00:00:00:01 – 00:00:49:05
Charles
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Sal Tarsia. He is the Managing Partner at CastleGreen Finance, a premier provider of Commercial Property Assessed Clean Energy financing solutions.
Sal has over 30 years of expertise in commercial real estate financing. He has built and led multiple lending platforms, originating and structuring billions of dollars in transactions across ground-up construction, adaptive reuse, and large renovation projects.
His career spans leadership roles at Hannon Armstrong Sustainable Real Estate (where he ran the Principal Transactions Group), co-founding Bedrock Capital Associates, and serving as co-head of Lending Operations at Capmark Finance, where he managed a team of 22 professionals originating over $15 billion in CMBS and structured debt.
So, Sal, thank you so much for coming on the show today.
00:00:49:06 – 00:00:51:12
Sal
Charles, thank you very much for having me. It’s a pleasure.
00:00:51:12 – 00:01:01:00
Charles
So you have a long history background in finance. Can you tell us a little bit about what you did prior to getting involved in real estate and finance?
00:01:01:03 – 00:01:30:13
Sal
Yeah, I mean, I, you know, I’m one of the few people I think that really knew what I wanted to do. Coming out of college, I attended NYU’s Real Estate Institute and really jumped into real estate. Immediately after that. I spent a couple of years doing asset management and, you know, other kind of support roles in, in finance to really understand and learn what happens at the property level.
00:01:30:15 – 00:01:41:21
Sal
But very quickly went into finance, which included commercial mortgage backed securities, or CMBS, as well as balance sheet lending and subordinate.
00:01:41:23 – 00:01:49:16
Charles
Interesting. So tell us a little bit about exactly what CPS financing is. As I spoke before, we haven’t had anybody on the show with this specialization before.
00:01:49:17 – 00:02:26:18
Sal
Sure. CPUs is a public private partnership that was specifically designed to incentivize owners, as well as finance companies, to put capital into projects to renovate them from an energy efficient standpoint. The programs really started from, you know, as small as poorly putting solar panels on roofs, replacing HVAC systems, and then grew to a point where it’s very integral to ground up construction.
00:02:26:18 – 00:02:27:04
Sal
Now.
00:02:27:10 – 00:02:35:05
Charles
Because I imagine you can be a lot more energy efficient with a new build versus renovating a, you know, value add property.
00:02:35:06 – 00:03:19:03
Sal
It can very often be easy to start with a clean sheet of paper and be able to put in those improvements from the start. But we also do a lot of older buildings, including some historic buildings. Program works very well with historic tax credits. Historic tax credits typically approach renovation and rehabilitation of properties. More from an esthetic and historic preservation standpoint, and Pace works very well with that because we take the same approach but from the real guts of the project, from an energy efficiency and equipment standpoint.
00:03:19:04 – 00:03:41:22
Charles
Interesting, interesting. So I’ve seen before some government programs before they give a discount for energy efficient. I know there was one. I think it was with Fannie or Freddie that would give you a slight discount on your rate. If you put in certain types of low flow type water facilities, products, whatever fixtures into your property. What are some of the benefits of C financing versus traditional financing?
00:03:41:22 – 00:04:19:10
Sal
So CPA is financing is very different in the public private partnership arena, in that we don’t get the benefit of any government guarantees, and we also don’t use any taxpayer money. What we benefit from is the local government pace, unlike a lot of programs that can be federally based, Paces state based. So there is a state statute that is passed and then individual communities, whether they be cities or counties, can opt into the state’s program and what it does.
00:04:19:10 – 00:04:51:16
Sal
The government’s role in this is they take what looks to a traditional financier and property owner as a long term, fixed rate, self amortizing financing product, and they take that fixed stream of payments and they record it as a special assessment real estate tax. So we get the benefit of having priority treatment in the capital stack, which allows us to provide lower rates than alternative financing methods for this type of product.
00:04:51:17 – 00:05:09:14
Charles
Yeah. The capital stack was exactly going to be my next question. So that’s going to be something where I can take out maybe a preferred, a preferred spot or a mezzanine finance spot, and I can just put senior debt and then I can use this as part of it, and then our own in owner’s equity. Is that correct?
00:05:09:15 – 00:05:46:22
Sal
That’s absolutely correct. Or like I like to refer to as the new improved capital stack. We basically flip the capital stack somewhat upside down from the financing or debt side of it, where we’re very often a replacement for mezzanine and preferred equity, as you stated, in some cases, depending on the cooperation of the first mortgage lenders that we work with, we could also narrow the equity gap so that owners can keep a larger portion of their project or reduce the need for obviously much more expensive equity.
