Had anyone used Pace Equity for a multifamily loan?
Trying to up our leverage but I've heard mixed things. Anyone have experience with pace equity and would they recommend? Would have this on top of a senior loan.
[{"id": "ima8go1", "text": "Are you talking about C-Pace? Most senior lenders won\u2019t allow it because it\u2019s more secure than the senior loan. We\u2019re using c-pace in a construction deal right now that\u2019s taking the first 35%, followed by a senior that\u2019s going up to 70%. It\u2019s only cost effective because it\u2019s hotel development, otherwise the trade off wouldn\u2019t be worth it (the senior got a lot more expensive when we included the c-pace).\n\nIf you want to get past ~65% LTC you\u2019ll need to get a stretch senior or pref equity.", "replies": [], "depth": 1}, {"id": "imaimc7", "text": "I've closed 2 deals that had PACE financing and I'm on my third.  It's not really equity -- it's a loan that is secured on the property by a \"special assessment,\" a tax assessment.  It has heavy pre-payment penalties but for a couple of my projects this year, it made sense to use them.  Here are some details about them: \n\nMy first PACE loan was a construction take-out.  Hotel was nearly completed.  I closed a $77MM loan of which $45MM was PACE and the rest was a senior mini-perm loan.  Closed this two months ago.  \n\nThe second  PACE deal I've did is a 150 unit multifamily construction project.  I took out a construction lender of $40MM with a loan of $70MM as costs had come up.   PACE made up $35MM of this loan and the senior the rest.  Closed this three weeks ago. \n\nCurrently working on a 217 unit multifamily project with 120k SF of retail on the water.  Working on my third PACE deal where $90MM will be PACE and $100MM will be the senior loan.  \n\nSo because the senior loan retains their position, and the PACE lender is only secured by a special assessment, the senior lender's I've worked with have not had any issues.  But PACE does limit your overall pool of  lenders who want to work with you and PACE.  And again, heavy pre-payment penalties.  You really need to know what you're doing with your property. \n\nThough your PACE lender might be ok with giving you 30% of the future LTV, with a total LTC constraint of 80%-90% (depending on the type of asset for my PACE lenders), the senior lender your'e working with might still limit the total financing (with the PACE) to 75%.  This is because most seniors will want you to still have skin in the game.  \n\nEach deal is unique.  You should be putting a sources and uses together that is a bit more in-depth than the traditional simple \"here are all the funds\" and \"here are all the costs\" S&amp;U.  If you can, model the S&amp;U so that you list out the detailed land, soft, and hard costs.  Then allocate the specific cost line items to a source.  That is, after you have a total budget created, add a few more columns for equity, PACE, and then senior lender.  Now start allocating the costs to each column next to the total budget column.  The PACE and senior lender each have their own closing costs, points/fees to the lender and broker, and then an interest reserve.  Make sure to allocate those first and then allocate the remaining costs up to the loan amount.  This will make it very clear what costs aren't covered by the loan and what will have to be your (or an investor's) equity.  The same model will work for a straight forward MF acquisition.  You should have a document that gives you the full picture of the project and accounts for every expense with every dollar.  \n\nGood luck with your projects and feel free to ask any questions!", "replies": [{"id": "imaunlh", "text": "Well said!!", "replies": [], "depth": 2}, {"id": "imavcn2", "text": "Can you tell me more about how you go about this structure? How are you getting to those levels of proceeds? Is this ground up construction? I'm doing a big rehab ($40mm+) and only getting to around $5-7m of PACE eligible costs.", "replies": [{"id": "imc2rbx", "text": "it all depends on how much of the project scope falls within the eligible criteria. A good basis, for example, that I am using on my current hotel is the LEED Certification. The certification provides a comprehensive list of categories that makes my building more \u201cgreen/efficient\u201d and, in turn, also provides the PACE provider you are using with the ability to underwrite at higher $$ level", "replies": [], "depth": 3}, {"id": "imfp9mf", "text": "Will write a reply soon. Just currently busy in-between meetings!\n\nEdit: Sorry about this delay. The way this works, in my experience, for example, is that the PACE financing is up to 30% of the stabilized appraised value.  If the project is $95MM in cost, $120MM in value, this means that my PACE loan would be $36MM.  Since my senior lender is constrained by a total debt on the project of 75% LTC, this means that my total debt outstanding can only be $71.25MM.  If I reduce this loan amount by my $36MM of PACE, the senior's loan would be the remaining $35.25MM.  This is very similar to how my deals have been.