‘Green’ Bucks: Where to Find Them
By Keat Foong, Executive Editor
Multifamily property owners who embark on energy efficiency retrofits before talking to their lender will be disappointed. Conventional lenders generally do not recognize projected, non-historical, boosts to NOI resulting from energy savings measures that have not yet been implemented. Down the road, however, that skepticism in the financing industry may begin to change, as more scientific data becomes available to prove the efficacy of green upgrades.
Deutsche Bank Americas Foundation (DB) took a step forward with respect to the evolution of green financing when it initiated a study “to encourage the financial industry to scale up financing of building energy-efficiency retrofits.” Commissioned by DB and the community development collaborative Living Cities (LC), Steven Winter Associates and HR&A Advisors prepared a report entitled “Recognizing the Benefits of Energy Efficiency in Multifamily Underwriting.”
The study has tried to address “a key bottleneck for private capital: the lack of confidence in energy savings for lenders to underwrite loans against,” states DB in a forward to the report. DB noted that New York City multifamily buildings have undergone green retrofits for decades but have relied on public subsidies, “a limited resource.” If successfully deployed, private capital could prove transformational.
“The purpose is to translate the world of energy efficiency into financing. Energy-efficient retrofits have been taking place for a time, but no one in the banking community has taken that into consideration when lending,” comments Jason Block, senior mechanical engineer at Steven Winter Assoc. Steven Winter focused on analyzing the building systems of the portfolio under study, while HR&A concentrated on the financing aspects of the report.
Sam Marks, vice president at DB, says that the company’s goal to “scale up” green retrofits creates an alignment between carbon reduction and DB’s long-time community development goals. “Retrofits reduce carbon emissions, and at the same time they can make multifamily/affordable housing better places to live for the residents. A more efficient building is also more comfortable, healthier, and more financially stable for the long run.”
The study compared projected versus actual savings as a result of energy-efficient retrofits in 231 mostly affordable projects representing over 21,000 units (91 percent of them affordable) in the five boroughs of New York City. The database was obtained from the New York State Energy Research & Development Authority (NYSERDA) and the federal Weatherization Assistance Program (WAP). All the projects had participated in multifamily programs sponsored by either of these two programs, which provided a ready database of projects that had completed retrofit programs. “In New York, there is a good pool of projects that have undergone retrofits. Few had taken the time to go back to the buildings to see how well they did compared to their projections,” explains Block.
The study found that across the portfolio, buildings reduced their fuel consumption by 19 percent and electric consumption by 7 percent as a result of the upgrades. On average, buildings recorded $240 per unit in fuel savings and $50 per unit in common area electricity savings. Actual savings were 61 percent of projected savings for fuel-related upgrades, while the actual electrical savings were a statistically negligible percentage of projected electrical savings. Green retrofits included boiler replacements, boiler control improvements, windows weatherization, lighting retrofits and roof insulation installations.
Block suggested a few reasons for the greater fuel savings compared to electricity savings. Light bulbs may not be uniformly installed. And electricity use experience continually greater loads over time as more appliances are plugged in, thus reducing any apparent electricity savings from electrical-related green retrofits. In addition to greater savings on the fuel side, the study also concluded that fuel savings tend to be more reliable than electricity savings in terms of meeting projected savings. “We recommend that banks lend against fuel, not electricity, savings,” says Block.
Another conclusion was that the more energy that is used by a property initially, the greater the savings subsequent to the energy upgrades. “There is a strong correlation between how much energy is used before the work and how much the property will save,” says Block. The reason that savings are greater could be that there is more room to cut energy costs if the property is already overusing energy. (And it is generally believed that affordable housing tend to use more energy than market-rate housing.)
The DB/LC report recommends some steps for lenders to take in underwriting against fuel savings projections, including: benchmarking the building’s fuel usage with its peers’ to determine whether opportunities exist for fuel savings; developing procedures to ensure the quality of energy audits; lending to the anticipated savings recommended by the report based on a building’s pre-retrofit fuel use; and ensuring effective implementation and management.
According to Block, the study is applicable only to New York City buildings, which may have different building systems compared to other parts of the country, and cannot be extrapolated to other cities. However, “the methodology is transportable,” he says, and it is hoped that similar studies would be conducted for other markets.
As for the New York City market, Living Cities made a follow-on grant to the New York City Energy Efficiency Corp. (NYCEEC) to take the next step after the completion of the study. NYCEEC, whose mission is to support New York City’s green energy goals by developing “an energy efficiency retrofit financing market for private building owners,” is working with public sector entities to develop new energy-efficiency multifamily mortgage products in a pilot program that incorporates the lessons learned from the DB/LC study. Among its current offerings, NYCEEC provides direct loans to building owners to finance energy-efficiency retrofits.
Unfortunately, NYCEEC’s program also applies only to New York City buildings. And overall, the private lending market appears to be still uninvolved at this point. “There are some really compelling lessons learned from our study, although we haven’t seen the private market take up the charge to incorporate the lessons into their underwriting yet,” says DB’s Marks. The NYCEEC pilot program and DB/LC model might be important first steps in leading to the day when private lenders will feel comfortable taking into account future energy savings when sizing the loan.
The Lenders’ Perspective: Potential Benefits of a Greater Focus on Energy Efficiency
■ Better energy performance creates stronger cash flow to pay debt service
■ The increased cash flow might allow for a larger loan or for subordinate debt
■ Energy performance improvements can benefit long-term asset value
Source: “Recognizing the Benefits of Energy Efficiency in Multifamily Underwriting”