The Future of Energy Efficiency Financing is Bright

January 23, 2018 | Emily McLaughlin

This is the final post in a three-part blog series in which I explain how and why commercial real estate lenders and brokers should factor building efficiency into mortgage loans and property condition assessments. Part one of this series highlighted how mortgage loans are still a missing link to energy efficiency growth and adoption. In part two I covered IMT’s broker education program and overcoming the existing sustainability knowledge gap among brokers, who play a central role in most real estate deals. In this post I’ll provide more detail on current mortgage products and services that are helping drive efficiency and savings for building owners, as well as for both small and large businesses.

Assessing Our Buildings

Financing Energy Efficiency through Mortgage Loans examines a number of real estate finance offerings that require or recommend a Property Condition Assessment (PCA)/Physical Needs Assessment (PNA) and why it’s important for a building owner or lender to request a building assessment that takes energy efficiency into consideration. So what exactly is a PCA or PNA and why are they so necessary?

To answer this question, imagine you’re about to buy a pre-owned car. Which would you prefer; a quick once over of the car to see if it has any visible dents, bruises, or otherwise obvious faults, or a holistic analysis of both internal and external components of the car—including its past ownership, accident history, and issues with the engine or other critical components? Unless you’re using the car for a demolition derby, you will likely answer the latter; a holistic look at the internal and external components of the car. A PCA is similar to a holistic pre-owned car analysis but for your building.

While PCAs are a great way to get a more in-depth look at your building’s characteristics, most of these assessments fail to factor in energy efficiency, even though energy costs are a top concern for many buyers and efficiency has an outsize impact on the life of the building and its equipment. This is like that pre-owned car report not considering MPG or fuel type; energy efficiency is a critical component of a building just as fuel efficiency is critical to cars. A notable exception is New York City’s Green Physical Needs Assessment (GPNA). NYC’s Housing Development Corporation realized the importance of integrating energy and water usage into its physical assessment of buildings. The City and other energy financing entities, such as the Community Preservation Corporation (CPC), use this data to help inform and improve mortgage loans. CPC is a community development financial institution launched in 1974 through a joint agreement between the City and its leading commercial banks to restore and rebuild New York’s aging neighborhoods.

The organization has factored data from GPNAs to help underwrite loans on several buildings in need of efficiency upgrades. One of those buildings, a multifamily walk-up in the Washington Heights neighborhood is highlighted in Financing Energy Efficiency through Mortgage Loans. Through upgrades made possible by CPC’s loan, the apartment building was able to reduce its annual utility cost by $23,000. Prior to the overhaul, the owner historically spent about $2,210 per apartment on annual utility expenses (i.e. heating, water, electricity). Post-retrofit that cost decreased to $1,540 per apartment, representing a yearly savings of roughly 30 percent. This is just one example of how a building owner used a PCA or PNA to holistically gather building information and data in order to positively augment their mortgage loans.

Energy Efficiency Options for Small Businesses

Evaluating a building’s characteristics and energy usage via an audit or assessment are not just for large corporations. Small businesses have a number of opportunities aimed at increasing their energy efficiency and saving them money. Most notably the Small Business Administration (SBA) runs the CDC/504 loan program which helps business achieve loans up to $5.5 million if they demonstrate one of three public policy criteria, such as demonstrating 10 percent energy savings through efficiency or renewable energy. Although SBA can loan up to $5.5 million, most loans average around $300-400,000, leveraging the unique loan capability of CDC/504 to provide small businesses large financial opportunities.

While the CDC/504 loan is not a mortgage underwriting product, nor does it require applicants to meet energy efficiency standards,  the model is one that could be replicated for other commercial energy efficiency financing programs. To read a real-life example of how this program works, visit page six of Financing Energy Efficiency through Mortgage Loans, which covers how a full-service car wash in Illinois obtained a CDC/504 loan and worked with a local energy service company to decrease its energy use by nearly 13 percent. Linking energy efficiency with other financing vehicles has proven successful in the small business space, which is a positive indicator that a similar product could be tailored for larger commercial operations.

Commercial Mortgage Default Risk and Energy Efficiency

In 2017, Lawrence Berkeley National Laboratory (LBNL) published a report demonstrating that energy efficient buildings have a lower risk of default. Studying buildings across the country, the researchers found that source energy use intensity (EUI) and the characteristics that affect building energy performance have a direct effect on the likelihood of default risk. In their case study examples, the effect on building default risk spanned between 5—40 percent depending on geographic region. This is a significant finding given the commercial real estate industry’s lack of focus on energy efficiency, and the potential negative financial impacts of an inefficient building. According to LBNL’s findings, financing options that incorporate energy efficiency in commercial mortgages are vital.

Programs such as the SBA’s CDC/504 loan or CPC’s mortgage financing offerings are great examples of what is possible and where the market can follow, but we must begin to translate and scale up these successful services into more widespread mortgage financing options and offerings, with both lenders and owners on board, if we seek to leverage the present opportunity. Incorporating energy efficiency into mortgage financing requires buy in from numerous sectors. Regardless of which sector you work in, there are ways to integrate energy efficiency into your business proceedings and portfolio. Below are some suggestions on where to begin:

For real estate brokers: Look to IMT’s “The Business Case for High Performance Buildings” course and learn how being knowledgeable about green buildings means increased profits.

For the financial community: Familiarize yourself with New York City’s Green Physical Needs Assessment, and learn how a green PCA/PNA can be mutually beneficial for every deal you close.

For building owners and tenants: Seek out, and demand your real estate broker be educated on green/high performance characteristics. Visit IMT’s resource library for a wealth of ideas and topics.

Meet the Author

Former Program Manager, Private Sector Engagement

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