A $118 million project to put a luxury hotel in a landmark building on La Salle Street has become the first development to get city-backed financing under a new program that supports energy conservation.
Developers of the Reserve hotel at 208 S. La Salle St. have qualified for $21.25 million in financing for energy-related work designed to lower costs over time. The money will be repaid from future property tax bills that apply to the building.
The financing is available through Chicago PACE, or Property Assessed Clean Energy, a program the Illinois General Assembly authorized statewide in 2018. Former Mayor Rahm Emanuel’s administration got it started in Chicago and his successor, Lori Lightfoot, has embraced it as an incentive for economic growth that’s energy efficient.
A property owner enrolled in Chicago PACE agrees to an extra charge on the property tax bill that covers the loan repayments. The program can be compared to a special service area, a taxing district in which multiple property owners pay extra for a service — except that it applies to just one parcel and the work must be related to saving energy.
Jana Wesley, managing director of Chicago PACE, said the program essentially has no funding cap, since it relies on private sector investments. “Our task has been to do as much marketing as we can so people know this is available,” she said.
Lightfoot said in a statement that the program “will advance Chicago’s commitment to building more efficient and sustainable designs, strengthening our clean-energy economy.”
Wesley found out quickly the name is a source of confusion, as PACE is also the name of the suburban bus system. “I learned to define this program very early in the conversation,” she said.
Although interest rates are low, Wesley said the program helps developers by providing lower-cost debt than sources they often use, such as mezzanine financing, which generally carries double-digit percentage rates. It can be used for any form of commercial property and residential property of five units or more.
For the Reserve hotel, developer Prime Group is paying 5.5% interest on the loan for the next 27 years, said the firm’s chairman, Michael Reschke. The money will go toward work on windows, lighting, elevators, plumbing and heating and cooling systems, saving an estimated $3 million in operating expenses over the life of the loan.
“This is a good program for both the city and the private sector,” he said. Reschke said one challenge has been to get senior lenders comfortable with the financing, as it puts a lien on the property. But it’s rare for commercial properties to be lost because of unpaid taxes.
Reschke is putting the 233-room hotel in the five top floors at 208 S. La Salle, the old Continental Bank Building. In 2010, he opened a JW Marriott on its lower floors. Five floors in between the hotels will remain as offices.
The Reserve, a luxury brand of Marriott, will open in spring 2021, Reschke said.
Chicago PACE is administered for the city’s Department of Planning and Development by a private partnership called Loop Counterpointe PACE, a joint venture of the investment bank Loop Capital Markets and Counterpointe Energy Solutions. The Illinois Finance Authority issues the bonds and the partnership places them with private investors.
While Chicago PACE’s first project is a large one, Wesley said she hopes it also supports developers doing medium- and small-scaled projects. Several such deals are in the pipeline, she said.
Chicago has been the nation’s leader in energy-efficient office buildings for the last three years, according to an index published by CBRE Group, Maastricht University and the University of Guelph. It identified 71% of Chicago office buildings as meeting green standards.