00:05:46:23 – 00:06:06:02
Charles
Now, how does this work with the lender? Every time that you start bringing on with most lenders supported in debt or some sort of additional money one way or another into the property to capitalize it, the senior debt is going to have some questions about this or a say in it, right? Because they don’t want to fight a second person if they don’t need to.
00:06:06:04 – 00:06:15:18
Charles
If you foreclose or if you get behind on your debt. Can you tell us a little bit about how that lender usually acts when a investor brings us to them?
00:06:15:19 – 00:07:00:08
Sal
Yeah, absolutely. I got into the space a little over nine years ago, and it was still very new. And like a lot of new programs, finance companies, you know, can have an inherent fear of the unknown. And so we try to disarm that fear very quickly by indicating that we’re just like a lot of other special assessments. If a local municipality does a sidewalk project or a water a sewer project in an area, it’s been done for decades, if not close to a century, that they will do that project and then issue a special assessment back to the properties that benefit from that.
00:07:00:11 – 00:07:26:17
Sal
Pace is very similar in that we’re taking private capital, putting it into a single property and issuing a very similar special assessment. So when we explain to the lenders that we work with that once we close, we have to behave in every way, shape and form, just like a regular municipal real estate tax. We don’t have any discretion.
00:07:26:17 – 00:07:42:01
Sal
We can’t really operate any differently. So it’s something that the lenders are already accustomed to dealing with over their careers, and they can analyze it, and it’s very predictable going forward for them.
00:07:42:01 – 00:07:52:04
Charles
So if it’s like an assessment, how does that affect a an investor that wants to exit the property and how will that affect the the the buyer of that property?
00:07:52:05 – 00:08:26:20
Sal
That’s an excellent question. So unlike a lot of financial instruments, paste does not have a do on sale clause. It also is a very long term instrument, typically 20 to 30 years in duration, that can be left in the project upon a refinance, and then either the new owner or the new financial company coming in to do a new mortgage can just analyze it the way that they would any other expense that might be in the property.
00:08:26:22 – 00:09:02:00
Sal
So, you know, think of it somewhat like a ground lease, except with a lot more flexibility, because we do provide the ability for a new owner or the existing owner upon a refinance. If, you know, let’s say rates dropped by 200 basis points in the market, you know, over a 4 or 5 year period, we do provide them with prepayment flexibility so that if there are alternatives, financing methods, or if they sell the property and the new owner does not want to assume the pace, they can pay it off.
00:09:02:00 – 00:09:25:19
Charles
All right. And how is that? How are you protected as and putting money into the property. Because obviously we know if senior debt they’re going to get they’re going to get first position on the property. They’re also going to get paid probably the lowest interest rate on the property because of lower risk. How are you than protecting yourself if something goes, goes, goes downhill.
00:09:25:20 – 00:10:07:14
Sal
So that really is the key benefit of pace in that we’re inserted into that real estate slot. So very similar to the way that municipal real estate tax works. If there is something that goes wrong with the property and the taxes aren’t paid, then we can file a real estate tax lien against the property. It would abide by the same rules of that municipality, in that it’ll follow the tax lien foreclosure rules that are prevalent in that area, which can very often be 2 to 3 years of notice, cure, redemption rights.
00:10:07:16 – 00:10:38:03
Sal
That’s the real benefit. That’s what gets a lot of the first mortgage lenders comfortable is that let’s say we make a $10 million pace loan. The entire $10 million isn’t in front of them at any particular time. The only thing that is senior to the mortgage financing is that then outstanding payment. Once that payment has been brought current, then we go back into the corner and sit there in a very passive role and move on.
00:10:38:04 – 00:10:49:10
Sal
However, you know, the real estate tax lien rules are in place to make sure that while this isn’t a gun to anybody’s head, that it’s not ignored as well.
00:10:49:12 – 00:11:05:23
Charles
You know, that’s a great position for you to be in because, as I’ve understood over the years, I mean, that is the banks will make sure no matter what happened to the property level with the owner of the property, that taxes and insurance will be paid. So that’s a that’s a great position for, for your funds to be in.
00:11:06:00 – 00:11:22:02
Charles
What how does that work with like the time frame. So you said if you’re sitting in a backwards back seat, pass the position after stuff is brought current. How long when one of these when you do financing like this, how long does that usually stay? I mean, how long are these kind of the term on these.
00:11:22:02 – 00:11:48:19
Sal
So the term is typically 20 to 30 years on a self amortizing basis more prevalent. You know, and it depends on the interest rate environment, the current interest rate environment that we’re in right now. We would expect that most borrowers are likely going to pay off the pace in conjunction with some other permanent financing once they stabilize the property.
