C-PACE Financing and the Hospitality Industry: Understanding the Benefits, Market Drivers, and Transactional Considerations

Once viewed primarily as a funding mechanism for energy-efficiency upgrades, commercial property assessed clean energy (C-PACE) financing has evolved in recent years into a mainstream financing tool utilized by commercial real estate owners and developers throughout the United States.

In years past, the C-PACE discussion focused on educating stakeholders in the industry about the unique benefits offered by C-PACE financing. Those education efforts seem to have paid off, as the C-PACE financing market has not only seen broader market adoption, but also significant growth in the size of C-PACE financings among a broad range of real estate assets, including hospitality. Today, C-PACE policies exist in 40 states throughout the United States, with more than 32 active programs. Since 2017, average C-PACE financings have jumped in size from approximately $800,000 to $40 million in 2026, with some recent transactions, such as the C-PACE financing of the Rio Hotel & Casino in Las Vegas last September, reaching north of $175 million.

Hotel owners and developers in particular continue to optimize the benefits of C-PACE industry growth, turning to this state policy-enabled funding mechanism to support new hotel developments, major renovations, property improvement plans (PIPs), and asset repositioning strategies in hotels across the United States.

This Legal Update examines the distinctive benefits of C-PACE financing, the market trends driving its growing popularity among hotel owners and developers, and the key factors to consider when evaluating C-PACE financing for a hotel project.

Unique Benefits of C-PACE Loans

Unlike traditional debt, C-PACE provides long-term, fixed-rate financing for properties through a voluntary state policy-enabled assessment attached to a property’s tax bill, based upon eligible sustainable design and construction projects. Because many of the building systems that drive hotel operations (such as HVAC, lighting, roofing, windows, and mechanical infrastructure) qualify for C-PACE funding, the program has become particularly attractive for hotel owners and developers seeking to optimize their capital stack for new developments as well as property improvement plan (PIP) requirements or other necessary brand standards.

Among the unique benefits C-PACE financing offers to property owners are:

• Repayment terms that can reach 20-30 years;
• Retroactive application for recently completed renovation projects or developments;
• No personal recourse or guaranty requirement;
• Generally not subject to acceleration; and
• Generally no assumption process for a purchaser to assume C-PACE financing, as it transfers automatically upon transfer of the property.

Trends in Hospitality Market Contributing to Continued C-PACE Growth

Several converging trends are contributing to the expanding adoption of C-PACE financing across the hotel industry. As hotel owners and developers face a more challenging operating and capital markets environment, the ability to secure long-term, fixed-rate financing for new developments and necessary building improvements such as PIPs has become increasingly valuable.

The cost of developing and renovating hotels has increased significantly in recent years due to inflation, supply chain disruptions, labor shortages, and higher material prices from tariffs. These pressures have made it more difficult for projects to achieve target returns using conventional financing alone. Additionally, although interest rates have moderated from recent peaks, borrowing costs remain elevated compared with recent historical lows.

C-PACE financing offers hotel owners and developers the ability to obtain a substantial portion of project capital to pay for eligible improvements at the hotel, bridging funding gaps by supplementing senior debt and reducing the need for additional equity.

Further, as travel patterns evolve and guest expectations change, hotel owners are increasingly investing in asset repositioning, conversions, and adaptive reuse projects. These initiatives often require substantial upgrades to building systems and infrastructure. C-PACE financing can help fund eligible components of these types of projects, making them more financially feasible while supporting long-term operational efficiency.

Last, hotel owners facing liquidity concerns may be able to turn to C-PACE financing for relief. Depending on the C-PACE program offered in a hotel’s jurisdiction, a hotel owner may be able to obtain C-PACE financing for eligible improvements completed at the hotel up to three years previously. Proceeds from this retroactive C-PACE financing would reimburse such hotel owner for eligible capital costs already spent on such recent renovation, enabling the hotel owner to apply those proceeds by pay down expensive debt or increase working capital reserves to support hotel operations.

Considerations to Keep in Mind When Adding C-PACE to the Capital Stack

A hotel owner should anticipate seeking consent to enter into C-PACE financing from its senior mortgage lender. In response to the increased prevalence of C-PACE financing in the market, loan agreements from traditional mortgage lenders with increased frequency expressly state that obtaining C-PACE financing requires lender approval. That being said, mortgage lenders have consented to C-PACE financings with increased regularity, and a growing number of large institutional banks have developed internal policies to guide review of C-PACE financing consent requests from their borrowers, moving beyond the case-by-case approval process from years past.

Senior lenders concerned about being “wiped out” by a tax sale or tax foreclosure resulting from a C-PACE financing may condition their consent upon the Borrower agreeing to: (i) limit the size of the C-PACE financing to a maximum loan-to-value (to protect the lender’s first-mortgage position); (ii) escrow the annual assessments payable under a C-PACE financing with the senior lender (alongside property taxes and insurance premiums) to ensure C-PACE assessments are paid timely; and (iii) adjust the debt service coverage ratio calculations and covenants within the senior loan documents to take into account C-PACE payments and ensure that net operating income generated by the hotel will cover the combined debt.

These discussions with a senior lender will likely need to be re-addressed with each refinancing of the property.

A hotel owner should also consider how C-PACE financing could impact the underwriting of any sale of the hotel. While C-PACE financings are generally freely assumable by a purchaser, not every purchaser will want to inherit a C-PACE financing upon acquisition. Similar to the hotel owner who is looking to sell the hotel, a purchaser will need to obtain consent from its senior lender and factor into its underwriting the ongoing operating cost of paying annual assessments under any C-PACE financing it assumes upon acquisition.

C-PACE financing typically is priced as a fixed-rate spread over the United States. 10-Year Treasury was as low as 2% in pre-pandemic years but has, as of late, been hovering around 4.5%. As a result, a purchaser acquiring a hotel subject to C-PACE financing obtained years ago may elect to assume the C-PACE if locked into a relatively low rate, but may require that a seller, as a condition to closing, repay from sale proceeds a more recently acquired C-PACE financing with a higher locked-in interest rate.

Conclusion

The growing adoption of C-PACE in the hospitality industry reflects broader trends shaping the hotel market today. As investors, lenders, brands, and guests place greater emphasis on both financial resilience and environmental performance, the role of C-PACE is likely to continue expanding in the industry. To maximize the benefits of C-PACE financing, hotel owners and developers should engage legal counsel early in the process to evaluate the requirements of the applicable state C-PACE program, secure any necessary senior lender consent, and assess how a C-PACE assessment may affect the underwriting and marketability of the property in a future sale or refinancing.