Is It Time for an Energy Retrofit?

Energy retrofitting is becoming an increasingly popular way to recoup investments, attract and retain residents and address environmental concerns all at the same time.

Aspira Glass ExteriorOwners throughout the multifamily industry are intrigued by the notion of energy retrofitting. Whether using tried-and-true methods or new approaches, energy retrofits have the potential to deliver dramatic bottom-line gains, attract and retain residents, and address social imperatives such as climate risk.
But owners also have an array of questions about energy retrofitting. From a return-on-investment perspective, how long does it take to recoup upfront investment in these retrofits? Can the cost of energy retrofits be passed along to residents? Are there public sector initiatives that can provide incentives and low-cost financing to help building owners reduce energy consumption? These are just a few of the issues owners must contemplate before proceeding.

Among the newest trends in multifamily energy retrofits is the concept of a one-stop shop of sorts, consolidating all services building owners need for retrofits under the umbrella of a single organization, according to Darren Port, building energy codes manager for Northeast Energy Efficiency Partnerships (NEEP) in Boston.

Those services would include the energy audit, contacts with contractors who can perform the retrofit work and connections to banks providing the financing. “We’re seeing more and more of that,” Port said. “It could be a state organization like a housing finance agency, a community development program or organization, [or] a utility company serving as a program administrator and hiring a private contractor to be an aggregator of all the services.”

Examples include CLEAResult in Massachusetts, EnergySmart Colorado and a Chicago program operated through Elevate Energy, Port added. Another methodology being adopted is the on-bill repayment option, he said. This is a form of utility-provided unsecured financing, enabling customers to access energy efficiency at no upfront cost. An upgrade’s cost is offset in part by the resultant monthly energy savings. This helps owners spread out the cost of the energy retrofit over time. Examples are MPower Oregon, and a program from New Jersey-based Public Service Electric & Gas.

A third development is the emergence of energy-efficiency software used to target buildings most in need of upgrades, said Charlie Taylor, high-performance buildings research and analysis associate for NEEP. The software can be greatly beneficial for owners of multiple buildings, which can use it to compare each building with other buildings across their portfolios to determine which are most in need of retrofits. “The big one is EPA’s Portfolio Manager, but there are also privately-developed software programs like WegoWise,” Taylor said.

A frequently asked question about energy retrofits is how long it takes for an upfront investment in the work to be recouped. To some extent, that’s contingent on how the energy retrofit is financed, said Thomas Osdoba, vice president of Enterprise Green Initiatives at Energy Community Partners in Columbia, Md. “If you finance with market debt, a seven-year loan, you will do stuff that you are confident can pay back in five years,” he reported. “But if you are able to structure financing that goes 10 years, then that gives you more room in terms of payback.”

Osdoba added, “If you are doing efficiency plus solar, it is easier to get a 10-year loan. Moving beyond five to seven years is a critical step in trying to get good retrofit activity.” Lighting retrofits tend to have the shortest payback periods, sometimes as short as one or two years. Water efficiency retrofits also have very quick payback time frames, according to Port. “Especially in multifamily buildings, it’s kind of low-hanging fruit to retrofit the common area lighting, which the owner pays for and tends to be on for a good part of the day,” Taylor said. “Envelope retrofits and HVAC retrofits can take a bit longer, and it really kind of varies.”


Nick Stolatis, senior director of global sustainability, global real estate for TIAA-CREF

A number of variables can impact length of payback periods, said Nick Stolatis, senior director of global sustainability, global real estate for New York City-based TIAA-CREF. These can include the goals of ownership and funding availability. A strong industry bias exists to consider only short payback periods of three to five years, Stolatis said. “But the concept of high-performance investments creating significant long-term value for a property is beginning to spread, encouraging owners to look into such projects,” he added. “The extension of the ITC for solar, and the development of PACE [Property Assessed Clean Energy] financing, are two examples of efforts to encourage these types of projects.”

In new developments, Jonathan Rose Cos. aims for seven-year hard-cost paybacks, and five for retrofitting acquisitions, said the companies’ project manager Michael Catalano. “For a single project, the soft costs to figure everything out and design the system can often add two to five years to the payback period. However, if you can amortize a new solution over many projects, it makes sense to explore new ideas. Thus, in most projects, we try to implement our tried-and-true solutions and supplement them with one new innovation. Then, if it works, we can scale it across the portfolio.”

