Panama Bartholomy is a director for the Investor Confidence Project (ICP), a global underwriting standard for developing
and measuring energy-efficient retrofits for commercial and multifamily buildings. ICP created the Investor Ready Energy
Efficiency (IREE) certification, which is administered by Green Business Certification Inc. (GBCI). To pursue IREE certification
for a building project, visit eeperformance.org. Reach Bartholomy at firstname.lastname@example.org.
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t is estimated that green investments could result in more than
$1 trillion in energy savings over a 10-year period. When looking at
the types of projects in which energy efficiency presents opportunities,
building retrofits stand out. Energy-efficient, building-scale retrofit
projects — such as upgrades to heating, ventilation and air conditioning
(HVAC) systems and lighting systems — could reduce greenhouse-gas
emissions by more than 600 million metric tons of carbon dioxide per year.
There is a powerful trend emerging that shows commercial banks are
now considering green buildings a better risk than conventional buildings because of the lower operating costs, higher rent prices, lower vacancy rates and increased values upon resale. The rising demand for
green buildings is being fueled by an increased focus on corporate social responsibility and a demand from new generations of workers who
prefer green spaces. As demand increases, lenders have followed and are
now assigning lower valuations and higher risk premiums to conventional
buildings that do not achieve Leadership in Energy and Environmental
Design (LEED) or Energy Star certification.
Green investing also continues to drive change in the market. There
are national programs to help increase investor and building-owner confidence in the environmental and financial savings of a retrofit project.
These programs may have their own certification standards, which offer
the commercial real estate sector a consistent and transparent process to
ensure energy savings and greater investment returns.
ESCOs and ESAs
In 2011, Shaw Environmental and Infrastructure Inc. was subcontracted by
the American Council for an Energy-Efficient Economy (ACEEE) to study
the financial institutions involved in energy finance and outline the various green-financing models that were either available or being developed. They found that initiatives exist for nearly every type of residential
and commercial building, and for every ownership structure.
The commercial banking sector’s main energy-efficiency financing offers are through contracts with large energy services companies (ESCOs),
which most commonly work on projects with municipal governments,
universities, school districts and hospitals. This structure is specifically for
highly creditworthy organizations that have been evaluated by a major
credit-rating agency, such as Standard & Poor’s, Moody’s or Fitch Ratings.
ESCO contracts require the energy company to provide a performance
guarantee to the building owner, which means the borrower has to meet
loan obligations even if the original energy-reduction targets are not
met. An energy services agreement (ESA) is similar to the ESCO structure,
except that energy savings are tied to loan repayment, meaning that
repayment amounts are proportional to the savings that are generated.
For noninvestment-grade projects, commercial banks offer middle-market
and small-business lending programs, including U.S. Small Business
Administration (SBA) programs. The SBA’s 504 program is convenient for
energy-efficient projects because it allows for longer-term, fixed-rate debt.
To accommodate small commercial facilities and privately owned multifamily buildings, large commercial banks offer financing to intermediary
partners, such as community development financial institutions, or CDFIs.
These entities encompass various private financial institutions, nonprofit
loan funds and venture-capital funds. They are certified by the U.S. Department of the Treasury’s CDFI Fund. Commercial banks are one way that
CDFIs secure funding for their loans, as well as from philanthropic foundations and government sources. CDFIs often have to pledge assets or
provide guarantees in order to secure funding.
Utility companies have long provided energy-efficiency funds through
on-bill financing and on-bill repayments. On-bill financing allows utility
companies to recover the costs of a clean-energy upgrade, which is repaid
by the property owner through the utility bill. An on-bill repayment
means the property owner repays the investment through a charge on
their monthly utility bill. These kinds of financing plans are increasingly
becoming attached to state legislation that require utilities to offer a
certain amount of financing for small commercial and residential projects.
Federal, state and local governments offer a variety of programs for
energy-efficiency financing. On the federal level, energy financing is offered
through the PowerSaver program at the U.S. Department of Housing and
Urban Development (HUD) and the Energy Efficiency and Conservation
Block Grant (EECBG) program at the U.S. Department of Energy. There
also are various public-private partnerships that take advantage of subsidies, such as the Green and Healthy Homes Initiative, which was created
through collaboration between the White House Office of Recovery and
the Council on Foundations, a nonprofit organization.
More funding sources
State housing agencies are among the major sources of capital for
energy-efficiency projects. They may require low-income housing-tax credit
(LIHTC) allowances to be linked to such projects. State development-finance
authorities also are a growing source of funding for the energy sector,
typically requiring projects to provide back-up letters of credit from
investment-grade companies in order to protect the state.
Private finance companies also are significant players in the energy-efficient lending space. Community development corporations (CDCs),
which work with SBA’s 504 program, represent a portion of these private
“State housing agencies are among the major
sources of capital for energy-efficiency projects.”