This is a second post summarizing the Berkeley Center for Law, Business and the Economy and Philomathia Foundation Forum on unlocking capital for energy efficient improvements. The previous post is here.
Throughout the forum, many presenters agreed that multifamily units present an especially appealing opportunity for increasing investments in green renovations. With reasonable up-front capital costs, these improvements often drive down operating expenses and generate an attractive return at relatively low risk for both property owners and independent investors.
Sadie McKeown, senior vice president of The Community Preservation Corporation, stressed that savings from energy efficient retrofits to multifamily units often exceed the additional loan payments, especially when the projects are financed with inexpensive mortgage capital. Once the industry has developed energy savings benchmarks, McKeown predicted that many building owners would be willing to go forward with such projects. From her own experience, she noted that many multifamily properties only require $1,500 to $4,000 per unit, but yield consistent cost savings. If financed through traditional mortgage markets, with capital improvements amortized over 20 or 30 years, even modest energy expense reductions will cover the costs.
McKeown is not alone. Caroline Blakely of Fannie Mae agreed that the multifamily asset class has not gotten much attention from the energy efficient industry, but noted its potential moving forward. According to Blakely, the Environmental Protection Agency has joined the effort, conducting regression analysis of Fannie Mae’s multifamily unit data. Fannie Mae is conducting a “green audit” with this analysis, attempting to be a thought leader throughout the industry and to provide economies of scale as it grows.
But even if the data is collected and presents a compelling sales pitch to property owners, the industry still requires a capital structure. The Forum’s experts offered possible securitization models. Although the suggestions did not exhaust the industry’s options, they presented practical solutions to an open debate.
The Treasurer of the New York State Energy Research and Development Authority, Jeff Pitkin, presented a participation loan model that works well for public funding initiatives. In a participation loan model, a government agency partners with a lender by offering a loan equal to the project’s cost at a low interest rate. See NYSERDA’s Participation Agreement. Other panelists suggested that private lenders may use a similar structure, adding principle to the original loan via a “co-first” mortgage.
Alternatively, Mckeown suggested that when a property has a high energy bill from energy inefficiencies, the lender should underwrite the utilities savings from the repair. In these cases, a lender could underwrite the “BTU savings per square foot.”
Clean Fund’s John Kinney preferred a property tax model for private capital, in which a lender underwrites the property itself, instead of just the renovation. Kinney thinks that investors would prefer this model because they are being paid back with property taxes over a long (perhaps 20-year) amortization period. Clean Fund’s PACE program uses a special assessment line item—described as a loan but technically a lien—on the property’s tax bill. When the local government collects property tax payments, the loan repayment portion is automatically routed to the company. See more here.
Pitkin cautioned that all of these models will likely face resistance, at least in the short term. The asset-backed security market is used to seeing large, homogeneous loans; and even with new, compiled energy savings data, the market will take time to become comfortable with average levels of delinquencies and defaults in a new “energy efficient loans” asset class.
Once the capital is available, the industry will have to find a way to push its improvements beyond large-scale commercial and multifamily projects to individual homeowners. Francisco DeVries with Renewable Funding noted that homeowners often replace or improve old equipment without considering energy efficient alternatives. He gave a straightforward example: When your air conditioner stops working, you call an HVAC service company. If the unit is beyond repair, the company becomes the point of contact for purchasing a new air conditioner. DeVries argues that the green industry should make its sales pitch to the service company, so that when the customer asks what her options are, it offers a regular new unit for $5,000 but also presents an energy efficient system. Many homeowners will consider the efficient system if the company points out that its $6,500 price tag will reduce energy costs each month and offers financing on the energy efficient unit.
The Symposium offered competing models for “Unlocking Capital for Real Estate Efficiency Improvements.” While none is perfect, each is better than today’s lack of viable funding mechanisms. Experts in law, finance, energy, and policy suggested that, once capital is available, attractive energy efficient retrofit projects await, especially in the multifamily market segment. As markets rebound from the financial crisis, this growing industry may play the unique role of creating jobs, improving infrastructure, and protecting environmental resources.