CREJ - Multifamily Properties Quarterly - April 2015
Rehabilitation 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 tenants 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, including 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 governments 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 development 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 contractor 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 execute on individually metered multifamily properties. EPC is also off-balancesheet financing. Power purchase agreement. A PPA is essentially an EPC contract, except it is for energy generation (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 maintains 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 planning. Utility financing. There are two primary methods in utility financing. 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 Colorado. The above options have one drawback – the only part of the rehab that is financed is the green portion, such as energy efficiency, renewable energy, water conservation and perhaps indoor air quality improvements. The following option typically funds the entire rehab. Debt financing. Loans from banks, credit unions, community development financial institutions or agencies, 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 typically 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 federal tax incentive that provides a 30 percent credit for certain renewable energy installations such as solar photovoltaic systems. Production tax credit. PTC is another federal tax incentive that provides 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 efficiency improvement achieved and is maximized at $1.80 per square foot. Utility rebates. These are cash incentives 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 government, and private foundations can fund green retrofits in multifamily properties to subsidize housing costs for tenants, or achieve carbon savings. The U.S. Department of Energy Weatherization 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 photovoltaic, 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 Legislature 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.