We’ve got a ground up development and we’re considering using PACE as 15% of the Capital stack. 70% LTC, with the remaining 15% being cash equity.
There’s a 5 year prepayment lockout for PACE, starting with the first payment which is made in project year 3. If we’re targeting a sale between project years 5-7, we’d still be in that lockout period so the buyer would have to assume the PACE financing for another year or two. The other option is to not sell and just refi to a perm loan after the lockout period is over.
Does anyone have any experience exiting or redo on a deal involving PACE? How was it treated in the marketplace? Did it cause any major headaches?
Thanks in advance.
Will definitely be a headache as it sits in front of a 1st mortgage in most states.
Agreed - but as I understand it, only one year's worth of payments sits before the 1st mortgage. And I've been told that money can be escrowed to ensure the payment is available, which puts a lot of the construction lenders at ease. Most of the pushback we've seen from them is due to lack of education on some of the newer policies associated with PACE financing, but once we've connect them with our PACE guy they seem to get it. However - the debt shops all say that life companies won't touch it for permanent financing, which makes me nervous about finding someone to refi.
I've been discussing these concepts a lot lately with a trade association I sit on the board of. We have been asked to support new legislation in our state. All of our banker members are opposed and the mortgage bankers association is testifying against it. I don't think it will make a refi impossible, but it will certainly make it more difficult as a lot of groups simply won't touch it. The anecdotes I've heard are it's a lot easier to get the lender on board up front when it makes the project work and they get a construction loan they otherwise wouldn't, but when it's a refi and they aren't really as invested in making the project happen they tend to balk at it.
Thanks for the insight - it's very much appreciated.
I'd really push on your PACE lender on the lockout. PACE Loans are governed by state law which won't dictate any lockout provision. In an attempt to maintain your future business they could very well waive that lockout.
Talking on a refi, at that point the PACE is a recorded tax. Your lender will underwrite the PACE assessment as any other real estate taxes and use the resulting NOI to back into the ultimate leverage level.
Assuming the PACE lender allows you to prepay, you could view it as bridge equity.
I work at a PACE shop and would be happy to talk more!
That's good to know. Our PACE lender just came back to us and said they're offering a Non-Lockout option now, so I'm waiting to see what those rates are.
Have you had any of your PACE loans on new developments go through a refi or sale event? How was it looked at by the buyer or financing institution (specifically life co's.)?
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