June 25, 2021
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For the latest articles on EB-5 Funding, click here on C-PACE Funding.
Some believe the recent Behring v. Wolf case revitalized EB-5 funding for developers by lowering the minimum investment for EB-5 to $ 500,000
On June 22, 2021, a federal court in the Northern District of California in the Behring Regional Center LLC v. Chad Wolf validly invalidated the final rules for EB-5, which went into effect in 2019. These rules increased the minimum investment for foreign immigrants from $ 500,000 to $ 900,000 and imposed other restrictions.
Many commercial real estate developers hope this development will spark a new wave of EB-5 funding that could kickstart their projects, as it has for years (until a few years ago when the music stopped).
Don’t be too excited when the dependable EB-5 funding comes back – but maybe there is a better alternative. . .
For many years we have helped developers raise and complete EB-5 funding for new construction and development projects. We had a 100% success rate closing all of our EB-5 deals totaling more than $ 1.5 billion. But we have not felt comfortable using this source of capital for several years as none of the reliable sources we have worked with have been able to commit to a deal. They could not raise the funds of the immigrant investors.
What happened? More than 85% of the funding came from Chinese immigrants, and USCIS immigrant visa processing times grew to over 15 years! No investor wants to wait 15 years to get the immigrant visa they are paying for today.
These processing residues have effectively destroyed EB-5 as a reliable and robust source of funding for commercial property development. The court decision overriding the final rules for EB-5 will not resolve this or any other issue with the program.
But a better alternative to EB-5 funding has arrived mainstream and should be considered. Many do not know this alternative – Commercial PACE (or C-PACE).
Is C-PACE the “new EB-5” finance for commercial real estate developments? Yes and no . . .
C-PACE is the “new EB-5” finance for commercial real estate developers, but only in one remarkable sense: Virtually every commercial real estate developer will at least seriously consider C-PACE for projects in the 2020s, just as they have already done got EB-5 in the 2010s.
Aside from its skyrocketing popularity and even cheaper terms, the C-PACE solution has absolutely nothing to do with the EB-5 program
Here are some of the key differences between C-PACE and EB-5:
C-PACE does NOT have any of the negative characteristics of EB-5 funding. In detail, the C-PACE financing includes:
- No government approval or approval for any business
(only broad, state empowering laws)
- No uncertainties or long waits for fundraising or regulatory approvals
- No circular offers, marketing processes, translations and securities liabilities
- No immigration or foreign investors (only local funding sources)
- No recourse obligations
- No accelerations by default
One of the hottest finance opportunities for commercial property development, construction, improvement, and repair, C-PACE has hit the finance scene. In some ways, it’s the “alternative” finance developers who are looking at them now.
What is Commercial PACE or C-PACE?
C-PACE is a cost-effective, non-recourse financing that creates a lien on the property and is repaid through property tax. There is no balance sheet or personal liability of the owner or developer.
PACE is an acronym that stands for “P.Rope team Arated C.lean E.Energy. ”And the term C-PACE or Commercial PACE is simply PACE finance for any class of commercial property.
There is also a household PACE program for consumers, but this article does not address the issue. We deal exclusively with PACE financing for commercial real estate – offices, apartment buildings, retail, hotels, industrial and the like.
PACE funding is an extension of the concept of local appraisal districts, such as those used for school improvement, fire, or flood districts, except that the appraisal district is only the C-PACE funded property – not all of the lots in the district.
The only government involvement is the initial empowering laws and regulations of state and local governments. There is no government involvement or approval of individual financings. There are no investment bankers or marketing agents.
Although the original concept behind all PACE funding was energy and water efficiency and things that promote a cleaner environment, the eligible expenses for PACE funding are quite high. In several recent construction projects, up to 80% of the hard and soft costs of the project were PACE-eligible.