00:11:48:21 – 00:12:07:12
Sal
If we’re in a lower interest rate environment, the pace can be very sticky and it can stick into the into the capital stack, possibly for the for the full term. On average. I would say, you know, the life of a pace loan is typically going to be plus or minus ten years.
00:12:07:13 – 00:12:18:03
Charles
I know you have a map on your website, which I forget the number of states, but it is pretty prevalent. This product is throughout the United States. Do you have a number of like 30 states or something like this that it is available in?
00:12:18:04 – 00:12:42:05
Sal
So there are currently 38 states that are in. Plus, Washington, D.C. acts as its own unique program. The. I think we can divulge this at given the timing of of this podcast. State of Vermont should be due to come online, hopefully before the end of the month. That would be nine.
00:12:42:07 – 00:12:51:17
Charles
Yeah, I saw that in the northeast. There was New Hampshire, and Vermont were the only two states there in the northeast, I think were part of the program, if I remember correctly. I looked at it quickly, but it’s great.
00:12:51:18 – 00:13:11:17
Sal
Yeah, New Hampshire is online now. Yeah. And Vermont had a statute, but it was extremely flawed in its initial creation. It was structured more like mezzanine debt, which wouldn’t make a particularly attractive. That’s been amended. And we’re very excited to get into that state.
00:13:11:19 – 00:13:14:00
Charles
Yeah. That’s fantastic. Do you have money.
00:13:14:00 – 00:13:33:05
Charles
Sitting in the stock market and you’re worried about it or worse, you have money sitting at the bank not keeping up with inflation. My name is Charles Grillo, founder and managing partner of Harborside Partners. And since 2006, I’ve been investing my money and my family’s money into income producing properties. These are real assets, real properties with real addresses that produce real cash flow.
00:13:33:05 – 00:13:51:15
Charles
At Harborside Partners, we provide passive investors who love real estate with a turnkey investing solution. If you want to put your money to work in real estate but can’t find deals, don’t have the time to get funding. And the last thing that productive people want to do is manage real estate. We find the deals, we fund the deals, and we manage the tenants, the termites and the properties.
00:13:51:16 – 00:14:07:16
Charles
Partner with us at invest with Harborside. That’s invest with Harborside. Go to invest with Harborside. If you love real estate, you like the idea of passive income and believe that income producing properties will appreciate over time. Go to invest with Harborside. That’s invest with Harborside.
00:14:07:17 – 00:14:26:07
Charles
Com there’s another feature of the CPUs loan that I wasn’t aware of and it’s called like the retroactive like look back feature. And I see this if someone did renovations years before and now they can come back to you and they can get financing. How does that kind of work?
00:14:26:08 – 00:14:58:03
Sal
Yes, most states allow up to a 2 to 3 year look back. So let’s say that somebody was unaware of the Pace program or at a particular time. They had different options that they needed to move quickly. They can do renovations and any eligible improvements that will put into the project. Within that look back time frame can effectively be refinanced, you know, and that can, you know, that could potentially pay down more expensive debt.
00:14:58:03 – 00:15:08:23
Sal
It could potentially reimburse the borrower for equity contributions they made into the project at that at that point, that becomes very fungible capital.
00:15:08:23 – 00:15:20:10
Charles
When the decision for CPUs, it’s done on a state level. It’s also done as the the municipalities have any kind of say in it or any control over it, or is it just state level that makes the decision?
00:15:20:11 – 00:15:56:03
Sal
State level makes the initial decision. Now, you know, like with any other law, there’s going to be, you know, lobbyists and, you know, different interest groups within the state that that typically speak up, which may include certain municipalities that have certain needs. But the municipalities ultimate control is they’re not obligated to be in the program. So once a state statute is passed, then it becomes a process of going city by city or county by county to see if they want to opt into the program.
00:15:56:03 – 00:16:05:13
Sal
And that typically starts like anything else, with the largest, most populous counties and cities and then works down from there.
00:16:05:14 – 00:16:11:20
Charles
What would be some typical projects that people utilize CPS financing for, or some projects that you’ve been involved with?
00:16:11:21 – 00:16:45:15
Sal
So hotels seems to be very popular within within the programs they have, you know, a lot of pace eligible improvements within those property types. There also has historically in more traditional financing, been significant constraints on hospitality financing, which leaves more of an opening for our program to step in and fill those gaps. But it can be used on virtually any type of building type.
00:16:45:15 – 00:17:03:15
Sal
We do multifamily, we do senior living, retail, office, industrial. There were also certain esoteric projects. We recently closed a hotel with an adjoining amusement park and water park on it.
00:17:03:18 – 00:17:14:04
Charles
How was the big Beautiful Bill impacted CPS financing? I mean, they put so much stuff into these bills when they go through, you don’t really know what’s in it. They probably don’t even know either. How is that impacted what you do?
