Checking In, Plugging Out

The country’s largest project – under an innovative national program to improve the sustainability of commercial buildings – is underway in Universal City. The 24-story Hilton hotel at 555 Universal Hollywood Drive will receive about $7 million of water- and energy-efficiency improvements under the Property Assessed Clean Energy, or PACE, program. The program, adopted in 2009 by Los Angeles County, allows property owners to receive affordable financing for energy-saving improvements. The loan is repaid through a special assessment on property tax bills over a period of years. “By doing this, we were able to protect some funds for other uses,” said hotel General Manager Mark Davis. “And it doesn’t really impact the balance sheet here at all.” PACE legislation has been passed in 31 states, but the Hilton renovation is the largest ever undertaken. The biggest previous project was announced in July in Sacramento, where Metro Center Corporate Park, a four-building, 250,000-square-foot office park, will receive $3.2 million in upgrades. The Hilton Universal City, which was built in 1984 and has 489 rooms, is the largest hotel in the Valley region. Structured Finance Associates LLC, a San Marcos firm that provides capital toward energy-efficient and sustainable upgrades, is providing the $7 million in financing. The Hilton’s owner, Sunhill Properties LLC, has 20 years to pay back the loan in bi-annual payments. Davis would not specify the exact interest rate, but described it as a “little higher margin than a typical secured loan.” He added the upgrades will not affect room rates and other customer costs. The hotel will get new LED lighting, replace its shower heads with low-flow versions, exchange bathtubs for showers, install electric vehicle charging stations and make elevator improvements. The upgrades, which began in October and should be complete by early next year, are expected to save the hotel $800,000 in annual energy costs. They also will save about $28,000 in water costs a year by conserving 2.8 million gallons of water. Davis expects that the savings will offset the cost of the loan, making the project cash-flow positive. Bruce Baltin, a senior vice president at the Los Angeles office of PKF Consulting USA, a hospitality consultancy, said the project will do more than reduce energy costs. “There are a lot of businesses and agencies that make sustainability a box you have to check to make a hotel acceptable,” he said. “They can market this.” Program financing Pace financing was first known as “Special Energy Financing District,” and was proposed in the Monterey Bay Regional Energy Plan in 2005. It was focused on the residential market, including solar upgrades and adding insulation. However, the first city to actually implement a PACE program was Berkeley, under its BerekelyFirst climate program in 2008. L.A. County got going about a year later before it spread to other parts of the country. The White House Council on Environmental Quality has been a staunch supporter, lauding the program for being a “means of removing barriers to expansions in the residential energy efficiency and retrofit market.” But home lenders have not been so supportive. The program took a hit and was put on pause in 2010 when Fannie Mae and Freddie Mac were not willing to back mortgages that had liens on them associated with PACE upgrades. PACE loans are senior to other debt, which means if a property goes into default or foreclosure, the PACE lien would be paid before the mortgage on the property. “The PACE assessment has priority over the mortgage,” said Howard Choy, general manager of the Los Angeles County Office of Sustainability and PACE program administrator. “The FHFA (Federal Housing Financing Agency) and lenders had concerns and it put things on hold.” Thus the program shifted to the commercial market, where it is structured differently. The county guarantees repayment to the financer, in this case Structured Finance. Twice a year the hotel will pay its property taxes to the county, along with the assessment for the PACE loan. The county then pays Structured Finance what it is owed. The hotel can pay the loan back in full at any point, much like a mortgage. If the Hilton hotel were to go into bankruptcy and default on all property taxes and loans, the new owner would be on the hook for the loan repayments. Choy said either way, the “financer gets made whole again.” L. Jean Dunn Jr., managing director at Structured Finance, said his firm was founded in 2009 exclusively to finance PACE projects. He said the risk involved in the lending is limited, being tied to the credit of the property being upgraded. “The risk on the bond is the credit of the property,” he said. “But Hilton is very low risk in terms of its credit rating.” Growing trend In Los Angeles County, Choy said there are 39 applications for PACE financing in the pipeline, which could amount to more than $36 million worth of sustainable upgrades. “This is just the absolute beginning stage for commercial PACE,” Choy said. “But we hope for a lot more once all the features are understood.” But to date, only one PACE project has been finished locally: The Long Beach headquarters of Teamsters Local 848, which represents truck and bus drivers, completed upgrades this summer. The deal also was financed by Structured. Upgrades to the headquarters at 3888 Cherry Ave. cost about $200,000 and included replacing the roof and all the light fixtures in the building. Eric Tate, secretary-treasurer of the union, said the upgrades are estimated to save the group about $500 a month over the next six to seven years. Tate would not disclose the amount of the assessment on the Teamsters’ property, but did say that the upgrades result in positive cash flow. “This is a great move for us,” he said. “It saves money and enhances the value of our building.” The Hilton upgrades will have minimal impact on its business, said Mike Bahr, principal at Sacramento sustainable development firm ReNewAll LLC, which is handling the project and also worked on the Teamsters building. “Almost all of the upgrades will be done before customers even check in,” he said. “There will be almost no impact to the customer.” And the only portion of the upgrades that will take longer than three months and have some customer impact is the elevator work. The Hilton has 14 elevators, including service elevators, which will be shut down in stages. Each elevator will take about 12 to 16 weeks to overhaul. The new elevator motors will use 60 percent less energy. In addition, when going down, the elevator creates electricity. But hotels are still a business driven by location, amenities and aesthetics. And the hotel does have more visual upgrades planned for next year. While the Sheraton hotel down the street underwent some $30 million in renovations less than five years ago, the Hilton is in need of updating. Davis, the general manager, said the hotel hovers in the high 80 percent range for occupancy year-round and what he calls a “complete makeover” is in the works, though he wouldn’t give specifics. He said the plans are still in the design phase and have yet to receive the OK from Hilton Worldwide Holdings Inc. in McLean, Va. “There are companies that will only do business with sustainable hotels, so we need to look good inside and out,” he said. “We consider this to be a wise investment and the right thing to do.”