Unlocking Equity-Free Growth: C-PACE’s Innovatory Role in Hotel Development

Commercial Property Assessed Clean Energy (C-PACE) financing is a rather novel and sophisticated non-dilutive financing mechanism that is proving to be an extremely interesting tool in how hotel developers and investors approach project capitalization. With traditional construction financing becoming increasingly expensive and scarce, C-PACE is offering a compelling alternative that has the ability to preserve developer equity while enabling ambitious sustainability improvements that drive long-term value creation.

Understanding C-PACE: A New Paradigm in Commercial Real Estate Finance

C-PACE represents a shift in how commercial properties can be financed for energy efficiency, renewable energy, and building resiliency improvements. This innovative financing structure operates through state-enabled legislation that allows property owners to obtain up to 100% financing for eligible improvements with no upfront costs, repaying the investment through a voluntary property tax assessment over terms that can extend up to 30 years.

The mechanism works through a unique public-private partnership where state or local governments enable the financing framework, but private capital providers fund the actual improvements. This structure creates what's called "non-dilutive financing" because it does not require traditional equity contributions from developers while simultaneously improving property performance and value.

Notable Program Characteristics:

• Financing terms typically range from 20-30 years

• Interest rates generally between 6-9%

• Projects can finance up to 30% of property value

• 100% financing of eligible improvement costs

For commercial real estate developers (including hotel developers), this financing tool addresses one of the most persistent challenges in the industry: how to implement sustainability improvements and energy efficiency upgrades without depleting precious equity or taking on expensive mezzanine debt. The assessment runs with the property rather than the borrower, creating a transferable financing structure that can actually enhance property marketability upon sale.

Strategic Benefits for Hotel Developers 

Hotel developers have discovered that C-PACE financing offers several compelling advantages over traditional financing mechanisms. The most significant benefit lies in its ability to reduce overall development costs while improving project returns. Unlike conventional loans that require monthly payments beginning immediately upon funding, C-PACE assessments typically begin only after project completion and utility savings start accruing.

The non-recourse nature of C-PACE financing provides additional security for developers. The assessment is secured solely by the property itself, with no personal guarantees required from the borrowing entity. This structure contrasts sharply with traditional construction financing where developers often face significant personal liability and complex covenant requirements.

From a capital stack perspective, C-PACE financing typically offers interest rates that are 200-300 basis points below mezzanine debt alternatives. For a typical select-service hotel development, this cost advantage can translate to substantial savings over the life of the project. The long-term fixed-rate structure also provides predictability in an environment where interest rate volatility has become a significant concern for developers.

Perhaps most importantly, C-PACE financing can fund both hard costs such as HVAC systems, solar installations, and high-efficiency lighting, as well as soft costs including engineering, permits, and project development fees. This comprehensive coverage reduces the equity burden on developers while enabling them to pursue more ambitious sustainability goals.

Transaction Structure and Financing Stack Integration

Typical Hotel Development Financing Stack with C-PACE

Senior Construction/Permanent Debt (60-70% LTV)

• Traditional bank construction loan or permanent financing

• First lien position on the property

C-PACE Financing (10-20% of eligible improvements)

• Senior assessment lien that runs with the property

• Funds sustainability improvements and eligible systems

• Does not count against debt-to-income ratios for senior lenders

Developer Equity (20-30%)

• Remaining project costs and contingencies

• Reduced equity requirement due to C-PACE financing

Key Structural Advantage

C-PACE’s senior lien position actually protects the senior lender’s collateral by funding improvements that increase property value and reduce operating costs. Most experienced hotel lenders now accept C-PACE as enhancing rather than competing with their security interest.

Investor Advantages and Market Appeal

For institutional investors and private equity firms focused on hotel assets, properties with C-PACE financing offer several attractive characteristics. The senior lien status of C-PACE assessments actually enhances the underlying property value by funding improvements that reduce operating expenses and increase net operating income. This creates a unique situation where the presence of senior debt improves rather than compromises the investment thesis.

The transferability feature of C-PACE assessments provides additional flexibility for investors. When a property with C-PACE financing is sold, the assessment automatically transfers to the new owner without requiring formal assumption procedures. This seamless transition can make properties more marketable and potentially command premium valuations, particularly among ESG-focused institutional investors. 

