Buch the Trend — A Commercial Real Estate Blog

The Place for PACE

By Steve ‘Buch’ Buchwald – The Debt & Equity Finance Group

(Steve ‘Buch’ Buchwald, New York, 3/25/2019) — In my previous article on Historic Tax Credits, we discussed one complicated financing structure commonly used by developers to capitalize their deals. In this article, we will discuss PACE Financing. I will do an article on several of these – a quick list includes Historic Tax Credits, PACE Financing, EB-5, and Ground Leases. Each of these specialty finance products adds layers of inflexibility to recoup equity, make refinancing decisions, account of cost overruns, and exit or refinance at attractive terms. My next article will be about EB-5, which was similarly popular a few years ago and now many developers regret the decision to take such an inflexible, difficult to deal with piece of capital just to save a few hundred basis points during construction on a small piece of the capital stack.


If you are in the commercial real estate development or financing business, I would be surprised if the term PACE Financing hasn’t crossed your desk by now. So…what is PACE? PACE stands for “Property Assessed Clean Energy”. Putting aside the minutiae of energy efficiency and what costs qualify, the key components to address are whether to employ PACE, where it lies in the capital stack, its security and repayment terms.


Before we explore what PACE really is, let me first address how it is pitched. PACE lenders have hired some amazing sales people and put out some extremely compelling materials about their programs. These materials paint a rosy picture – at the end of this article I will address how their materials could present a more balanced view – but borrowers are often drawn to low interest rate financing alternatives regardless of the potential costs and penalties down the road or across the rest of the capital stack. Like all new forms of financing, developers should be discerning and cautious. Low interest rate financing alternatives that look attractive on paper can have unintended consequences as the project progresses, particularly when it needs to be refinanced, recapitalized, or sold.



So how is PACE pitched? It is pitched as a long-term, low cost mezz alternative. Why pay 12% for mezzanine debt or preferred equity when you can get PACE for 7% fixed? However, looking behind the curtains, PACE cannot be compared to mezz in terms of security and its position within the capital stack. A PACE loan is a self-liquidating loan that is secured by a tax lien and is repaid through tax payments over a 20-year period. Like any tax lien, it is in first position, ahead of any senior lender, and it is literally on the state’s tax assessment roll. That is why some states allow PACE and some do not. But if PACE is the most senior piece of capital in the capital stack, why should it get a higher interest rate than the senior lender? Good question – it shouldn’t.


The Place PACE by Steven ‘Buch’ Buchwald, Managing Director – The Debt & Equity Finance Group

Putting PACE into your capital stack also has a potential cascade effect. If the senior is getting pushed up in effective LTV by the PACE loan, then it will either charge a higher spread on what should be a much larger piece of capital than the PACE piece would represent, effectively killing or more than killing whatever benefit it should provide over a traditional mezz loan, or it will reduce its leverage dollar for dollar at the same rate. Either way, that is not what is shown in PACE marketing materials where it looks as if the senior lender keeps its leverage the same at the same rate. Add on top of this a yield maintenance or hefty 5%+ prepay penalties that reduce in amount but go out a very long time, a reduced NOI due to the tax lien upon refinance, and other ancillary fees, one will generally find that PACE can be an expensive financing alternative, particularly as it pertains to recourse averse developers, developers with larger projects, and merchant builders or partnerships with fund LP capital that want to exit quickly.


To be clear, there is a place for PACE. If you are looking to develop a smaller scale property, desire to hold on to the property for a long time, are in a state that allows for PACE, and are employing local community or regional senior bank debt (typically partial to full recourse), then PACE may make sense. These lenders just care about their Loan to Cost and are underwriting to stabilized DSCR.


One of the perks of PACE is that the green energy aspect of it allows for a rationale to pass the tax lien on to tenants in commercial buildings through their lease or to guests at a hotel as an ancillary charge. While this does affect the end user’s effective rent or ADR, respectively, the underwriting can certainly pass muster for these local and regional bank lenders. Going back to the PACE marketing materials where the lender is pushed up in the capital stack and keeps their loan amount and rate the same – this is now a possibility – and the PACE works as intended (and marketed). It is no wonder then that almost every senior lender that has closed with PACE financing has this lender profile.

Hotel is Ace Hotels’ first “Sister City”-branded property

NEW YORK (March 20, 2019)

Mission Capital Advisors announced that it has arranged $80 million of bridge financing for the recently completed Sister City hotel, a 200-key hospitality property located at 225 Bowery, at the intersection of the SoHo and Lower East Side neighborhoods of Manhattan. The Mission Capital team of Jonathan More, Steve Buchwald, Ari Hirt and Jamie Matheny arranged the first-mortgage financing from Bank Hapoalim on behalf of a partnership between Omnia and Northwind Group.

