Compare retrofit financing options with this resource

(This post is part 1 of a 2 part post on retrofit financing mechanisms.)

These slides are for a talk I gave at GSMI’s recent conference on sustainable retrofits (if you have trouble seeing the slides, you can download the presentation here). I put it together to help anyone walk through a quick comparison of a mid-sized investor’s financing options for her portfolio of properties. Several members of the audience emailed me later saying that they thought the information was helpful, so I decided to share it with the Green Journey community as well.

The presentation takes you through the side by side comparison of tax-lien financing, energy performance contracting and on-bill financing, to answer the question “which is the best deal?” All of those three are also compared to self-financing and using conventional bank debt.

Takeaways

• Small energy saving improvements at the property level can significantly impact the portfolio’s financial and environmental performance: The study portfolio consists of small, owner-occupied retail buildings with similar layouts and building mechanical equipment. While the portfolio is relatively large in terms of number of properties (62), the total portfolio square footage is less than 220,000 square feet. For this portfolio, small measures at each property can add $155,000 in annual portfolio cash flow, and increase portfolio value by nearly $2M. The estimated annual reduction in GHG emissions (1,719 tons of CO2) from these energy efficiency measures is equivalent to removing 314 passenger vehicles from the road, or providing the total energy use for 156 homes.

• Emerging financing mechanisms such as tax-lien and on-bill financing can significantly ease the pain of upfront retrofit costs. It became clear that these two emerging funding mechanisms were the most advantageous for this portfolio because the owner would be able to pay for energy efficiency measures with very little or no up-front capital from the property owner.

• Energy performance contracting is best for public buildings: While ESCO financing can be a relevant source of capital for financing/leasing costly building system equipment, ESCOs are not the best funding source for financing comprehensive energy efficiency retrofits for small and medium size structures. Energy performance contracting (EPC), a financing technique that uses cost savings from reduced energy consumption to repay the cost of installing energy conservation measures in a building, is currently best suited for Federal and MUSH (municipal, university, school, and hospital) buildings.

How tax-lien and on-bill financing work

While both tax-lien and on-bill financing are still not as widespread, there are a  number of pilot programs across the country. With the government’s increase in funding for energy efficiency, we expect both forms of finance to become more widely available for property owners.

The American Public Power Association lays out a good definition for both these mechanisms:

On-Bill Financing: “a mechanism whereby the utility finances energy efficiency upgrades and the property owner pays off the costs overtime through a charge on their monthly utility bill. If the program is designed properly, the monthly loan payment is usually equal to or less than the cost savings, and so the property owner should not see their monthly utility bill increase.  Tariff‐based on‐bill financing, one variation, allows the loan to stay “with the meter.” In the event that the property is sold, the repayment obligation transfers to the new property owner/new beneficiary of the upgrades. This model allows for a longer payment term and can decrease monthly payments. Renters may also be able to participate in tariff based financing because they only pay for the measures, while they benefit from them.” San Diego Gas & Electric offers on-bill financing.

Tax-Lien Financing,  which is the funding mechanism used by Energy Efficiency Financing Districts, (otherwise referred to as Municipal Energy Financing, Property Assessed Clean Energy (PACE), Sustainable Finance Districts, and a host of other terms), is  a mechanism that allows property owners seeking to make major energy efficiency investments to opt‐in to a special tax or assessment district (or local improvement district). Property owners borrow money to finance energy efficiency improvements and/or renewable energy equipment, and repay overtime through a line item on their property tax bill.

The loan repayment obligation is attached to the property, not the individual, and if the property is sold before the end of the repayment period, the remaining obligation transfers to the new owner. Authorization from the municipal and/or state legislature may be required to enable special tax assessments for tax-lien financing.

The Sonoma County Energy Independence Program and the Berkeley FIRST Solar Financing Program are examples of tax-lien financing.

In our next post, we’ll talk about the comparative advantages of each as well as some tips on best practices for organizing energy efficiency financing for your portfolio.

Stay tuned for Part 2!

Read more on this topic

• Climate Benefit Districts, powered by green finance
• Sonoma County Funds first AB811 Loan
• $100 Million Energy Efficiency & Water Conservation Loan Program for Sonoma County

*   *   *

Get plugged in:

• Like this post? We’d love to hear your comments and suggestions.
• View more presentations from Galley Eco Capital.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.

$1 billion in retrofit financing from Community Preservation Corporation

People always ask ‘where’s the beef’? when it comes to green finance.

Of course, they’re asking who’s making money available to develop or retrofit buildings to sustainable standards.

You should pay attention to the recent announcement from the Community Preservation Corporation (CPC), to bring $1 billion in energy efficiency retrofit financing to multifamily property owners in New York. This should provide a great energy efficiency financing model for others to duplicate.

