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Habitat Magazine Insider Guide



Green Financing

For this 30th anniversary looking-back, looking-forward issue, Habitat’s publisher, Carol Ott, asked me to write about the future prospects for financing capital improvements expected to reduce energy consumption. I’m not talking about the standard we-need-to-borrow-some-money-to-replace-the boiler-and-we’ll-pay-back-the-loan-with-an-assessment-or-maintenance-increase kind of borrowing. I’m talking about we-had-an-energy-audit-thay-says-we’ll-save-x-dollars-a-year-if-we-put-in-this-high-efficiency-boiler-and-that’s-how-we’ll-pay-back-the-loan borrowing.

In Habitat’s early days, I often wrote about energy issues, and I’ve spent the years since then working for the Community Preservation Corporation (CPC), an affordable housing lender that launched an energy financing program for apartment buildings about three years ago. Our first “green” loan was to a co-op.

So here’s my prediction: it ain’t gonna happen anytime soon.

There are three primary reasons: lack of reliable data about actual savings, unreliability of audit predictions, and the need for unconventional underwriting requirements.

Lenders will probably be reluctant to make a loan when the money to repay the loan is expected to come from energy cost savings. Which doesn’t mean you won’t be able to finance insulation for the new roof, or air sealing, or lighting improvements, or a high-efficiency boiler. (Note that I haven’t mentioned windows. There are many good and valid reasons to replace windows. Reducing fuel costs is not one of them. Trust me.)

History Lesson

First, a little history. Back in the day, when it was almost considered un-American to be concerned about fuel efficiency in either cars or boilers, industrial and large commercial buildings were the focus of energy improvements. To the extent residential properties were targeted, the emphasis was on single-family homes. Only a few states, like New York, used federal programs, such as the Weatherization Assistance Program, to upgrade efficiency in apartment buildings. It was thought that consumption in co-ops, condos, and rental buildings was too hard to manage, largely because of the human factor: day-to-day management and resident behavior.

These issues remain a major aspect of energy management in apartment buildings, but now it is recognized that a significant part of a city’s carbon footprint is derived from them. Energy use in New York City is only one-third of the national average, but 79 percent of that consumption is from buildings of all types. The cost of supplying and heating domestic hot water, wastewater treatment, fuel and electricity – along with other costs associated with energy dependence – have fueled this realization.

Traditionally, a lack of reliable data documenting savings from efficiency improvements hampered efforts to convince owners, managers, and residents that such an investment makes financial sense. Thirty years later, a lack of reliable data is still impeding these efforts.

Energy-Efficiency Report

Deutsche Bank Americas Foundation, in conjunction with Living Cities, recently issued a report (Recognizing the Benefits of Energy Efficiency in Multifamily Underwriting) that analyzed documented energy savings in over 230 properties. Surprisingly, this study is the first of its kind and represents the largest database of before-and-after energy consumption in apartment buildings, all of which are rentals and virtually all of which are affordable housing. The study lays the foundation for continuing analysis of energy improvements. The data confirm that energy savings are achievable but also reveal some anomalies that may make financing based on projected savings unlikely, at least until more information is accumulated and analyzed.

The major findings of the Deutsche Bank/Living Cities study are the following:

(1) Building retrofits save energy.

(2) Gas and oil savings are greater and more reliable than electricity savings.

(3) High fuel use before the retrofit is a reliable indicator of greater savings post-retrofit.

(4) Adjusting projections based on original consumption data yields more reliable savings projections.

It is the fourth conclusion that reveals the tricky part for lenders. The data indicated that, while retrofits are effective, the actual energy savings, even when adjusted for cost and weather conditions, were often significantly less than the amount projected by an energy audit. The analysis showed that the savings actually achieved were only 61 percent of the savings projected by the audits.

Audit experts don’t find this surprising. Andy Padian, CPC’s vice president for energy efficiency and a certified auditor with extensive experience, points out that changes to retrofit scope, equipment substitution, poor installation techniques, and management failures can all contribute to a fall-off in the degree of savings. These are all valid points and mean it is too simplistic to “blame the auditor.” However, the fact that there are so many ways to compromise the projected savings means that lenders will not rely on estimated cost reductions to get their loan paid back.

To address this concern, Deutsche Bank suggests that the projected audit savings be adjusted based on the property’s base energy consumption. Doing so vastly increases the reliability of the data, according to its analysis. The numbers work, but I have a hard time believing that institutional lenders will undertake implementing such a complex system.

Given the risks involved, lenders want government to assume that risk, perhaps through some form of credit enhancement. The New York City Energy Efficiency Corporation does have $37.5 million in federal American Recovery and Reinvestment Act funds for a mortgage insurance program. While encouraging, this is insufficient to approach the scope of the need and is unlikely to be available for market-rate co-ops and condos. Even more relevant, I doubt that the secondary markets – Freddie Mac and Fannie Mae – will embrace complex and experimental underwriting standards anytime in the near future. This is especially true given their current operating constraints and government oversight.

Any major changes will be driven by market demand, and the market ain’t demanding just now. CPC saw little interest on its green financing program. (Full disclosure: we didn’t determine loan amounts on projected savings either, and given the recently released Deutsche Bank/Living Cities study, that was apparently the right decision.) Apartment building owners resented the additional requirements and fees (audits cost money), and the concept of spending money to save money is a hard sell, as always.

Co-op and condo boards – some of them at least – may acknowledge the common sense value of reducing energy costs, but their needs are insufficient to change the lending market. Banking, now more than ever, is an industry that operates on a national rather than community level. Co-ops may be ubiquitous in New York City but really don’t exist anywhere else. Condos are more prevalent, but usually don’t share common heating systems outside of major metropolitan areas, and all of them find it difficult to borrow for capital improvements, despite laws that make it theoretically possible.

Borrowing to install energy-efficiency improvements requires the same kind of commitment that is usually applied to redecorating the lobby, including the understanding that it sometimes makes sense to spend money to make (or save) money, as well as a healthy skepticism about the advice you get from your heating contractor. The real value of an audit, then, may not be to tell you that replacing your building’s 60-year-old boiler will reduce fuel consumption, but which boiler will reduce consumption the most. And make sure your super will be trained to keep it at peak efficiency – that’s where the real savings come in.

So where does this leave us? Unfortunately, pretty much the same place we’ve always been. Reducing energy costs requires a little investment of time, energy (pardon the pun), and a whole lot of common sense.


Mary A. Brennan, former assistant commissioner for energy at the New York City Department of Housing Preservation and Development, was also the director of field offices at the Community Preservation Corporation.


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