Preview: Mixed-Use Retrofit Financing

Ahead of our Deep Energy Retrofit: Multi-Use Building panel with The Center for Architecture on April 13, we talked to Cameron Talbot-Stern (Arup) about financing mechanisms available for projects like 125 Maiden Lane, including some of the options they considered. The presentation next week will go into more detail of the actual Energy Conservation Measures (ECMs) at 125 Maiden Lane and explain how the building met energy targets through a rigorous measurement and verification.

According to Talbot-Stern, there is significant pent-up demand for upgrading and replacing energy-consuming equipment in buildings across the country. Potential investment in this area has been estimated at over $300 billion in the United States alone. The impact of these investments could result in an energy savings of 30 percent, obviously with significant associated financial savings for the building owner/investor.

Traditionally there have been many barriers to the funding of energy efficiency measures such as:

  • Large upfront costs
  • Limited low-cost financing options
  • Split incentives with tenants that impede adoption
  • Owners’ preference for quick payback (usually in the range of 2-3 years)
  • Owners’ aversion to increased debt on their balance sheet

The examples below focus on private sector options that offer ways for building owners to reap the benefits of energy retrofits without using their own capital up front. 

Incentives

Incentives are effectively free money at a federal, state, local or utility level.  There are too many to go into detail, but online databases such as DSIRE provide lists of applicable state incentives, and there are similar websites for federal options.

Energy Service Agreement (ESA)

This is the type of agreement that was used at 125 Maiden Lane.  At a high level, financial institutions or investors cover the upfront costs and often provide the engineering and implementation expertise required to carry out the energy efficiency project.

For example, the building owner and the investors could enter into an agreement for a period of 10 years, during which the building owner pays what he normally would for energy to his investors, who in turn earn the difference between the new and historic energy bills. This serves as payback on the initial investment. At the end of the contract, the building owner now owns the equipment and realizes the full benefit of the energy retrofit. 

ESA-type contracts have already resulted in savings of 25-30 percent in a range of building types. Other buildings who’ve benefited from this financing model include:

  • Drexel University in Pennsylvania
  • Corporate Offices Properties Trust (COPT) in Atlanta

Property Assessed Clean Energy (PACE)

Municipal governments offer a specific bond to investors and then loan the money (upfront capital) to consumers and businesses to put towards an energy retrofit. The loans are repaid over the assigned term (typically 10-20 years) through an annual assessment on the resident’s property bill, which is paid via an increased property tax. A key distinction with this kind of funding is that the loan is actually attached to the property rather than to the individual.

There are similar financing mechanisms for public entities, which include Energy Savings Performance Contracts (ESPC), Utility Energy Service Contracts (UESC) and Power Purchase Agreements (PPA).

Learn more on 125 Maiden Lane’s features from project team members next Wednesday evening.

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Urban Green Council
Dedicated to transforming buildings for a sustainable future.