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Page 14 — Property Management Quarterly — October 2017
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Management
F ifty percent of building own-
ers who would be interested
in investing in building energy
retrofits are unable to do so
because of the high upfront
investment is likely hiding in plain sight
in the utility bill – in the form of wasted
energy. Innovative programs are emerg-
ing to unlock that heretofore hidden
investment power.
Energy retrofitting is the science (and,
at times, the art) of improving building
systems after the property is initially
developed – in some cases, decades or
even centuries later. Historically, energy
retrofits have been done only for neces-
sity, and typically one-off instead of
part of a comprehensive plan. A build-
ing system, or “measure” as known in
the industry, wears out and must be
replaced.
Owners traditionally paid cash for
such items, or perhaps entered into
relatively short-term, high-interest
commercial finance loans. In the U.S.,
energy has been relatively inexpensive,
therefore people were not as aware of
the impact of building systems on their
energy consumption, energy bill or the
environment.
Researchers estimate that today, the
nation’s residential and commercial
buildings consume between 37 and 45
percent of the 100 quintillion British
Thermal Units of energy produced in
our country, according to a 2017 report
fromNavigant. In this multitrillion dol-
lar domestic energy market, the U.S.
retrofit market of $70 billion, expected
to grow to $100 billion by 2025, is still a
niche player.
Given this small size and historical
lack of interest, the reason the moment
has arrived for
energy retrofitting
is because there are
major benefits.
• Economic. Ret-
rofits reduce the
consumption and
cost of energy and
improve the operat-
ing income of the
building and overall
value through higher
margins.
• Environmental.
Lower consump-
tion yields lower production of harmful
pollutants, carbon dioxide and other
greenhouse gases.
• Security. Reduced demand for
energy, supplemented by locally renew-
able production, helps to balance the
national energy diet, takes stress off the
national grid and reduces our need to
purchase foreign energy.
• Customer preference. Today’s
building owners and tenants are far
more aware of the importance of
energy-efficient buildings than previous
generations and more likely to make
leasing and purchasing decisions based
off that awareness.
To address this missed opportunity,
a variety of financing options emerged
over the last two decades including
Commercial Property Assessed Clean
Energy financing, on-bill financing
(where the repayment is paid to the
utility company) and energy service
companies. However, it should be noted
that if primary bank financing is avail-
able, it will still be the most efficient
form of capital and should be consid-
ered first.
For C-PACE projects, clean energy is
defined as both the investment in ener-
gy-saving building systems as well as
renewable energy-generating systems,
in the same financing package.The
basic concept is that improvements will
generate energy savings over their use-
ful life.Those savings, over the average
life of the measures (ranging from 15 to
30 years), are provided to the building
owners in the present, allowing them to
invest in the improvements that gener-
ate the savings.
The primary innovation is that the
financing is repaid through a special
property-specific assessment, through
the biannual property tax bill.When
designed well, energy savings exceed
the assessment cost, increasing cash
flow from day one. Due to the use of
the property tax assessment mecha-
nism, C-PACE financing is long-term,
nonrecourse and low-rate.
Putting these elements together, the
annual payment, based on term and
interest rate, is significantly lower than
any alternative investment or commer-
cial finance sources, creating cash flow
for the owner fromDay One.
C-PACE is a bipartisan public-private
partnership.While it is still relatively
new – currently available in 18 states,
and in Colorado only since 2016 – and
relatively small, it is on pace for rapid
growth as owners, architects and lend-
ers become more familiar with it.
On-bill financing literally means that
instead of the repayment being made
through the property tax mechanism, it
is made “on-bill” to the utility company,
which already is proficient at collecting
your utility bill. Like C-PACE, the money
saved in energy can be greater than the
increased assessment, yielding imme-
diate cash flow.While these programs
are limited to the use of utility funds,
new on-bill structures will open up the
market to private capital sources, also
like C-PACE. One downside is that only
measures associated with that utility’s
billing can be financed, while C-PACE
can finance the entire building’s mea-
sures.
Energy service companies are in
some ways the grandfather of C-PACE
and on-bill financing and are still rele-
vant and evolving today. Energy service
companies have the benefit of guaran-
teed energy costs, allowing businesses
to lock in prices (and stabilize operating
margins) years in advance.The pro-
gram is incentivized to reduce energy
consumption below a certain baseline.
Federal and municipal agencies, hos-
pitals, schools and universities drive
much of the demand for these services.
Payback periods often are much longer
than commercial periods, reflecting the
longer-term nature of public invest-
ments.
Other options include energy service
agreements, power purchase agree-
ments, managed energy service agree-
ments, as well as energy tax credit
investing – and, in Europe, a trade in
carbon dioxide offset credits.
Energy retrofits are an old tool being
applied in newways by a generation of
innovative owners, developers, finan-
ciers, policymakers and advocates.The
opportunity to save money, protect
the environment, become more self-
sufficient and attract new customers
is more available than ever. Smart
owners and property managers should
put together a package of one or more
of these potential funding sources to
optimize their building’s energy pro-
file, enhance the brand, attract new
customers, and help the state and
the nation become more energy self-
sufficient.s
Michael Leahey
Managing director,
PACE Equity,
Denver