00:17:14:06 – 00:17:40:12
Sal
Yeah, there’s there’s been some incentives because I think the biggest thing as it appeals to the Pace program, is that a lot of the can really be front loaded, while at the same time, pace is a long term instrument, so they can utilize the depreciation while extending their financing out for a very long period of time.
00:17:40:17 – 00:17:54:02
Charles
When people are selling properties, let’s say, because they have this and this is now, it just goes in as an above the line type expense. Is that correct? Because it is now property taxes as an expense, not some debt servicing. Correct?
00:17:54:03 – 00:18:44:18
Sal
That’s correct. You know, it really is a hybrid between a piece of debt and an expense. And when a new owner is is coming into it, they can really choose to have the property delivered free and clear the pace, or they can elect through the negotiation with the seller to keep it in. And I’ll give an example. There were projects that we did back in 2021 and early 22 that may have had coupons below 6% in an interest rate environment where Treasury ten year Treasury are roughly 4.5% today, that can become quite an attractive piece of financing to be able to assume for a new buyer.
00:18:44:18 – 00:18:55:11
Charles
And that’s how it’s done. They’re usually done when one of these projects or one of these financing products are utilized 20, 25 years, what you’re saying before the term on them, it’s going to be fixed. Is that correct?
00:18:55:12 – 00:19:02:00
Sal
That’s correct. We fixed the the coupon. It never changes for the life of the of the Pace assessment.
00:19:02:00 – 00:19:13:08
Charles
Oh that’s great. Would you say kind of as we’re wrapping up here, what are some common mistakes you see developers or maybe value out investors make when they’re trying to structure a deal involving CPAs?
00:19:13:11 – 00:19:39:00
Sal
The biggest mistake that we see is the order of operations. We we still see. And the market has gotten a lot better in this regard. The brokers who represent a lot of these owners for financing have really learned the proper way to go about it. We would advise any developer or redevelop to come to us first because of our position in the capital stack.
00:19:39:00 – 00:20:07:06
Sal
When a package goes out to a first mortgage lender, they never want to do all of their work, issue a term sheet and then have somebody say, oh wait, wait, wait. I’m sorry, I forgot to tell you. I want to use pace in this capital stack as well. The much better off getting a proposal from us first. They can build it into their projections and their pro formas, and then deliver it to the lenders out there.
00:20:07:07 – 00:20:19:20
Sal
Who a receptive and understanding of pace and B now have knowledge so that they can do their initial underwriting correctly with the full knowledge of what’s actually there.
00:20:19:22 – 00:20:32:00
Charles
That’s great. One of the things is as kind of a wrapping up here, I like to always ask when and your professional level over your career, what do you think you have done that has really compounded the most for you?
00:20:32:04 – 00:21:11:03
Sal
You know, my passion in real estate has always been structuring, you know, really figuring out complex situations. That’s what really led me to the the CPAs world. I spent a lot of my time in real estate doing complicated structures that went on to balance sheets or were subordinated debt. However, when you do those types of projects, you always have to be front and center on what’s the risk profile I’m taking on because of where we’re placed in the capital stack?
00:21:11:05 – 00:21:41:11
Sal
Not that risk profile is ignored, but because we’re in such a safe position, it now becomes secondary, which allows myself and my team to really focus on what can we do to really make this project beneficial for the owners. How can we make this appealing to the financial partners that work with us on these deals, as opposed to everything being really surrounded by the risk?
00:21:41:13 – 00:22:15:10
Sal
You know, the risk profile is going to be transferred more to the first mortgage lender from a concern basis, and we try to work with them to structure the deals properly, to relieve that, to make them comfortable. We’ve always really tried to package pace in a way that owners, developers, geeks and even our financial partners, what they were already accustomed to doing rather than trying to form, fit them into a pace box, if you will.
00:22:15:15 – 00:22:19:13
Charles
Sal, how can our listeners know more about you and Castle Green?
00:22:19:15 – 00:22:51:20
Sal
We we have you know, we’re very active in posting up the deals that we do. They can go to our website as well. WWE Castle Green Finance. Our website is designed as much for education as it is for marketing purposes. But, you know, quite honestly, you know, I might be a little old school in this regard. I’m still a big believer that picking up the phone and having a conversation is really the best way to learn what we can do and how we can benefit their projects.
00:22:51:21 – 00:22:57:11
Charles
Okay, great. So what I’ll do is I’ll put that link into the show notes. And thank you so much for coming on today.
00:22:57:13 – 00:23:01:19
Sal
Great. Real pleasure, Charles, and really enjoyed working with you.
