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Commercial Property Assessed Clean Energy, or C-PACE,
financing removes the upfront costs of energy-efficiency
upgrades, tacking the payments onto property-tax bills
over several years, even if the building changes
ownership. For smaller projects, such as replacing a
heating, ventilation and air conditioning (HVAC) unit or
conducting a lighting retrofit, many utility companies
offer incentives through which the customer can receive
a rebate upon successful completion of a project.
Additionally, there are several smaller and nontraditional financial institutions, such as community development
financial institutions (CDFIs) or the U.S. Small Business
Administration (SBA), that offer alternative financing.
One CDFI, the Community Preservation Corporation
in New York City, has had success with underwriting
financing for energy-efficiency improvements straight
into its traditional first-mortgage loans. Its financing,
however, is only for multifamily properties. For small-business commercial property types, the SBA’s
CDC/504 loan program allows borrowers to qualify for
a loan of up to $5.5 million if the upgrades result in
energy-consumption savings of at least 10 percent.
Each of the above financing options are worth exploring. None of them, however, allow for commercial
building owners to truly have energy efficiency underwritten into their mortgage loans.
If energy efficiency is such a prime opportunity for cost
savings and environmental benefits, what is delaying a
larger market harmonization between these projects
and commercial mortgage originations? One factor
There are admittedly a number of players involved
in a building’s life cycle that need to work together
in order to successfully underwrite energy efficiency.
A property owner must acknowledge the need for an
energy-efficient building and request a professional
evaluation, such as a property-condition assessment
or a physical-needs assessment. In turn, these assessments must take the efficiency of a building into
consideration and be performed by a trained professional who knows which components of a building
impact its energy use.
Once the assessment has been completed, the
building owner must then take that information to
their lender — either a traditional bank or alternative
financier — who has to be willing and able to use the
data presented to underwrite a loan with energy
efficiency as a top consideration.
To date, the overall commercial lending market has
not been able to carry out this ideal scenario with the
widespread success that Fannie Mae has had with multi-family properties. During the first half of 2017, Fannie
Mae’s green-financing portfolio funded $10 billion in
loans for multifamily properties that target an annual
reduction of 20 percent or more in energy or water consumption. These loans may allow borrowers to receive
a lower interest rate, increased loan proceeds or a free
energy audit, all of which translate into savings for both
tenants and property owners.
History is another factor behind market delays. Energy-efficiency investments were once viewed as risky
additions to a loan portfolio as lenders saw them as
highly capital intensive. And property owners may have
associated them with lengthy or unknown payback
periods, referring to the amount of time it takes to recoup
the initial investment.
In 2017, Lawrence Berkeley National Laboratory published a study that found source energy-use intensity
(EUI) correlates to mortgage-default risk. Source EUI
includes the amount of energy required to operate a
building, including all production, transmission and
delivery losses. Simply put, the more energy efficient
a building is, the less likely the underlying mortgage
is to default.
The same is true when looking at residential properties.
A 2013 study co-authored by the Institute for Market
Transformation and the University of North Carolina
found that, on average, mortgage-default risks were
32 percent less for energy-efficient homes than
comparable nonefficient homes. Increasingly, statistics
and case studies are pointing toward energy-efficiency
investments as smart, viable additions to loan portfolios
that have direct, positive impacts on parameters such
as net operating income, return on investment — and
even benefits such as increased tenant satisfaction,
decreased tenant turnover and higher rental prices.
Bentall Kennedy, a Canadian-based asset-management
company, commissioned a longitudinal study that
found green buildings had occupancy rates that were
10 percent to 20 percent higher, and tenant-satisfaction
scores that were 7 percent higher, compared to buildings without energy certifications. In this case, green
buildings included those with certifications from the
Building Owners and Managers Association, the U.S.
Green Building Council’s Leadership in Energy and
Environmental Design program, or the U.S. Environmental Protection Agency’s Energy Star program.
In order to overcome the green gap in the market,
key players, including commercial mortgage brokers,
must be aware of critical building components that
affect energy efficiency — and be willing to integrate
these details into their loan proposals. Mortgage brokers
have a unique ability to impact loan amounts when
successfully factoring in energy efficiency. Without
knowledgeable brokers, this task becomes more difficult.
Educated brokers, however, can incentivize and give
direction to their clients on energy-related questions,
which can produce more productive discussions about
n n n
Increasing investment in high-performance buildings,
creating a strong economy built on sustainability and
financial longevity, and removing the unwarranted
stigma of risk attached to investing in energy efficiency
are all very real possibilities. In order to get there,
mortgage brokers can help leverage all players in a
building’s life cycle and acknowledge that investing in
energy efficiency is both good for business and good
for the environment. n
Scotsman Guide Commercial Edition |
ScotsmanGuide.com | April 2018 34
Emily McLaughlin is a senior associate at the Institute for Market Transformation (IMT), a national nonprofit
organization focused on increasing energy efficiency in buildings to save money, drive economic growth,
reduce harmful pollution and tackle climate change. As part of IMT’s market-engagement team, McLaughlin
focuses on energy-efficiency financing and market-based programs that work to incentivize energy
efficiency and green leasing for commercial real estate companies and government agencies.
Reach McLaughlin at (202) 525-2883, ext. 312, or email@example.com.