Three new hotels finance efficiency work with PACE

June 2020

Rochester’s sprawling Destination Medical Center (DMC) district has seen a steady stream of new apartments, office buildings, and hotels to absorb an influx of new residents and visitors to the world-renowned Mayo Clinic.

Three new hotels owned by one California developer recently hit efficiency targets by using Property Assessed Clean Energy (PACE) loans to pay for improvements. PACE offers developers a way to finance the purchase of better heating and cooling equipment, the construction of high-performance building envelopes, and other energy-saving features. 

Why Rochester?

Civic leaders hope the DMC will add thousands of residents and workers to Rochester’s sleepy downtown, positioning the city as a global healthcare and wellness powerhouse. A vital element of the plan calls for aggressive sustainability goals to reduce the average energy consumption of new buildings. To promote efficiency, the DMC makes sure building owners and developers know about PACE financing.

With PACE, building owners pay off loans for energy efficiency projects on their property tax bills, generally over 10 or 20 years. A national network of PACE lenders has emerged to assist developers with capital to pay for larger projects, such as the new Rochester hotels.

The Port Authority operates the state’s MinnPACE program. It creates joint powers agreements with counties where developers have asked to use PACE to pay off energy efficiency projects, Klein said. More than two-thirds of Minnesota counties have joint powers agreements because they have PACE projects, he said, and more are added as PACE grows. Minnesota’s PACE program remains among the largest in the country, with more than 250 PACE projects worth hundreds of millions of dollars in developments. 

It’s unique to see there are three hotels with PACE loans in one city, especially since the other hotel projects in Minnesota are spread out. But the Rochester market is just growing far more rapidly than other markets.

Pete Klein, Executive Vice President at Saint Paul Port Authority

PACE changes fuel growth

Last year a change to the state’s PACE law allowed developers to use the appraised value of a new building for determining the amount of PACE financing available. Developers once had to use the assessed value of a project site rather than the finished building, a sum too small to even bother with PACE financing, Klein said.

PACE can represent 20% of a project’s cost, or millions of dollars in the financing of new buildings. Hotel and senior home developers were the first to step forward and use the PACE for new construction, Klein said. At least six hotels, including those in Rochester, and around a dozen senior homes have used PACE for new construction, he added.

Hotels and senior living communities find PACE attractive because banks demand a higher equity stake compared to multi-tenant commercial buildings. PACE adds 10% to 15% to the capital available in a project, reducing the developers’ equity from 40% to 25%, Klein said. 

PACE helps answers demands for sustainable developments

Another reason Rochester has seen PACE investments grow stems from data developers must submit before building in the Destination Medical Center area, according to city sustainability director Kevin Bright. The city also suggests PACE as a financing option to pay for meeting the city’s efficiency goals. 

“This is a financing strategy that is shared with potential projects as part of the DMC application process,” Bright said. “Given the energy performance requirements that the DMC application process requires, the PACE program is a natural pairing from a financial standpoint.”

Even more helpful, the paperwork the DMC requires for meeting energy goals mirrors that of the Port Authority PACE program. “The PACE program’s deliverables also ask for similar documentation that DMC and the City of Rochester need to ensure compliance, so there is a natural connection between one and the other,” he said.

Given the energy performance requirements that the DMC application process requires, the PACE program is a natural pairing from a financial standpoint.

Kevin Bright, Sustainability Director for the Destination Medical Center

A closer look at PACE financing in Rochester

Newport Beach-based EKN Development Group used PACE for the Rochester hotels, which include the just-opened Hotel Indigo, formerly a Holiday Inn, and two others under construction, Hyatt House and the co-branded Even-Staybridge. Collectively they add more than 500 hotel rooms to the city’s lodging stock within blocks of Mayo Clinic.

With large projects, building owners use third-party lenders specializing in PACE loans. EKN used Milwaukee-based PACE Equity for Hyatt House and Even-Staybridge. PACE Equity’s Ethan L. Elser, Sr., executive vice president, said the $49 million Hyatt House has a $4.3 million PACE loan that paid for improved insulation, roofing, building envelope features and mechanical equipment. 

Although a larger hotel, the Even-Staybridge received a slightly smaller PACE loan of $3.4 million. The developer paid for a handful of energy efficiency enhancements through the project’s construction loan rather than PACE, Elser said. In both hotels, PACE offered access to long-term, fixed-rate mortgages that required no additional capital or personal guarantees, he said.

With PACE, you no longer have to trade cost and efficiency. This is funding that is dedicated to achieving your energy efficiency, renewables, and sustainability goals. You don’t have to make difficult decisions about those options because PACE gives you the capital to pay for them over several years.

Ethan L. Elser, Sr., Executive Vice President with PACE Equity

Look Inside: Hotel Indigo

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