Mixed-Use Hotel Development

Transaction description

Jason Roth of Pacific Southwest Realty Services (PSRS) secured $40MM in non-recourse mid-construction financing for a confidential Los Angeles-based hotel developer, making it the third-largest Property-Assessed Clean Energy (PACE) loan in U.S. history. The subject property is a mixed-use hotel development located in LA County that consists of a 225-room hotel, 87 managed apartments, and 41,000 RSF of retail space. Construction on the $120MM owner-financed project initially began in 2017. The impact of the COVID-19 pandemic at the end of Q1 2020 created the need for an infusion of outside capital into the project to complete the construction.

The project was mid-construction when PSRS was engaged to secure the additional $40MM required for completion.  Despite a shutdown in the hotel construction lending market, Roth and his team were able to leverage the PACE program to save the client an estimated $7MM over non-PACE alternatives in the market and secure the following terms:

• Non-Recourse Construction Financing
• Fully amortizing 30-year loan
• Low-cost prepayment penalty in the projected year of stabilization
• The client will make no principal or interest payments for the first two years of the loan

“When the client initially approached us regarding their unique circumstances, many advisors would have run from the assignment given the negative sentiment we were seeing from lenders on hotels and retail at the time,” said Roth. “There were three recommendations we made throughout the process which were critical in making this deal happen:”

1. Pursue the PACE program, so the developer could leverage the 65% of the project that was already built to drive proceeds above what a conventional lender would underwrite.
2. Secure an updated appraisal on the project before shopping the lender market.
3. Thoroughly vet the lender’s backend securitization process to avoid execution risk as there were many lenders who could quote this deal but few who could execute.

“I am particularly proud of this deal because of the immense value we were able to provide to our client during a challenging time in world history,” Roth said. “This deal required a collaborative effort with Twain Financial Partners and other third parties and will ultimately result in the completion of what will be a consequential project. I would like to provide thanks to the following people for their help on the transaction and look forward to working with them in the future.”