what
we do is we'll go through the construction budget will parse out kind of line by line what might be pace eligible another question is I know each
situation is different but in office buildings two landlords typically pass pace payment through their tenants as
part of the cam charges and you know it's really case specific we definitely
have clients who are actively passing them on we have clients who you know it's a conversation with their tenants
we have some who you know believe that pace is a assessment assessment of prior property tax bills and they absolutely
the language of their leases absolutely says that they can pass it on so it's really project specific and what is the
language what is the language in the in the lease allow for another question is
it seems most paces for 20 years are you going to 25 and 30 years or is this
based on the useful life so we can do you know 10 to 30 years depending upon two things one the statute so for
instance Colorado statute only allows for 25 years but in California we can do 30 years I mean it's in Missouri we can
only do 20 years so sometimes we're handcuffed by the statute and the sort of the other side of it is the effective
useful life of the assets were financing another question is will will clean fund
fund solar panel fields or roof installs we can do ground mount systems we did a
5-megawatt ten million dollar project for Pacific ethanol which was a ground mount system and we were also able to do
we are also doing rooftop projects as well what interest rate would you
recommend developer see what use and developing a pro forma so our rates are
tied to Treasuries and we're somewhere depending upon you know the size of the
project the asset type etc you know we're somewhere between 250 and 400
basis points above Treasuries so you know in general sort of ballpark six
to six and a half percent on a new on a ground-up new construction and less for a fully stabilized asset and we can kind
of talk more specifics once we understand a little bit better about your project so we are now at we are now
at 10:31 so we've gone over and I want to thank everyone for participating if
you've asked questions that haven't been answered please feel free to follow up and I will answer them directly I want
to thank again connect media for for being our media partner as well as Jason bass and Ikki and development group for
being awesome development partners and I hope everyone has a great day and please follow up thank you
you