Banking on Energy Efficiency in Real Estate

Bob Hinkle, President and Chief Executive Officer of Metrus Energy, cautiously reminded the audience, “The commercial building sector is the most promising for energy efficiency but also comes faces challenges, mainly because there are limited custom financing options for current projects.” The panel, composed of both public and private-sector leaders in area of energy finance, discussed the growing awareness among municipalities and players in commercial real estate for creative finance tools needed to advance the retrofit market. “The opportunity for energy efficiency is not in new construction but as we know, the retrofitting of existing properties,” said John Christmas, Senior Vice President of Hannon Armstrong.

The panel, moderated by Kate Q. Knight, Senior Associate at AIG Global Real Estate Investment Corporation, also framed the discussion of energy efficiency finance in a “post-PACE” marketplace. PACE, the working acronym for “Property Assessed Clean Energy”, is a finance mechanism whereby municipalities who pass this legislation can offer PACE bonds to investors which then provide return funds to consumers and businesses to put towards an energy efficient retrofit of existing residential or commercial properties. The loans are repaid over the assigned term (typically 15 or 20 years) via an annual assessment on their property tax bill. PACE financing enables investors and businesses to overcome one of the main obstacles to retrofitting: upfront costs.

In May 2010, however, Fannie Mae and Freddie Mac—which hold approximately two-thirds of all residential mortgages in the U.S.—would not allow borrowers with a PACE loan to refinance or sell their properties unless the loans are paid off, effectively stalling the program. According to Greg Hale, Senior Financial Policy Specialist with the Natural Resources Defense Council, “The beauty of PACE is that it is a capital markets solution,” and once lenders are more familiar with similar finance options, paired with access to more data on how retrofitted properties perform, will become for confident with financing retrofit projects. So what will the future of energy efficiency finance hold for those in the commercial real estate community?

Beau Engman, Vice President for Commercial Energy Solutions at Johnson Controls, Inc., estimated the energy retrofit market to be nearly $6 billion. The market is largely imbalanced, however, with more than 80 percent of the opportunity in the public sector—the MUSH market—and the private sector accounting for only 20 percent. One of the panel’s suggestions for expanding the private market for energy efficiency finance was to find more ways to creatively use American Recovery and Reinvestment Act (ARRA) funds such as TIF, tax credit and bond programs to bring the overall energy efficiency market to scale.

Another example explored by the panel was the continued growth of energy-savings performance contracts (ESPC). An ESPC is a partnership between an energy services company (ESCO) and customers formed for the purpose of financing and implementing cost-saving energy efficiency improvements to both residential and commercial holdings. The ESCO covers the up-front cost of purchasing and installing new equipment, and the customer repays the ESCO over the life of the contract from the cost savings that result from these improvements. “What we need to be looking to is existing Federal programs that can help us reach goals that we know are tangible,” said Nina Albert, Chief of the Office of Green Economy for the District of Columbia. The District of Columbia has passed legislation that has resulted in the successful implementation of a retrofit program being modeled by other local governments.