The newly formed CPC Green Initiative aims to be an industry pacesetter by proving that seemingly disparate public and private entities can foster new and creative green finance solutions. According to Michael Lappin, CPC President:

“We anticipate financing retrofits for up to 15,000 apartments over the next few years. But to change the urban landscape we will also need to adjust the financing landscape.”

This program is notable because it includes participation by the great range of potential sustainable finance partners — an affordable housing lender, a GSE, pension funds, private lenders and utility companies.

Key financing components:

• $150MM in construction funds will be provided by the New York Building Revolving Fund for properties needing extensive renovation. That fund is backed by proceeds from Deutsche Bank, HSBC and other lenders.
• $300MM will come from New York pension funds.
• Freddie Mac will fund permanent loans for buildings not requiring the above construction loans.
• Freddie Mac has also committed to buy $500 million of loans from this program.

By directly incorporating efficiency retrofits into the loan process as well as requiring ongoing monitoring regimes through the loan life-cycle, we feel the CPC and its funding partners are taking the long-term holistic perspective that we believe is essential.

With a sizable partners including Freddie Mac, Deutsche Bank and the NY State Pension Fund, the CPC will need to fill a role that we find essential – being a strategic hub were investors and key stakeholders can find expertise and guidance.

This kind of pooled investment and lending commitment that relies on multiple layers of funding solutions is one that we are seeing on current projects. We think these kinds of well-designed and sufficiently capitalized partnerships will compliment local government funding.

We’re sure that we’ll see more structures like the CPC Green Initiative emerging on the market. Let us know if you are aware of any similar programs for commercial properties in your area.

*   *   *

Get plugged in:

• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: sx70/DUMBO-Brooklyn.

Will green finance ultimately be local?

What’s the best way to concentrate our money to fight climate change? At the national level? More subsidies for clean industries or incentives for individuals?

Today’s Green Inc blog post examines the idea that cities are the most likely agents for positive action against climate change, since the authors see “uncertain prospects for a global treaty in Copenhagen”, which means “that local communities will need to lead the way on climate change.”

The column’s authors pose the  idea that, “like politics, action on climate change is ultimately local”.

It is estimated that cities contribute somewhere between 30 and 41 percent of global greenhouse gas emissions. The estimate has a large range because no one is really certain of how to measure this particular statistic. Nevertheless, GHG emissions at even the lower end of that range makes cities key actors in reducing greenhouse gas emissions.

Nearly two years ago, we posted that cities would lead most positive progress on green building and climate change.

[Local governments] have become sustainability’s cowboys, driving their own resource, energy and climate change policies, since the federal government can not deliver a comprehensive enough solution that preserves their viability. Since real estate has been outed as the big consumer of city resources and energy services and the big contributor to regional carbon output, it is fair to say that investors will have to think about investment markets in terms of resource and energy sustainability in addition to classic real estate fundamentals so that they can remain relevant to their municipal partners.

As of this date, about 1,000 U.S. local governments have signed commitments reduce greenhouse gas emissions within their jurisdictions.

What could this mean for green finance? A lot, we believe.

We have just seen local governments flexing their muscle with a major share of U.S. stimulus funding going for local government initiatives for green buildings, energy efficiency retrofits, home weatherization and green jobs. Tax lien financing, a local government finance innovation, which is growing rapidly here in California, is catching on nationwide.

With banks still navigating a tough economy and not offering the kinds of products and amount of capital needed, there seems to be both need and opportunity for local governments to become primary suppliers and coordinators of the finance for sustainability.

If you agree with the Green Inc’s columnists’ analysis of the global climate change situation, they really don’t have much choice.

*   *   *

Get plugged in:

• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: istockphoto/Daniel Schoenen - Solar Building.

Key events on energy efficiency finance and triple bottom line investing

Meet us at the the following events. We’ll be presenting about:

- energy efficiency financing

- responsible property investment metrics for high performance portfolios

- taking the green economy to the next level

In the weeks ahead, Lisa Michelle Galley will be featured at a number of key industry conferences. The topics covered by Lisa and other leading voices in the sustainable investment community will highlight the  latest trends and provide a valuable forum to learn about innovative solutions to some of the most pressing challenges facing the green building and finance sectors.

Presentation on Energy Efficiency Financing

GSMI -The Sustainable Buildings Series: Retrofits

October 21, 2009; 11:15am – 12pm, Mission Bay Conference Center at UCSF
Lisa will cover the key considerations for different types of energy efficiency financing.  From there she will talk about how owners can more effectively coordinate their energy efficiency financing efforts across their portfolios. Lisa will be co-presenting with Peter Liu of New Resource Bank.

Presentation on Metrics for High-Performance Portfolios

Responsible Property Investing Council: 2009 ULI Fall Meeting
November 04, 2009 – Joint session of RPI and Sustainable Development Councils
Moscone Center South, San Francisco
Along with co-presenters David Wood, of the Responsible Property Investment Center and  Jean Rogers of ARUP, Lisa will offer fresh insights and recommendations developed in a year long study of the development and application of  responsible property investing metrics on institutional real estate portfolios. Lisa and Jean will discuss how the real estate investment ‘system’ has been impacted by sustainability.

