Task force to Mayor Newsom: “Your 7 keys to existing building efficiency in San Francisco.”

How can green finance help increase existing commercial building efficiency?

As a member of the Mayor’s Task Force on Existing Building Efficiency, I had the pleasure of attending Mayor Gavin Newsom’s Friday announcement of his introducing new legislation, aimed at improving the energy efficiency of existing buildings in San Francisco.

The contemplated legislation is the product of a task force of 19 key stakeholders convened by the Mayor.  I was happy and proud to contribute to the financing aspects of this work and you can download the entire report here:  Report of Mayor's Task Force on Existing Buildings (187)

Goal: Cut energy use by 50% from existing buildings by 2030

The back story on San Francisco’s sustainability challenges reveals high stakes:

The operation, construction, and demolition of buildings accounts for almost half of San Francisco’s greenhouse gas emissions. Commercial, industrial, and municipal buildings account for 63% of building-sector emissions.

The City has established high standards of environmental performance for new construction. However, at the historic rate of 0.8% new buildings per year, it could take more than sixty years to ‘green’ even half of San Francisco.

As a result, the task force recommended that San Francisco move to help cut energy use by 50 percent, or 2.5% p.a. by 2030, from existing commercial buildings.

7 big ways San Francisco can achieve energy reduction goals via existing commercial buildings

The Task Force distilled its research down to seven big ideas that would help the City achieve the above GHG reduction targets by 2030.

1. Identify cost-effective savings in every commercial building: Require buildings to conduct an energy audit every 5 years.
2. Disclose energy performance information: Require building owners and managers to share energy data with the City.
3. Resolve split incentives: Provide a green lease toolkit and make submetering a policy priority.
4. Make incentives easy: Develop a web-based tool that finds all incentives and financing options for building owners in one place.
5. Educate, train, mentor and market existing building efficiency: Promote programs, facilitate mentorship and partner with institutions.
6. Lead by example in public facilities: Benchmark and disclose energy performance in public facilities.
7. Provide financing: Launch the San Francisco Sustainable Financing program and require that funding from that program prioritize efficiency before renewables.

Green finance focus - comprehensive incentives and smarter EE financing terms

Green finance mechanisms, the area I collaborated within, focused on recommendations #4 and #7.

Task force members reported seeing incentives either being ignored or misunderstood by property owners,  depressing the acceptance and prevalence of retrofits. Those problems were exacerbated by the fact that appraisers, contractors, lenders and others were equally unaware of the positive impacts that incentives could have on improving the economics of any commercial building retrofit program.

Based upon our own experience with assisting property owners in comprehensively sourcing incentives, I felt strongly that San Francisco should integrate a sourcing tool that would make it easier for property owners to quickly obtain comprehensive information on retrofit incentive options that were available to them.

We also made underwriting recommendations to the planned San Francisco Sustainable Financing program, to help it avoid problems that we’ve noticed in the loan programs of some of the other energy efficiency financing districts that are up and running.

Essentially, solar installers have a larger marketing force on the ground than energy efficiency retrofitters. As PACE loan programs are being rolled out across the country, we are getting reports of the unfortunate situation where the loans are going primarily for renewable energy, with energy efficiency funding running a distant second.  This results in the problem of solar panels supplying energy to “dirty” buildings. The regions in question are faced with achieving less of an impact from existing buildings to their climate action goals.

The financing recommendation to the City was that their own program include a provision to prioritize the funding of energy efficiency measures first, then renewable energy second. In our opinion, this requirement will would go a long way in making sure that the loans actually achieve the kind of impact expected by this financing mechanism.

I believe that even greater assurance of positive impacts from energy efficiency financing could be achieved by any program by further prioritizing energy efficiency measures according to the ‘loading order’ suggested by McKinsey in their recent studies. That level of detail was beyond the scope of our financing group’s work within this particular task force, but you’ll hear about it in upcoming posts.

At this point, it is gratifying to see that Mayor Newsom is moving forward with legislative action based upon a collaboration with key real estate industry stakeholders.

The task force has given him a lot to work with, assuring that San Francisco stands out as a leader in achieving real transformation through increasing the energy efficiency of existing buildings.

Be a tenant and investment hero with these Empire State Building retrofit tips

Heard at ULI Fall 2009 session: “Green Retrofits: What is making this the wave of the future?”

I went in to this session thinking that I’d already heard all there was to know on the well-publicized Empire State Building (ESB) retrofit. I’m pleased to report that my assumption turned out to be wrong … this session was a thriller; a high-protein download with lots of how-to’s that practitioners can use to be a tenant hero and  improve value with a comprehensive energy efficiency retrofit strategy. A thorough reporting of all the great tips would be too long for this post, but I think you’ll be able to put these highlights to good use:

The Set-up: A Great Business Case

Anthony Malkin, of Malkin Holdings spoke on behalf of the ESB ownership. The other speakers were representatives of New York City, the Rocky Mountain Institute and Johnson Controls.

The Empire State Building was already going through a $550 million repositioning, managed by Jones Lang LaSalle, before the ownership began to consider an energy efficiency retrofit. Since capital was already available for retrofit, no outside financing was needed to pay for the retrofit investment.

The team reported that the retrofit added nearly $13 million in upfront costs, with calculated savings worth $4 million per annum, so, the overall retrofit metrics are great, with the team reporting strong economics:

• Building annual energy costs were $11 million p.a., or 88 kBtu/sf/yr.
• 38% annual reduction in energy usage is projected; almost double the industry average.
• 3.1 year payback vs average 10-20 years.