Recent IRS rulings in the US have provided additional advantages for investors in C-PACE financings. The clarification that C-PACE assessments qualify as "qualified mortgage loans" under REMIC provisions has opened new securitization opportunities, potentially expanding the investor base and improving liquidity in the C-PACE market.

Critical Considerations and Implementation Challenges

While C-PACE financing offers significant advantages, successful implementation requires careful navigation of several key considerations, the most critical of which involves securing senior lender consent as the C-PACE assessment creates a senior lien position ahead of traditional mortgages. However, the industry has evolved significantly in this regard, with most institutional lenders now having established policies for reviewing and approving C-PACE transactions. 

That said, eligibility requirements for C-PACE financing are quite specific. Properties must be located in jurisdictions with active C-PACE programs, and improvements must demonstrably enhance energy efficiency, incorporate renewable energy, improve water conservation, or increase building resiliency. The project must also demonstrate that energy savings will exceed the annual assessment cost, typically requiring a savings-to-investment ratio greater than 1.0.

Geographic Span

Currently, the availability of C-PACE financing is dominated by the United States, with very limited implementation in other countries worldwide. Here’s a comprehensive overview of global C-PACE availability: In the US, C-PACE-enabling legislation exists in approximately 40 states, but program implementation varies significantly by jurisdiction. Some states operate comprehensive statewide programs, while others delegate authority to local municipalities, creating a patchwork of requirements and capabilities.

Canada has the most developed C-PACE programs outside the United States, with PACE-enabling legislation present in the Canadian provinces of Prince Edward Island, Nova Scotia, Ontario, Saskatchewan, Alberta, Northwest Territories, and Yukon.

Australia offers a similar mechanism called Building Upgrade Finance (BUF), which operates on principles similar to C-PACE. BUF is currently available in three states: New South Wales, Victoria, and South Australia.

European C-PACE availability is extremely limited, with most activity focused on research and pilot programs rather than operational financing. Research has identified several barriers to European C-PACE implementation:

            •          Fragmented building sector with varying construction standards

            •          Complex mortgage market structures that differ significantly from the U.S.

            •          High transaction costs that discourage lender participation

            •          Existing government subsidy schemes that compete with PACE financing models

No other countries currently offer operational C-PACE or equivalent financing programs. However, PACENation is conducting a 12-month feasibility study called “PACENations - Growing the international market” to collaborate with local networks, including Green Building Councils, in various countries looking to establish PACE-equivalent programs.

Practical Application: The Economics of Hotel C-PACE

Consider a practical example involving the development of a 120-room extended-stay hotel with a total project cost of $22 million. Under traditional financing, a developer might secure a 70% construction loan ($15.4 million) while contributing $6.6 million in equity. With C-PACE integration, the developer could finance $2.5 million in eligible improvements including high-efficiency HVAC systems, LED lighting throughout, building automation systems, and solar installations.

This C-PACE component would reduce the required developer equity to $4.1 million, representing a 38% reduction in equity requirements. The annual C-PACE assessment of approximately $175,000 would be more than offset by projected energy savings of $85,000 annually, plus operational savings from reduced maintenance requirements and improved guest satisfaction scores.

The improved energy efficiency would also enhance the property's NOI (Net Operating Income), supporting higher valuations for refinancing or sale transactions. With cap rates for extended-stay properties typically in the 6-7% range, the $85,000 in annual savings could add $1.2-1.4 million to the property's appraised value, more than offsetting the C-PACE assessment balance.

Recent Successful C-PACE Hotel Transactions

1. Black Desert Resort, Utah - $153 Million (2024)
The Black Desert Resort near Zion National Park in Ivins, Utah, achieved what Petros PACE Finance called “the largest single transaction in C-PACE history” when it closed $153 million in C-PACE financing in October 2022, with the first phase opening in 2024. The 630-acre resort development features a resort hotel, spa, golf course, roughly 1,000 condos, and 190,000 square feet of commercial space. The C-PACE proceeds funded energy-efficient HVAC systems, insulation, earthquake mitigation, and water conservation measures. The resort secured a 30-year agreement at a 7% interest rate with a 25-year amortization period. Managing partner Patrick Manning noted that the resort uses low-voltage power over ethernet throughout the entire property and that “C-PACE helped us accomplish our water conservation measures. Because of C-PACE, we were able to finance efforts that banks wouldn’t.” The resort’s CFO described the C-PACE experience as “seamless.”