After purchasing the property, Omnia and Northwind commenced a major construction campaign, adding three floors and transforming the century-old building into an amenity-laden, food-and-beverage-centric hotel. The first Sister City property created by Ace Hotels, the 14-story building will feature a 234-seat café restaurant, a 150-seat rooftop bar with sweeping views of Manhattan, and a ground-floor garden.

“We see that the Bowery is really becoming a prominent nightlife destination,” said Northwind managing partner Ran Eliasaf. “It has truly become the bridge between the Lower East Side and Nolita in Manhattan.”

A new concept from Ace Hotels, which will manage the property, the Sister City brand brings a fresh experience to travelers, offering comfort, beauty and human connection. Acclaimed for its hotels’ innovative design and development, Ace is one of the premier hotel operators, with nine other properties – and 1,400 rooms – in prime markets across the country.

Omnia and Northwind previously worked together on a number of successful projects, including a luxury rental building at 351 West 54th Street in Hell’s Kitchen, which they sold to Bentley Zhao in 2017 for $34 million.

The Omnia Group is a full-service development, design, and building firm focused on commercial and residential real estate in Manhattan. Run by President David Paz, Omnia has completed over 20 projects in Manhattan with over 475,000 square feet of residential units with a combined value of over $300 million.

The Northwind Group, led by Ran Eliasaf, is a Manhattan based real estate private equity firm focused on commercial, value-add residential, hospitality, and senior-living properties.

BISNOW – March 11, 2019 | Catie Dixon, Managing Editor

This series profiles men and women in commercial real estate who have profoundly transformed our neighborhoods and reshaped our cities, businesses and lifestyles.

David Tobin, an entrepreneur and aviation lover who still gets irked by the deals he didn’t do, co-founded Mission Capital in 2002. The real estate capital markets company, which is HQ’d in New York and has offices in California, Texas and Florida, has advised financial institutions and investors on more than $75B of loan sale and financing transactions plus more than $14B of Fannie Mae and Freddie Mac transactions.

Tobin also founded EquityMultiple, worked in brokerage and did a stint with Dime Bancorp — while working in asset resolution there, he had a role in the liquidation of the $1.2B nonperforming single-family loan and REO portfolio.

Courtesy of David Tobin
Mission Capital Advisors principal David Tobin and his son Lorenzo bookend Jean Jacques Peken Josue in Haiti. Lorenzo does a service project each year for Clean Hands for Haiti.

Outside of work, he is a lecturer on whole loan valuation and mortgage trading at New York University’s Real Estate School, is a member of the Real Estate Advisory Board of the Whitman School of Management at his alma mater, Syracuse University, and is a board member of the charity Clean Hands for Haiti. He keeps busy raising his two boys and, as an English major, feeling distress over grammatical errors he receives in emails.


Bisnow: How do you describe your job to people who are not in the industry?

David Tobin: In its most simple form, Mission brokers portfolios of debt, raises capital for commercial real estate projects and provides trade support for massive single-family loan portfolio transactions. Most people outside of the finance business don’t understand what we do, so I describe it in terms of my mother’s home mortgage. Every time she receives a notice from her mortgage company to send her mortgage payment somewhere else, that means that someone has sold or brokered her loan. I tell her that her home mortgage is just like a bond, which is a loan, and bonds are bought and sold.

Bisnow: If you weren’t in commercial real estate, what would you do?

Tobin: I have always been fascinated by the commercial aviation business and companies like Boeing, Airbus, Embraer, Bombardier and the like. One of my favorite authors when I was younger was Michael Crichton, and his book “Airframe” was a really interesting description of the business. It’s all in the wing design, apparently. I also find the energy business really interesting, from renewables to oil to the geopolitical issues. I have spent a lot of time reading about PDVSA, the national energy company of Venezuela, and the terrible value destruction of its franchise. Mission has brokered many debt trades of aviation-, equipment- or property-backed loans, and in a prior life, I sold hundreds of excess properties for Chevron, Exxon, Getty, Sunoco and Texaco.

Bisnow: What is the worst job you ever had?

Tobin: Aside from paper routes, my first job at 16 was working on the floor of the New York Stock Exchange as a runner during the summer of 1984. It was amazing. However the next summer, I worked for a town in Westchester as a laborer. I did a rotation, sort of like a rotation in a summer internship at Goldman … but not. We did sidewalk replacement, gardening work and garbage pickup … so for two or three weeks, I was, in fact, a garbage man. That was a tough and disgusting job. I always tell my son to be respectful to the NYC Sanitation folks because they don’t have it easy.