\n\nAs for eligible costs, I looked at one of my other PACE energy audits (the PACE report) and I had $38MM of eligible costs out of a total of $99MM of hard costs for that project.  So I think it may have to do with your building and how it has been designed.  I understand you're doing a big rehab and getting at most about $7MM of eligible costs.  Could it be that much of the core structure that's there was not built as energy efficient?\n\nLastly, I would add that PACE began as a financing tool to help owners be able to finance renovation for their buildings. PACE has been around as a public policy idea for about 14 or so years, it originally came about as a way to incentivize existing building owners to make their buildings more efficient.  They had old heaters/HVAC, inefficient lighting, bad roofs, etc.  If these owners went to a contractor to fix their building, they would certainly have to pay upfront for the improvements to then save money with efficiency over the next 5 or 10 years.... But most owners operate with a mindset of \"cash today is king -- no thanks.\" So the idea with PACE was to offer a long-term fixed rate financing mechanism where 100% of the improvements are to the building are financed. It was originally intended to be a rehab tool for existing properties.  But then it turns out that if you're a building owner, you're passing on the utility costs to the tenants anyway, so \"who cares?\" So the rehab application of PACE fizzled out. Over the past 3 or 4 years, where the industry has really pivoted, is PACE being a layer in the capital stack of new construction or gut-rehab.  The reason for this is that it effectively acts as cheaper mezz debt.", "replies": [{"id": "inqd0ah", "text": "Thank you, I appreciate the insight. Our rehab is a historic property, so we are qualifying for federal tax credits as part of the capital stack. The building itself is not efficient at all, so a huge portion of our upgrades will make the building envelope itself far more efficient, which is why I was kind of surprised at the numbers being put out in this thread in comparison with the estimates we've gotten so far. We are still waiting on final drawings and specs, so I don't have an energy audit yet, but I was definitely curious as to how people are achieving these numbers. We have a long term property tax abatement so I've got plenty of room for debt service within the special assessment just to bring the pro-forma up to fair market tax levels. I need to do more homework on PACE to really understand what's possible though, so this is an eye opener.\n\nOut of curiosity, are you looking to reduce your senior debt because of pricing/economics vs. the PACE loan, or looking to reduce the exposure to guaranties/credit of sponsorship? Or I suppose looking to place long term debt on the front end.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "imauls9", "text": "Hi - I specialize in certain forms of Multifamily Development Financing, particularly HUD insured loans. With PACE, there a few issues I\u2019ve seen. First, someone kicking the tires on PACE financing may frequently be doing so because they lack enough capital to get the project completed. Although it shouldn\u2019t be, a client seeking PACE has  become somewhat of a warning sign for me that the project can\u2019t be completed. Obviously a lot of deals get built with PACE so that is not always the case, but it has been my experience.\n\nSecond, if you are using PACE, the cost of the tax assessment will be an expense that will get counted in your applicable DSCR. In other words, if your loan is debt service constrained, you will get less loan proceeds when you add the expense of the PACE financing. This may be okay, because your PACE proceeds may be cheaper than your construction debt or pref equity, but frequently the PACE terms will be worse than the construction loan terms so the trade off is not worth it. For HUD loans, usually it\u2019s best to just maximize the HUD debt (which can be 85%~90% LTC) instead of using PACE. \n\nIf you want to discuss further just let me know. Good luck!!", "replies": [{"id": "imbk5dp", "text": "HUD won't allow PACE to be secured by improvements that are also secured by HUD's loan. PACE will only really work on a HUD loan if you are high cost factor constrained because then you can remove the PACE improvements from the mortgageable costs and still maintain your HCF loan, but you still get dinged on the DSCR NOI as you noted above. Takes a special kind of deal to work with HUD and PACE for sure.", "replies": [], "depth": 2}, {"id": "imbp97c", "text": "Here\u2019s the HUD Notice on point https://www.hud.gov/sites/documents/17-01HSGN.PDF", "replies": [], "depth": 2}], "depth": 1}, {"id": "iopwloc", "text": "Many years ago when I was doing my undergrad, I interned at Pace Equity under a Managing Director that no longer works for the firm. I speak strictly from my own perspective of the firm but I really liked the guy I worked under. As a company overall, I approved of the leadership, as well. Those guys are smart and care about their clients - that was clear to me early on. They do have a reputable track record of deals and if the numbers pencil for your deal, I recommend using them.", "replies": [], "depth": 1}]