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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