Top Energy Tip: Reduce Load and Use

The evaluation of an aging chiller showed that the retrofit team can’t only focus on ‘easy’ measures such as changing light bulbs to achieve energy savings. The better business case comes from investing opportunities to reduce the building’s energy load, in addition to use. In the case of the ESB,  $40mm was slated for new chillers in a cooling plant, but load reduction measures elsewhere eliminated need for new chillers (!)  Result: Existing chillers were retrofitted for $5mm.

Tenant Relations Hat-trick

Investment real estate is only as valuable as the bundle of leases that generate rental income. So, many owners are motivated to green and/or retrofit their buildings when they know that it will help them to keep existing and/or attract new tenants. The trick is to get tenants on board with doing their share to keep energy costs down. When discussing retrofit costs/benefits with tenants, the ESB team focuses on the three drivers of tenant occupancy costs: payroll, utilities and rent.

In the case of the ESB, tenant buy-in on retrofit measures was crucial, since analysis revealed that more than half of the energy conservation measures would take place in the tenant’s space.  The team discussed three interconnected programs they use to assist tenants with reducing energy within their suites. The bonus they discovered is that word of these programs has attracted the attention of brokers and prospective tenants that typically would not include the ESB within their search for new space, so now the building has become competitive with a larger universe of possible tenants than prior to the retrofit.

Here are the three key tenant-related programs:

1. Pre-built space: Vacant suites were pre-fitted to turn-key status for prospective tenants, containing many features which would aid tenants with maintaining energy reduction upon move-in.
2. Tenant design guidelines: For tenants that build out their own suites, the landlord’s design guidelines incorporate energy efficiency measures
3. Tenant energy management program:  The ESB team developed a special energy management guide to help tenants understand how they use energy; they also give the tenants reports about their energy usage within their space, telling them how their energy use compares with the building average.

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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

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$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.

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Profile: Climate Benefit Districts, powered by green finance

District-wide sustainability is hot!

As we blogged about last week, equally hot are the green finance tools and mechanisms being created to pay for it.

Mithun Architects‘ has developed the Climate Benefit District (CBD) in the State of Washington (disclosure: Galley Eco Capital works with Mithun on other projects). The definition from their own documentation is here:

A CBD is an independent taxing district and a quasi-municipal corporation. It will have its own
taxing authority and its own debt capacity independent of the city.

A CBD must be located within an urban growth area and should approximate “neighborhood”
scale, or roughly a square mile. It may include unincorporated territory that is within the city’s
urban growth boundary, but only if the unincorporated territory is less than 50% of the total area
and only after the city and county enter into an interlocal agreement. Multi-city CBDs may be
created pursuant to interlocal agreement.

While Climate Benefit Districts are not yet in action, parts of the structure are similar to other initiatives emerging across the nation, so this brief profile might be helpful to your efforts to expand your green finance toolbox.

How are Climate Benefit Districts financed?

A CBD is an independent taxing district with ability to issue general obligation, revenue or special assessment bonds.

It’s structure makes it eligible to create tax credit partnerships to take advantage of federal tax credit incentives such as: low-income housing tax credits, renewable energy tax credits, new markets tax credits, historic preservation tax credits and other federal tax credits that may be created. A CBD may also administer federal grant funds, is eligible to receive priority consideration for state grant and loan programs, and is eligible to create energy efficiency loan program.

Additionally, revenue can come from funds earmarked by the City where the CBD is located or from direct assessments within the CBD. The CBD chooses those assessments from a menu of “local option revenue tools”:

• Climate benefit services charges (similar to fire benefit charges, based on measurable benefits from CBD projects and services)
• A parking tax on commercial parking facilities
• A vehicle license fee
• The local option revenues available to transportation benefit districts
• Special assessments for the financing of local improvement district (LID) improvements.
• Voter approved excess property taxes for the repayment of bonds issued to finance climate benefit projects.

How is performance measured?

Performance measurement is a key strength of the Climate Benefit District. Each district’s sustainability plan would include “climate benefit targets” for:

• utility infrastructure and service;
• vehicle miles traveled reduction strategy;
• land use, green building and energy efficiency; and
• neighborhood social sustainability programs and services.

Opportunities & Challenges

One advantage within the mechanism is that the financing platform is based purely upon the coordination of existing financial products, allowing the municipal sponsor to “look under the hood” and quickly understand the proposed business plan.

But a challenge might lie within understanding ‘how much additional assessment buys how much additional value?‘ One of the primary arguments for climate benefit districts are that property within such districts would be worth more to those property owners.

We definitely agree from our own work that mixed-use projects usually achieve a sales premium to competing existing projects within their local market. There is also strong industry evidence that tenants typically prefer green buildings. Extending those facts to an entire district makes us think that this assertion of higher property value is very plausible.

But at what cost? And who pays?

Remember that this mechanism is based upon compulsory district-wide assessments based upon proportional benefit creation, as opposed to the voluntary opt-in by owners within energy efficiency financing districts here in California. That means that you are required to pay your calculated share of the additional costs if you live or do business there.

So we wonder how this mechanism works for the parts of town, where low-to moderate income residents and small businesses are too cash constrained to pay the special assessment for a district-wide sustainability program.

Will the City step in to subsidize improvements in order to allow those lower income residents and small businesses the same district-wide sustainability benefits?

Nonetheless, the Climate Benefit District offers deep green performance measurement, coupled with practical ideas that should stimulate thinking for many practitioners and communities needing district-wide solutions.

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Things you might want to know:

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• Photo credit: Noel Powell on istockphoto.com

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