Last Friday, October 5, 2012, the Berkeley Center for Law, Business and the Economy co-hosted a symposium in San Francisco, entitled: “Where is the money? Unlocking Capital for Real Estate Efficiency Improvements.”
The event included presentations from leaders in law, finance, energy, and policy—all addressing the lack of adequate funding models for energy efficient remodels and retrofits. Panels throughout the day covered energy improvement risk from owners’ and lenders’ perspectives, underwriting challenges, recent technology improvements to fill critical data gaps, bond and secondary markets, and state and federal financing policies and initiatives. United States Senator Ron Wyden, D-Oregon, and John Chiang, California’s State Controller, were in attendance. This is the first in a series of posts that will summarize the event, its recommendations and forecasts.
While financing is available for mortgages or refinances, property owners often have a difficult time locating traditional funding mechanisms for energy efficient retrofits or improvements. John Kinney, CEO of Clean Fund, explained that even some Fortune 500 companies must borrow for these projects at much higher interest rates because real estate tends to be held in special purpose entities.
Although “environmental awareness” has significant cultural momentum, lenders and rating agencies have been slow to invest in energy efficiency improvements for residential, multi-family, and commercial properties. Panelist Sadie McKeown with The Community Preservation Corporation suggested that “financing creativity” has been somewhat of a dirty word in private capital markets since the financial crisis. That may be slowly changing, but Jeff Pitkin noted that structured finance rating agencies in particular remain risk averse. Mr. Pitkin explained the challenge of demonstrating energy efficient retrofits’ creditworthiness, when only pockets of borrowing history and performance data are available. Caroline Blakely of Fannie Mae noted that much of the funding for “green” renovation is currently obtained through acquisition or refinance loans. Thus, it becomes difficult to separately evaluate the energy efficient retrofits’ performance.
The panelists agreed that investors will be much more likely to invest in energy improvements if the debt is structured to look like other financial products. They suggested that these projects’ funding could be securitized in much the same way as mortgage or car-loan debt. But first, the industry must establish benchmarks and aggregate data on energy savings and loan performance. For example, energy savings may be measured by BTUs per square foot. Once regional and nationwide databases are compiled, investors would consult the established range of energy use reduction, and compare expected energy savings to capital improvement costs.
As John Kinney points out, energy improvement projects add value to the underlying asset, the property itself. Armed with standardized efficiency improvement data, confident investors will likely be willing to fund such projects at lower rates, perhaps comparable to mortgages. And, of course, lower capital costs make more projects attractive.
But it’s a steep hill to climb. Developing industry benchmark measurements, aggregating energy savings data, and creating the requisite funding structure is not an easy process. Sadie McKeown framed the industry’s scaling dilemma as a classic chicken and egg problem and asked, “How do we get the first billion dollars done?” Kinney agreed, noting that the solar industry has only recently been in the market for securitization. Still, McKeown applauded Fannie Mae’s institutional approach to energy efficient retrofit financing, especially in the multifamily market segment. She is hopeful that, due to the size of its portfolio, Fannie Mae’s thinking will lead property owners, direct lenders, and secondary markets to understand the new, energy efficient products.
Many of the Symposium’s energy and policy experts cautioned that financial structures can only facilitate the green renovation movement if customers demand the improvements themselves. In the same way that a dealership must sell a car before it can offer an auto loan, consumers must demand energy efficient retrofits before the market will find value in offering to fund them. Francisco DeVries, President of Renewable Funding, argues that this consumer demand already exists—Californians alone spend tens of millions of dollars on residential retrofits related to energy efficiency each year. If people are replacing this equipment anyway, Mr. DeVries reasons, the industry should attempt to improve the quality (and frequency) of those decisions.
Look for a second post on the Symposium, coming soon, which will address proposed new funding models—with special attention paid to energy efficient improvements to multifamily properties.