2. Home2 Suites/Tru by Hilton Dual-Brand Hotel, San Diego - $22.4 Million (2024-2025)
Peachtree Group originated both a $50.4 million first mortgage and a $22.4 million C-PACE financing for the development of a dual-brand, 263-room Home2 Suites and Tru by Hilton hotel in San Diego, California. This transaction demonstrates the integrated financing approach that successful developers are employing, with Peachtree Group providing both senior debt and C-PACE financing under one roof. The project is strategically located in San Diego, which attracts over 30 million visitors annually and achieved the fifth-highest RevPAR among the top 25 U.S. hotel markets as of July 2023. The experienced sponsor is a vertically integrated real estate development and management company that operates four other hotels within one block of the new development, creating operational synergies and cost efficiencies.

3. Appellation Healdsburg Hotel, California - $62.6 Million (2023-2025)
GreenRock Capital and Petros PACE Finance secured $62.6 million in C-PACE financing for the construction of the Appellation Healdsburg hotel project in Sonoma County’s wine country. The 108-key luxury boutique hotel, anticipated to open in 2025, will feature a 160-seat Charlie Palmer signature restaurant and bar, rooftop bar, fitness club, spa, two pools, and 15,500 square feet of meeting and event space. The C-PACE proceeds funded key sustainability measures including building envelope improvements, LED lighting systems, and water conservation plumbing fixtures. Chris Robbins of GreenRock Capital noted that “C-PACE financing is integral to structuring a robust capital stack, offering our clients a path to not only secure the viability of new development projects but also to advance them with a strong commitment to sustainability.” The property is positioned as the only 4½ star resort in the market that provides luxury amenities while intimately connecting guests to the local wine country community.

Transaction Process and Critical Success Factors

Successful C-PACE implementation requires early integration into the development planning process. The optimal approach involves identifying eligible improvements during the design phase, conducting preliminary energy modelling to demonstrate savings potential, and engaging with both C-PACE program administrators and senior lenders before proceeding with formal applications.

The application timeline typically requires 45-90 days for approval, making early initiation essential for projects with tight construction schedules. Critical success factors include maintaining clear communication with all stakeholders, providing comprehensive documentation of projected energy savings, and ensuring that improvements are properly integrated into construction specifications and draw schedules.

Lender coordination represents perhaps the most crucial element of successful C-PACE transactions. Developers who engage senior lenders early in the process, provide detailed information about proposed improvements, and demonstrate the value enhancement potential typically encounter fewer obstacles during the approval process.

The Future of Non-Dilutive Hotel Development Financing

C-PACE financing represents a fundamental evolution in hotel development finance, offering developers a sophisticated tool for reducing equity requirements while improving property performance and environmental sustainability. As the hospitality industry continues to face pressure for ESG compliance and energy efficiency improvements, C-PACE provides a new financial tool that can assist developers achieve these objectives without compromising financial returns. 

The continued expansion of C-PACE programs across additional states and the growing comfort level among institutional lenders suggests that this financing mechanism is poised to weave itself more concretely into mainstream hotel development capital stacking. However, successful implementation requires deep expertise in both the technical requirements of C-PACE programs and the complex coordination required among multiple stakeholders.

The inherent reality at play is that commercial real estate finance landscape continues to evolve rapidly, with new structures and opportunities emerging regularly. Developers who stay ahead of these trends, supported by experienced advisory partners who understand the nuances of innovative financing mechanisms, will be best positioned to capitalize on the significant opportunities ahead. As the industry moves toward greater sustainability focus and more sophisticated capital structures, tools like C-PACE financing will become increasingly advantageous to competitive success.

Amimar International is a leading advisory firm specializing in commercial real estate finance and development strategies. Our team provides comprehensive advisory services on innovative financing structures, funding package optimization, and complex transaction support to help developers achieve superior project outcomes. To learn more, contact us today.