Lender Consent – Why Do Lenders Say YES to PACE?

Rob-Shear

Rob Shear

Post written by Rob Shear, CEO of PACE Sage Capital, LLC

In every Commercial PACE transaction, existing lienholders are asked to provide Acknowledgment and Consent to the PACE financing. In the vast majority of PACE enabled States, the state law requires the consent.

As a practical matter for PACE financing companies, it’s prudent business practice to ensure that a PACE financing would not trigger an Event of Default and that Lenders are fully apprised of the financing.

Annual PACE special assessments are usually added to the property tax bill, are treated like property tax and have a superior lien status to mortgages or other secured debt.  Thus, we have the real need for Lender Consent.

Our clients will inevitably ask us “Why do Lenders say YES to PACE?”.  Besides showing them a long list of consenting Lenders , we guide them through the analysis.

Over 80% of PACE consent requests are granted. The Lenders that say yes generally see PACE this way:

  • ApprovedIf there is a default on Senior Debt, the Lender can accelerate the loan, step in and foreclose and control the asset; PACE assessment contracts are non accelerating and are paid like property tax. As long as the current assessment is paid by the Senior Lender, the Lender is in complete control of its asset;
  • Borrowers frequently treat PACE as off balance sheet. Assessments can be viewed as operating costs that are not placed on the balance sheet.  From a Lender’s point of view, PACE may not be seen as debt and counted in their LTV;
  • PACE funds pay for long term energy and water conservation measures that increase the energy efficiency of buildings and modernize them. That enhances the collateral value of a Lender’s asset and makes the property easier to lease or sell;
  • PACE is long term, fixed rate and non recourse and it pays for long term useful life measures with long payback periods. For most conventional Lenders, that is outside of their wheelhouse to lend with those terms.  PACE financing is a better solution for these long payback measures and banks support what is best for their borrower clients;
  • PACE financing is an economic development tool that can fill a gap in the equity stack to get a project launched. If the Senior Lender can help facilitate the PACE financing and the capital stack is secured, the project moves forward, the Senior Lender makes a new loan and assists its borrower client to get the project off the ground;
  • PACE funds are sometimes used to pay down existing debt, especially when PACE is a pass through to tenants or hotel guests and the effective rate of the PACE capital is driven down below the rate of the conventional debt. This is an effective strategy and reduces the exposure and risk for the Senior Lender and the borrower;
  • PACE can fund projects retroactively  and that provides an opportunity for borrowers to withdraw equity from a property to deploy elsewhere. If the property can support the withdrawal of equity and the Lender consents, the equity can be used for another project and the Lender may get a new loan with its borrower client.  Win-win!

When do Lenders say NO?

Lenders will say no if their relationship with the borrower is unstable and when the property cannot support the PACE transaction and the debt service coverage ratio will fall below the Lender’s minimum threshold with PACE.  With every financing solution, it’s important to ensure that the property can support it.

PACE Sage Capital will assist its borrower clients with Lender Consent at the early stages of a PACE application process. Lender Consent and Energy Engineering are two factors in a PACE transaction that need to be satisfied very early on.

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