Taking the Green Economy to the next level

Sustainable Industries Economic Forum in San Francisco
November 19, 2009; 9:30am -10:15am
St. Regis Hotel, San Francisco
Lisa will join a panel of industry leaders including Paul Hawken, author and CEO of the Pax Engineering Group, to discuss some of the most challenging aspect of successfully implementing triple bottom line solutions and how we can take the green economy forward. The event will offer valuable perspective on growing strategic partnerships as a core aspect of sustainable business.

If you would like to meet us at any of these events, please email us info@galleyecocapital.com

News about future events is available through our website.

*   *   *

Get plugged in:

• Sign up for our list on our green finance training page, to get info on upcoming workshops, which go deeper into the green business case.
• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: Flikr/manu chao by Michale.

This green finance approach makes your initiatives more successful

When you are putting together a green finance strategy, what are the key pieces of the puzzle?

When we compare the climate change and energy efficiency strategies that public and private bodies have created to date, we’re seeing lots of them calling for new incentives to pay for climate change and energy saving initiatives (answering the “how much”, “what” and “why” strategy questions), but almost none of them answering the “which”, “when” and “how” questions on the financial support they call for. By the latter phrase, we mean ‘which kinds financial mechanisms and products’ work best with ‘which technology and energy savings initiatives’ at ‘what point in time of the carbon reduction time frame’?

Those are very tough questions, we know. However, the failure to embed those particular answers about financing any strategy leads to the tragic irony that we now see in many jurisdictions: experts say energy efficiency offers huge business potential, billions of dollars and euros in incentives are authorized, with billions more in the pipeline, but everybody’s still scratching their heads about how to access the funds and put them to good use. Without clearly acknowledging and differentiating finance’s varied impacts across a sustainable strategy’s time line, lots of good plans are assured ineffectiveness by fragmented, uncoordinated financial support.

It’s almost as if sustainability might be starving in a grocery store full of food.

Now here’s an interesting model we have come across that, in our humble opinion, does a neat  job framing the coordination of financing mechanisms so that sustainable finance can better deliver what’s intended: provide the right kinds of funding for the right types of initiatives and technologies at the right points in time over the life of the carbon emissions reduction strategy. We see the individual points of this framework in many strategies, but this model elegantly organizes those disparate pieces into a coordinated approach to sustainable finance.

A Green Finance Approach from the European Commission

From our work in the European Union, we’ve seen the European Commission’s recent announcement of their plans to invest EUR 50 billion (USD 73.5 billion) into low carbon technologies over the next 10 years. This really caught our attention because the Commission’s strategies are among the few which include a detailed framework, called an ‘impact assessment’ for deciding on the right combination of financing structures to pay for identified groups of technologies and mechanisms needed to achieve greenhouse gas emissions reductions targets.

So if you wanted to apply a similar process to assessing finance within your own green investment and/or energy efficiency platform, how would you do it?

1) Lay out your most likely individual finance options. Financial policy options were first derived independently of the underlying technical applications. Starting with the ‘business as usual investments and institutional arrangements’ and proceeding along a continuum to ‘the creation of new investment vehicles along with specific institutional arrangements’, they were each evaluated for individual strengths and weaknesses.

2) Group your initiative/technology investments around key characteristics. In the case of the European Commission, strategic planning involves technologies/initiatives that were grouped into different timing buckets based upon how close they were to market competitiveness. You can do this for all kinds of initiatives, too. We can imagine that investors in green and/or energy efficient real estate might not think in terms of the technology groupings. However, if you see your sustainable real estate portfolio as being geographic and technical groupings of properties, leases, regulations and technologies over time, then you will have taken the crucial first step to removing the confusion of fragmented incentives and other ineffectual financing moves.

3) Clearly define assessment criteria for each finance option to be adopted. In the case of the European Commission, the finance policies considered were evaluated in terms of mobilization, suitability, flexibility and effectiveness. By the way, we think these particular criteria could be useful in a broad array of cases.

We’ll let you read the document to learn about the particular finance policies that the European Commission came up with, since we’re more focused here on their framework’s broader application.

The results of their approach highlights the need to maximize sustainable value creation through better, up front coordination and structuring of finance policies and initiatives.  One way that their recommendations are better as a result of this framework is that they are able to distinguish up front between instances where simply more funding was needed, such as for energy efficiency, and those areas where different types of funding and/or institutional arrangements would be more appropriate.

We hope this discussion gives you a good starting point for structuring and coordinating your own green finance and investment options, so that your own portfolio and programs are more successful.

Send us any stories you have to share on that front, since this is a topic that we are very passionate about.

*     *     *

Things you might want to know:

• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: chromatika on istockphoto

Next Page »