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Page 12 — Multifamily Properties Quarterly — April 2015
R ehabilitation of multifamily
properties always has been a
difficult decision for owners,
and to make green upgrades
is an even tougher call
because of the reputation that green
upgrades are costly. The up-front cost,
hassle of managing the rehab and the
issue of split incentive (i.e., the owner
pays for the upgrades while the ten-
ants receive the benefits) often lead
owners not to consider a rehab, let
alone green upgrades.
In reality, there are hassle-free and
cost-effective ways to green rehab
multifamily properties with ample
benefits flowing to the owner, includ-
ing an increase in property value,
lower operating and maintenance
costs, improved occupancy and lower
turnover.
When looking at financing, there
are options other than the obvious
sources of cash reserves and cash
from operations. Other financing
options include:
Property Assessed Clean Energy.
PACE is a means of financing green
upgrades through municipal govern-
ments that invest bond funds into
green rehab. The investment is repaid
for up to 20 years with an assessment
added to the property’s tax bill. PACE
financing stays with the property on
sale and is easy to share with tenants.
PACE financing is off-balance sheet. A
Colorado PACE program is in develop-
ment and is expected this spring.
Energy performance contracting.
EPC uses the savings of the green
upgrades to pay for the cost of the
upgrades. For example, the utility cost
savings are guaranteed by an energy
service company or general contrac-
tor in order to generate cost savings
sufficient enough to
pay for the project
over the term of the
contract. After the
contract ends, all
cost savings accrue
to the owner. EPCs
are difficult to exe-
cute on individually
metered multifam-
ily properties. EPC
is also off-balance-
sheet financing.
Power purchase
agreement. A PPA is essentially an EPC
contract, except it is for energy gen-
eration (i.e., solar). The multifamily
owner guarantees to buy the energy
generated by the seller by entering
into a PPA. Buyers typically pay no
up-front cost (capital is provided by
the seller) and purchase the power
generated for an agreed-upon price
for the duration of the contract. The
seller installs, operates and main-
tains the system, which typically is
on site at the buyer’s property. A key
advantage is that the price of energy
will not fluctuate under the contract,
which can help with financial plan-
ning.
Utility financing. There are two
primary methods in utility financ-
ing. The utility pays for the green
upgrades and collects the repayment
in the utility bill, or the utility merely
collects for other financiers. Either
way, this option is also off-balance
sheet, but unfortunately utility
financing is not available yet in Colo-
rado.
The above options have one draw-
back – the only part of the rehab that
is financed is the green portion, such
as energy efficiency, renewable ener-
gy, water conservation and perhaps
indoor air quality improvements. The
following option typically funds the
entire rehab.
Debt financing. Loans from banks,
credit unions, community develop-
ment financial institutions or agen-
cies, including U.S. Department of
Housing and Urban Development,
Federal Housing Administration, U.S.
Department of Agriculture – Rural
Development and state housing
finance agencies, can fund an entire
rehab.
Banks and credit unions typically
require first-lien position and are
good for refinancing and large rehab
projects. Community development
financial institution or agency green
rehab loans often are available at
below-market interest rates, but typi-
cally are for multifamily properties
serving low- to moderate-income
residents.
There are also several incentives
available to owners of multifamily
properties that can reduce the cost of
the green rehab.
Low-income housing tax credit.
LIHTCs are available to qualified
affordable housing properties and
allocated by state housing finance
agencies. A property with a major
rehab is eligible for both 9 percent
and 4 percent tax credits.
Investment tax credit. ITC is a fed-
eral tax incentive that provides a 30
percent credit for certain renewable
energy installations such as solar
photovoltaic systems.
Production tax credit. PTC is anoth-
er federal tax incentive that pro-
vides a specific tax credit for certain
renewable energy installations
such as wind. The credit amount
depends on the technology.
179D. 179D is a federal tax credit for
energy-efficient buildings. The credit
amount is dependent on the effi-
ciency improvement achieved and is
maximized at $1.80 per square foot.
Utility rebates. These are cash incen-
tives offered by local utilities and
can vary by utility and the solution
installed. The incentives can range
from negligible to 100 percent of the
cost of the installed conservation
solution.
Grants. Federal, state and local gov-
ernment, and private foundations
can fund green retrofits in multifam-
ily properties to subsidize housing
costs for tenants, or achieve carbon
savings. The U.S. Department of
EnergyWeatherization Assistance
Program provided billions of dollars
in grants over the past 30 years for
green upgrades in affordable housing
properties, which improved the lives
of more than 7 million families by
reducing their energy bills.
Accelerated depreciation. The
modified accelerated recovery system
allows owners to depreciate certain
green upgrades, such as solar pho-
tovoltaic, quicker (six years), instead
of the 20-plus year life of the green
system.
State tax credits. These are currently
being discussed in the Colorado Leg-
islature for commercial properties
including multifamily and, if passed,
could offer as much as $75,000 in
state tax credits to an owner.
These incentives often cover the
additional cost of the green piece or
subsidize the project enough to bring
the payback down to a few years,
making it a no-brainer in favor of a
green rehab.s
Financial Market
Ravi Malhotra
President, TBL
Fund, Denver