One of the most important emerging sources for deep retrofits is Property Assessed Clean Energy (PACE), a source of debt capital for commercial and larger multi-family property related energy efficiency and solar investment. Essentially, municipalities, or in some cases private lenders, loan money to building owners to make energy-related improvements to their properties.
PACE loans are secured by a property tax lien, and paid back through property taxes. This creates important advantages for deep retrofits, including low interest rates (6-8 percent); long terms of 5-10 years (longer for solar or other long-life equipment); and no sale restrictions (obligations remain with the property). Disadvantages include required approval by the first mortgage holder, the program being available only to owners, not tenants, and the program not being available for portable items such as refrigerators. While the programs are new, most programs are service oriented, providing building assessors, certified service providers and contractors, and other support.
Another emerging source with growing momentum is the energy services agreement (ESA), or energy performance contracts. ESAs are contracts that permit energy efficiency to be packaged as a service that building owners pay for through savings, and that generally require no (or minimal) upfront cost to the owner. The energy service company assesses energy efficiency options, arranges or provides the capital, develops the project, and maintains installed improvements. In return, the energy service company receives some portion of the energy savings, and retains ownership of the installed equipment, enabling it (or its investors) to take advantage of tax benefits, rebates, and other benefits, lowering the overall cost.
"Off Balance Sheet" Financing
One of the key benefits of ESAs is that they are "off balance sheet" (subject to confirmation with the organization's accountants, given changes underway) and can offer a work-around to restrictive mortgage covenants. Additionally, ESAs are often transferable to new owners, reducing the worry that an energy efficiency investment won't pay back before a property might be sold. Service companies also typically assume the risk that savings will be sufficient to justify the upfront investment, and may offer savings performance guarantees. Downsides include the high transaction costs necessary for underwriting and creation of special purpose entities and other legal work.
Finance innovation is also occurring in the interaction and combination of some of the capital sources. Energy service companies are often sponsors of ESAs, and are working with PACE sponsors and utility finance programs. New state and federal capital for energy efficiency is being distributed through local programs employing grants, incentives and some of the new financing vehicles. Finally, look for traditional debt and equity providers to enhance their efforts to integrate incremental retrofit debt into their financial products as demand by customers grows.
Technical innovations by product providers, service providers, and industry professional groups have led the way in moving sustainability forward in the real estate industry. Emerging innovations in sustainable valuation and finance promise support for increasing the breadth and depth of investment in the coming years.
Scott Muldavin (smuldavin@muldavin.com) is a senior advisor with Rocky Mountain Institute and executive director of the Green Building Finance Consortium. He has 30 years experience in the real estate industry, including the co-founding of Guggenheim Real Estate, a multi-billion dollar private real estate fund, and leadership in Deloitte & Touche’s real estate practice. Roy Torbert is a consultant with Rocky Mountain Institute, where he focuses on accelerating deep energy retrofits and reducing the costs of solar photovoltaics. He specializes in innovative financing to allow corporate portfolios and university campuses to reach net-zero energy.
On Balance Sheet Debt Options
Off Balance Sheet Financing
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