C-PACE funding is a great way to fund a “green” project, but there is no LEED certification or other government approval. Eligible expenses include broad categories of airtighting, ventilation, insulation, HVAC, lighting, roofing, water heating, cooling, compressed air, charging stations, elevator modernization, renewable energy, plumbing and irrigation, landscaping, and more.
Why does everyone seem to be talking about Commercial PACE now?
PACE funding has been quietly growing for more than 10 years. With steady and increasing local, state, and federal support, it has matured and improved. Over the past 3 to 5 years, C-PACE financing has caught on and is now a welcome and accepted tool for commercial real estate financing.
Here are a few indicators of its explosive popularity:
- 37 states and the District of Columbia have now issued enabling regulations
- 25 states and the District of Columbia now have active programs
- PACE funding doubled from $ 800 million in 2020 to over $ 1.5 billion in May 2021
- C-PACE is available for every class of commercial property
Why C-PACE financing can be attractive:
C-PACE funding takes the form of a voluntary real estate tax assessment that has the same characteristics and priority as an ad valorem property tax (usually only paid twice a year if property taxes are paid). Here are some of the features that can be negotiated that can make financing attractive:
- Lower interest rates (5.5-6%) than traditional mezzanine debt and equity
- Fixed Income Financing
- Terms of up to 30 years
- No personal recourse or guarantee (except completion guarantee)
- Usually covers new construction and renovation (e.g. “PIP” financing)
- Capitalized interest component allows 2-3 years without payments
- Only interest period is possible
- Fully reasonable financing (no maturity component)
- Prepaid (often with a decreasing prepayment fee)
- Sensible part of the capital stack (15-30% + of the costs)
- Fast and efficient process (less complex than typical mortgage documents)
- Limited standard triggers
- No financial covenants or tests applicable
- No acceleration to standard
Retroactive C-PACE funding may be available for completed properties
PACE commercial finance was generally viewed as a form of construction finance, but it can also be offered for certain completed or operating properties. This is known as “retrospective financing,” which can provide the ability to refinance qualified improvements such as the cost of HVAC, electrical and water efficiency systems, building envelopes, seismic foundations and upgrades and related soft costs. The retrospective funding calculation in certain jurisdictions may include costs related to improvements that are completed up to 36 months in advance of closing.
The C-PACE proceeds from such retrospective funding can be used for working capital, amortizing or redeeming existing loan obligations, or making payments for PIPs or improvements.
How we can help with Commercial PACE Funding (C-PACE)
C-PACE lending has become an important and rapidly growing sub-area of our hotel finance competencies. We work with C-PACE providers / lenders and borrowers. In fact, we have been fortunate to partner with one of the leading C-PACE finance providers to expand its national platform.
We welcome inquiries to see if we can help you evaluate potential PACE funding opportunities.
Webinar and more about C-PACE funding
To learn more about C-PACE, watch our free recorded webinar:Why So Many Are Considering PACE (C-PACE) Commercial Finance Now. “
You can find more information on this topic in the hotel law blog under the topic of C-PACE financing. Here are a few selected items and some representative transactions we have completed.
Retroactive C-PACE releases hotel investment capital
C-PACE Financing – Now an Accepted Tool for Hotel Lenders and Borrowers
Should You Consider PACE (C-PACE) Commercial Finance Now?
C-PACE Financing Lawyer: New York Opens Commercial PACE – A Great Opportunity!
Some of our offers: C-PACE financing on a roll!
This is Jim Butler, Author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We advise hotel owners, property developers, independent operators and investors on business and legal matters. This advice covers critical hotel issues such as hotel purchase, sale, development, financing, franchise, management, ADA and IP matters. We also have strong experience in hotel litigation, union avoidance and negotiation, and cybersecurity and privacy.
JMBM’s Global Hospitality Group® has been involved in more than $ 87 billion in hotel transactions and in more than 3,900 hotel properties around the world. Contact me at 1-310-201-3526 or [email protected] to discuss how we can help.
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