Post written by Rob Shear, CEO of PACE Sage Capital, LLC
Commercial PACE financing is new in the markets that we operate in and we spend a lot of time educating developer and property owner clients and those who serve our clients.
Most are intrigued with this novel program and appreciate the nuances and benefits of this financing, especially the unique ability to go back up to two years and reimburse (take out cash) for project costs already incurred.
More than a few times we hear the following: “Sounds very interesting and relevant, BUT THE RATE!”
Today’s PACE fixed, non recourse rates for 20 years are in the 6.25% to 7.0% range. When one compares that to a shorter term, recourse conventional financing (construction, mini-perm, bank mortgages), the rate sounds high. That is the issue: comparing the rate to conventional senior debt.
PACE is not a replacement for conventional senior debt financing. We tell our clients to obtain as much conventional senior, shorter-term debt for their projects that they can get and our financing will be a GAP filler in the equity stack. PACE combines with TIFs, historic and new market tax credits and other financing incentives and is best positioned with these other incentives in the equity stack.
If one compares PACE to mezzanine debt or equity hurdle rates, 6.25% to 7.0% fixed for 20 years is very competitive. It’s all about what PACE is replacing. When PACE is part of the equity stack and it reduces the amount of cash equity required for a project, that could be a real boost to the IRR of the investment.
When one can passthrough some or all of the annual PACE special assessment to tenants (triple net leases and leases with expense stops) or hotel guests (energy efficiency surcharge below the daily rate line), the effective rate of PACE capital can be driven down to zero.
The math works that for a PACE fixed rate of 6.50%, if 45% of the annual special assessment cost is recovered by a passthrough, the effective PACE rate is 0%. It would be hard to say “But the Rate” if the rate is effectively 0%.
Finally, some of our clients are using part of the PACE funds to pay down their senior debt to below a threshold LTV that gives them a reduced senior debt rate. After the senior debt rate cut, when they combine the new senior debt rate and the PACE rate, their overall debt service is lower.
I hope this helps to put a real perspective on the RATE!