In the multifamily space, there aren’t any real means to directly pass along the cost of energy retrofits, Stolatis said. “Of course, if a project reduces the common-area operating costs, those savings flow directly to the owner, so it has a direct benefit from such projects,” he said.

“When the project, such as the installation of ENERGY STAR appliances, improves the efficiency of an apartment unit, the owner will realize a return by making the property more attractive to residents by reducing their occupancy cost through this improved efficiency. In all cases, when the owner demonstrates its concern for the environment, that message will also resonate with a core group of residents, adding to the attractiveness of that apartment community.”

Another trend starting to gain traction with some building owners is the notion of incorporating language in leases—sometimes termed “green leases”—that requires residents paying utility bills to pass back some of their savings to the landlord, through a rent adjustment. In short, they wind up paying a bit more for their rent, but benefit from lower utility bills, Port said.

“If tenants are paying the utility bills, it’s harder for owners to justify the energy retrofits,” he added. “This gives the owners more incentive to implement those retrofits and gain more satisfied residents and more rent. And certainly it increases the value of their buildings, because high-energy-performing buildings tend to be valued more highly in the marketplace.”

Osdoba believes the ability of owners to pass along the cost of energy retrofits to residents is dependent on whether utilities are paid by owner or by resident. “Generally speaking, the way we’re hoping this will work is that it doesn’t have to be dependent on being able to raise the rents,” he noted. “Because we want an effective project structure where there’s enough cash flow and enough risk mitigation so that it’s not dependent on raising rents.”

Public sector initiatives
There are a number of public-sector initiatives addressing energy retrofits in the multifamily sector, Port and Taylor report. One example is the Energy Savers program delivered by Elevate Energy and the Community Investment Corp. in Chicago. It is funded by the major utilities in Illinois, as well as by state and federal funds and foundation funding, Port said. Another example is the Renew Boston program, which kicked off about five years ago, Taylor reported. “[It] partnered with the utility efficiency programs in the state to provide enhanced incentives to weatherize multifamily housing,” he said. “I think it has been a big success… It started with greater incentives, but now it is focusing on two and three-family multifamily buildings.”

In NEEP’s region, an initiative of the New York State Energy Research and Development Authority (NYSERDA) is a multifamily performance program offering incentives and low-cost financing for new and existing buildings that commit to 15 percent cuts in energy and gas usage. A second incentive tier is for buildings committing to 20 percent savings, Port said. Efficiency Maine and Efficiency Vermont both have multifamily programs as well, he added.

Retrofitting investment strategies
There are investment strategies that make energy-related retrofitting efforts a centerpiece. One such example is the pioneering effort of the Jonathan Rose Cos. and TIAA-CREF partnership. Both organizations are deeply committed to sustainable practices as a component of a broader socially responsible investing platform, Stolatis said. The investments must achieve their stated financial objectives. But attaining those goals while embracing principles of social responsibility is a differentiator that sets the two organizations apart from the rest of the industry, he asserted. Recognition by the EPA as an EnergyStar Partner of the Year for eight consecutive years, the last six at the Sustained Excellence level, provides validation that the partnership’s efforts have been successful, noted Stolatis.

“Our acquisition funds, such as our Affordable Housing Preservation Fund with TIAA-CREF, use BrightPower to track the energy and water consumption of every property we own,” said Jonathan F. P. Rose, president of Jonathan Rose Cos. “This gives us meaningful raw data, and climate and region-adjusted benchmarks to track performance.”

Following acquisition, he added, energy usage is reduced by 20 to 40 percent and water consumption by 18 to 25 percent. “We are also taking every property through the Enterprise Green Community certification process,” he added. “Additionally, we are focusing on using non-toxic materials.”

Growing awareness of the need to address climate risk is adding fuel to efforts to consider the environment in property operations and capital improvement projects, Stolatis said. The advance of technology, especially LED lighting, is providing additional options for property owners and managers to consider.
“Of course, the expanding list of cities that are emulating New York City’s benchmarking and disclosure regulations around sustainability in commercial real estate is adding impetus for owners and managers to implement basic best practices such as benchmarking, which would provide critical information when evaluating capital projects,” he added.

Rose noted that the Federal Weatherization program, state energy banks and local retrofit funds are all very helpful. “But PACE funding is the strategy that would really unleash green retrofits and create hundreds of thousands of new local jobs,” he said.

“It’s time that the FHFA, Fannie Mae, Freddie Mac and HUD created a fiscally responsible PACE program,” added Rose. “The economic and environmental benefits to our cities and buildings would be transformational, with no government cost.”