Courtesy of David Tobin
Mission Capital Advisors principal David Tobin skiing in British Columbia

Bisnow: What was your first big deal?

Tobin: There were two first big deals. My first financing transaction was to refinance a discounted payoff of a $47M development bond secured by the Newark Airport Hilton. I met the owner in a real estate class at New York University taught by Phil Pilevsky. My first really large loan sale transaction was during the Russia Crisis in 1998 and I advised Daiwa on the sale of their entire bridge loan book of business. I think it was $250M and at the time, it seemed like a monster. In retrospect, those transactions were small but in the ’90s, $100M was a big deal.

Bisnow: What deal do you consider to be your biggest failure?

Tobin: There are several financing transactions that I have been involved in that died for one reason or another, and every time I drive by those properties, they irk me. The St. Moritz Hotel, which Ian Schrager was buying and for which I was working on the financing team, was one of them. Watching the creative process of Schrager was incredible and memorializing it in a financing package was a really interesting assignment. First Boston had provided a guaranteed take-out, and we were tasked with arranging a construction loan. We brought in a British bank who was ready to go and then First Boston’s lending platform fell apart in 1998 and so did our deal. I also went into contract on my loft building in SoHo right after 9/11 at a ridiculously low basis. I cut a deal to deed two apartments to artist-in-residence tenants living above and below me and then went out to arrange financing. It was a tiny amount in retrospect, but it simply was not available. I lost a portion of my deposit to get out of the transaction and it aggravates me to this day.

Bisnow: If you could change one thing about the commercial real estate industry, what would it be?

Tobin: I wouldn’t change a thing. It’s a perfectly imperfect illiquid business which has maintained its margins, opportunities and approachability through multiple technological booms. Each time a tech wave comes along, the nattering nabobs of negativity say they are going to make it perfectly liquid, tokenize space and buildings and trade it on a screen and it never happens.

Bisnow: What is your biggest pet peeve?

Tobin: People who write “principle balance” instead of “principal balance”, and in a broader context, as an English literature major, bad business writing and poorly written emails.

Bisnow: Who is your greatest mentor?

Tobin: My dad and then my wife. I used to go to the office with my dad on Saturdays when I was a kid. He was an attorney at Skadden and then for a reinsurance company. He taught me my work ethic. My wife was a very successful equity portfolio manager for many years and is the person whose business advice and acumen I most respect now. She is my biggest champion and motivator now (and a great mom).

Bisnow: What is the best and worst professional advice you’ve ever gotten?

Tobin: Best: Don’t focus on being right, focus on getting what you want. Second Best (I think it’s a Sam Walton quote): Some people spend 100% of their time dreaming and never get any work done. Some people spend 100% of their time working and never achieve any of their dreams. I spend 10% of my time dreaming and then 90% of my time working to achieve those dreams. Worst: Life is a marathon. I disagree … life is a series of sprints.

Courtesy of David Tobin
Mission Capital co-founder David Tobin and his wife, Emily

Bisnow: What is your greatest extravagance?

Tobin: Our New York office is pretty deluxe, in a minimalist industrial sort of way. Its 35 floors above Madison Square Park with a 360-degree view. We found it, designed it and purpose built it. I find it motivating to work here. I think others do as well.

Bisnow: What is your favorite restaurant in the world?

Tobin: It’s a three-way tie. Odeon, Raoul’s and Balthazar. My wife and I took out Balthazar for an entire Saturday afternoon for our wedding reception. Angry Europeans were banging on the windows trying to get in.

Bisnow: If you could sit down with President Donald Trump, what would you say?

Tobin: I’m generally speechless on the “noise”, but as it relates to business, perhaps, “Continue to be the change agent you have been with corporate tax reform and necessary deregulation but don’t ignore those who better understand related economic issues, like trade and maintaining alliances. Good managers are good delegators.”

Bisnow: What’s the biggest risk you have ever taken?

Tobin: Starting Mission Capital … and going heli-skiing.

Bisnow: What is your favorite place to visit in your hometown?

Tobin: Edo Plaza Hibachi and Four Corners Pizza.

Bisnow: What keeps you up at night?

Tobin: Many things … finding our next opportunity, competitors, parenting, the uncertain state of the world.

Bisnow: Outside of your work, what are you most passionate about?

Tobin: My family, our time together and raising our two boys … and skiing … and occasionally sailing.

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