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— Multifamily Properties Quarterly — August 2016
C
ensus data shows that nearly
60 percent of multifamily
properties were built before
1980, and more than half of
multifamily rental units avail-
able are at least 50 years old. These
aging properties are inefficient and,
often, in need of significant rehab.
A National Resource Defense Coun-
cil study estimated $6.5 billion of net
benefit (after accounting for costs) is
achievable by implementing green
retrofits in multifamily affordable
housing across nine states. Scaling it
nationally, achieving higher-efficien-
cy standards for multifamily proper-
ties could be a game changer that
not only provides billions in benefits
but also significantly impacts the
living standards of multifamily ten-
ants by making housing safer, more
comfortable and healthier, as well as
making housing affordable by reduc-
ing utility, operations and mainte-
nance costs. Despite these benefits of
green rehab, the multifamily market
remains underserved due to the
unique nature of a multifamily prop-
erty being a commercial building for
residential use.
There are two major barriers to
green rehab. The first is split incen-
tives. While multifamily owners
usually pay for water use and utili-
ties in common spaces, it is the ten-
ants who pay the utility bills for
their apartments. So, owners lack
the incentive to invest in efficiency,
because they do not benefit from the
utility savings.
The second is a lack of knowledge
and resources at the ownership level.
Green rehabs require assessing the
property, hiring design and engineer-
ing teams, figuring out financing,
overseeing selection
of contractors and
construction man-
agement, as well
as other tasks that
owners don’t have
the time, resources
or know-how to
undertake.
So when capital
improvements are
needed, multifam-
ily owners typically
seek the lowest-
cost, fastest solu-
tions to bring their
property back to
full capacity. By hir-
ing contractors who
do not specialize in green upgrades,
owners miss the chance to be made
aware of the benefits, including
financial incentives available for
green upgrades.
Since many of the projects are
small, there is a high transaction cost
and lack of volume efficiency in com-
parison to a new multifamily con-
struction project or a total gut rehab.
Most contractors prefer to work
on a large project for which transac-
tion costs are a smaller percent of
the total project costs. Also, larger
projects allow for volume efficiency,
which lowers costs. Many contractors
are unable to create efficient and sus-
tainable services for smaller projects.
Financing a green rehab for an
older property has many unique
challenges. A typical green rehab is
a small transaction on a property
with an existing mortgage, making
a second position lien the best avail-
able option for financing. Banks and
credit unions will not finance a proj-
ect if they are not
provided a first-lien
position.
In addition, tra-
ditional financial
institutions do
not like to fund
small projects.
Also, most finan-
cial institutions do
not recognize the
associated utility
cost savings from
a green rehab as a
new income source
for the repayment
of the debt on the
property, so they
are unwilling to
lend based on the
benefits of a green
rehab.
A lack of control
over tenant behavior is another chal-
lenge. Installing the most-efficient
solutions won’t help if tenants leave
windows open, lights on or taps run-
ning. Without the ability to control
tenant behavior, many owners find
themselves prohibited from under-
taking green rehab.
There are opportunity costs from
free or “low-hanging fruit” programs
available. To combat the hurdles, two
primary green rehab programs have
emerged to incentivize multifamily
owners.
The first is the Weatherization
Assistance Program that provides
grant funds from the Department of
Energy and state agencies for green
upgrades to multifamily affordable
housing. However, with dwindling
government funds, multifamily
owners have a long wait to obtain
WAP grants.
The second is direct install pro-
grams that use funds from utility
companies to provide free or highly
subsidized solutions that usually are
limited to the “low-hanging fruit”
(i.e., low-cost, high-saving measures
such as low-flow devices, CFL or LED
lights, and pipe wraps). These green
upgrades are inexpensive and have
a high return on investment for the
utility, but provide less than 5 percent
in utility savings for the properties.
Because these programs are heav-
ily subsidized, owners often come
to think that green upgrades should
always be low cost or free. And since
these programs don’t cover more
extensive retrofits, property owners
miss out on the larger ticket items
that typically provide greater savings
and other benefits.
s
Ravi Malhotra
Founder and
president,
International
Center for
Appropriate
and Sustainable
Technology, Denver
Sustainability
ICAST
A typical process-flow for a green rehab project
