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Nancy Anderson, Ph.D.Torchlight

Energy Efficiency: Money Isn't Everything

By: Nancy Anderson, Ph.D.

November 04, 2010

Really, money isn’t everything, but like good information, it can go a long way when it comes to improving the energy efficiency of big city office buildings. At a November 2010 panel organized by the Pew Center on Global Climate Change and Point Carbon on innovative approaches for financing energy efficiency in commercial buildings, financial experts took a close look at what kinds of commercial buildings are the most attractive for purposes of making loans to pay for building renovations that would improve energy efficiency. The panel’s energy engineer started from a different entry point and spotlighted efficiencies that could be achieved by operational improvements and other collateral benefits for existing buildings. The policy speaker offered a glimpse into a financing mechanism soon to be announced by the Bloomberg administration.

Here are several of my takeaways. While environmental advocates and building systems experts agree on the potential benefits of making the existing stock of commercial buildings more energy efficient, translating this into an effective argument for obtaining the funds to carry out capital expense improvements is far from a routine loan transaction. Another impediment is a typical real estate industry expectation of no more than a three-year payback time for building projects that entail debt. With this threshold, there is not much that can be done in an integrated and systematic way to enhance energy performance and recoup costs.

Compounding the impact of this customary three-year cutoff, since the typical commercial mortgage is so much shorter than a residential mortgage, many commercial property owners and their lenders are unwilling to put money into energy efficiency projects with a longer pay back period. The ideal commercial building, for purposes of obtaining energy efficiency financing is one that is owned and occupied by a major corporation, where the occupancy time horizon is long and the asset profile is deep and robust. Even these attractive features may not outweigh the current dearth of measurement and verification data on the performance of energy efficiency projects in other commercial projects. The market does not yet know how to value high performance building, but it is easier to underwrite a loan for major corporate borrower than a special purpose loan for a smaller borrower.

Another takeaway is that projects to enhance a building’s energy efficiency may produce collateral benefits that the market does know how to value. The example given was renovation work at Rockefeller Center that yielded thousands of extra feet of rentable space that resulted from its energy upgrades. Owners of the Empire State Building, New York’s Art Deco icon being modernized into an icon of green, coordinated overall building renovation work and market repositioning with its energy efficiency upgrades.

While one speaker cautioned that today, financial professionals cannot attribute any value to energy efficiency performance risk on its own, the panel’s energy engineer did not see the availability of finance as a big barrier to improving the energy performance of commercial buildings. Instead, he stressed that lenders and borrowers should seek the tangible collateral benefits of enhanced energy efficiency which would make finance a more attractive proposition and could overcome the three-year payback metric used by so many commercial property owners.

On the policy front there was news about a proposal to use $35-$40 million in energy-related federal stimulus funds to establish the New York City Energy Efficiency Corporation. This entity would be structured as a public-private, non-profit organization partnership, housed at the City’s Economic Development Corporation. It would work to centralize and scale up the City’s energy efficiency industry. Initially, it would assist both commercial building and affordable housing owners to obtain financing for energy efficiency projects. Assistance tools might take the form of project loans, and credit enhancements. As currently conceived, the credit enhancement vehicle for affordable housing should not require first lien status in bankruptcy and therefore could avoid the problem that was fatal to the PACE bond program for homes. Over time, the Corporation would become self-sustaining through payment of transaction fees and becoming a low-risk magnet for other funding sources. My final take away was a question posed by one panelist to another: how much credit enhancement would be enough to interest the private sector in making energy efficiency loans? There was no answer.

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