Securing financing for hotel developments has become an increasingly complex challenge, especially in today’s economic environment. As interest rates remain high and lenders become more conservative, developers often face significant hurdles in obtaining the necessary capital to bring their projects to life.
A recent $73 million origination for a 263-room dual-branded Hilton hotel development in San Diego demonstrates how creative financing structures, combining both construction loans and Commercial Property Assessed Clean Energy (CPACE) financing, can overcome these obstacles.
The financing challenge
Hotel development financing has always been more complex and difficult to obtain, but in the current environment, these challenges are amplified. Higher interest rates, sticky inflation and economic uncertainty have made traditional financing more expensive and difficult to secure.
For developers, this environment creates significant headwinds to get a project off the ground. Traditional banks, which previously provided the bulk of construction financing, are now more reluctant to offer favorable terms or any financing for that matter. This forces developers to seek alternative financing methods to balance debt costs while still meeting the project’s capital needs.
$50.4MM senior + CPACE deal
In the San Diego deal, a $50.4 million floating-rate construction loan was central to the financing structure. This short-term loan bridges the gap between the construction phase and permanent financing or the sale of the property.
In this case, the construction loan provided the flexibility needed for a hotel development project to proceed, as cash flow will not be generated until the hotel is operational.
One of the more innovative elements of this financing structure was the use of CPACE financing. CPACE allows developers to secure long-term, fixed-rate financing specifically for energy-efficient improvements.
Benefits of CPACE for hotels
For hotel developments, this can cover a wide range of eligible improvements, including seismic upgrades, advanced HVAC systems, energy-efficient lighting, plumbing and building envelope enhancements.
In this case, the $22.6 million CPACE financing was amortized over 25 years, allowing the developer to finance critical aspects of the building’s energy-efficient design and systems without absorbing those costs immediately. This solution provided crucial capital while spreading repayment over a longer period, making it more manageable than traditional shorter-term construction loans.
Integrating CPACE into the capital stack
The integration of CPACE into the overall capital stack was pivotal in making this deal work. By combining the construction loan with long-term, fixed-rate CPACE financing, the developer was able to mitigate risks while enhancing the project’s sustainability.
Peachtree Group, which provided the financing, determined that utilizing CPACE was instrumental in enhancing the overall transaction, yielding significant savings of approximately 200 basis points in interest-rate spread, making the project more financially feasible.
Creativity the key to bringing large projects to life
Successfully securing construction loans and CPACE financing in a difficult market highlights the complexity and creativity needed to bring large-scale projects to life. With traditional financing sources tightening, developers must work with a variety of capital providers and navigate intricate financing structures to ensure their projects get off the ground.
In this deal, the combination of construction and CPACE financing represented 64% of the total development costs. Given the current market conditions, finding lenders willing to contribute such a significant portion of the financing is no small feat. This also highlights the importance of crafting a tailored capital stack that addresses the unique needs of a project while managing risk for both the developer and financing parties.
As hotel development faces ongoing challenges, deals like this highlight how developers can adapt through creative financing structures. The successful use of CPACE financing emphasizes the growing role of sustainability in real estate, both environmentally and financially. As traditional capital sources remain tight, alternative financing avenues will be crucial for completing complex projects. In a high-risk environment, mastering deal structuring and financing will be key to success in commercial real estate development.
Learn more at The Lodging Conference
Peachtree Group is a direct balance sheet lender focused on funding first mortgage bridge loans, mezzanine loans, preferred equity investments, and commercial property-assessed clean energy (CPACE) financing. Jared Schlosser is responsible for Peachtree’s hotel originations platform and its CPACE program. Hear more from Jared during the “Connect with Active Lenders” panel at the upcoming Lodging Conference October 7-10 in Phoenix.
Provided by Jared Schlosser, Peachtree Group’s EVP, Hotel Lending & Head of CPACE
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