You want to do a lighting retrofit in your garage or convert your boiler from oil to gas. Where do you get the money? If your building is the right size, you may want to try shared savings agreements.
“For us, it was a no-brainer,” says Herbert Freedman, the managing agent of Riverbay Corporation, which runs the 15,000-unit Co-op City complex in the Bronx.
Freedman is talking about a shared savings agreement (also called an energy services agreement) that the cooperative employed to tackle a $3 million garage lighting retrofit that was completed in 2011. Although the concept has been used in New York City since the 1980s, it is now gaining traction with co-ops and condos as another way to finance green projects.
Here’s how it works: individual finance companies, energy consultants, or contractor/vendors finance a building’s green project with the promise that they will be repaid annually through the subsequent energy savings. The lender receives a certain percentage of financing over the life of the term, which can range from three to ten years. In some cases, a finance company will pay the contractor to perform the work and then the co-op repays the finance company. In other cases, the contractor secures its own funding and then the condo repays the contractor.
Let’s say your traditional budget was $100,000 annually for garage lighting. After the retrofit, the actual cost is $50,000 a year. Under most shared savings deals, you pay annually an amount that is higher than this actual cost, but lower than you were paying before – say, $80,000 – to the financier. You still see a savings, but the bulk goes to repay. At contract’s end, the co-op or condo feels the full impact of the savings.
At Co-op City, the lighting retrofit for the development’s eight parking garages cost $3 million. The deal was helped along by a $1 million grant that came from federal stimulus funds but was administered by the New York State Energy Development Authority, leaving Barrett Capital Corporation to fund the remaining $2 million. About 6,100 lighting fixtures were swapped out. Most were metal halide 100-watt lamps, which were replaced with 40-watt induction lights. The rest were fluorescent tubes that were replaced with LEDs, says John Tabacco, chief executive officer of Green Energy Management Services, which did the work.
Before the retrofit, the electric bill was $360,000 annually; now, it is about $120,000 a year, a 66 percent drop. The savings have been evaluated and confirmed by a third-party independent meter reading company, says Tabacco.
Although the contract calls for a maximum of 10 years, the deal is finished after the amount borrowed and financing costs have been paid to Barrett Capital, says the firm’s managing director, Barry Korn, who notes: “They’re on track to be done sooner than 10 years because of the amount they are saving.” In general, if energy savings are not as healthy as planned, the contract can specify a minimum amount that Barrett would be repaid.
Korn declined to detail the exact financing deal he secured from Co-op City, or those for any of his projects, but said his financing on shared savings can range from 6 to 10 percent (6 percent would bring them $120,000 in financing for the Co-op City project). Those interest rates are certainly higher than what co-ops and condos can often borrow in a loan secured by the apartment’s property, which can be in the 4 or 5 percent range, he says. (That would have cost Co-op City between $80,000 and $100,000 in financing.)
Reasons to Choose
But, he says, there are many reasons why a co-op or condo would choose a shared savings deal. For Co-op City, the development did not want to incur additional debt and could not tack on additional funds through a mortgage refinancing because it had refinanced recently, says Freedman.
In some cases, the underlying mortgage precludes taking on additional debt. Korn says that many condos and co-ops simply don’t have the reserves to do a project or that they have gone to residents for assessments one too many times already.
“There is no question that pricing for an underlying mortgage is the lowest form of pricing if the co-op is able to refinance their mortgage,” he says. “Sometimes those prepayment formulas make prepayment uneconomical and they’re stuck.”
That’s exactly the case with another project Barrett is in the process of financing. The co-op, about 200 units on the Upper East Side, has a mortgage with a stiff prepayment penalty that was a deal-killer for refinancing. The co-op is looking to stage a $1.1 million project that will include an oil-to-gas boiler conversion, a cogeneration system, and upgrades to the hot water, heating, and chiller systems.
Korn says that project will be done in about eight months, and that the money will be repaid over a maximum of five years. The interest rate will be in that same 6 to 10 percent range.
Adding debt at condos can often require a vote of sixty-six and two-thirds percent of the unit-owners, says David Kuperberg, president of FirstService Residential. That can be a stumbling block. Through a subsidiary, FirstService offers shared savings agreements for potential green projects for the 500 properties it manages in New York. Only four have done so since 2011.
FirstService pays for the gas conversion, but the client pays a set percentage – 90 or 95 percent – of what it was spending on oil for the life of a contract, usually about five years. If consumption or costs rise, then the amount paid out by the building rises. The deal finishes after the term ends. If savings are higher than expected, the condo or co-op can buy its way out of the contract early, but if savings are not as good as projected, FirstService takes the hit, says Kuperberg.
At an Upper East Side condo, a 230-unit luxury building, the board decided to go for shared savings and also for an oil-to-gas conversion. “They had recently done a Local Law 11 project and a window project, and they were tired of assessments,” Kuperberg says. “This was just a good option for them.” He notes that the cost of financing its deals can range from 10 to 20 percent of the project. He likens it to deciding to lease rather than buy a car. “It is almost always cheaper to buy, but there are always reasons why people want to lease as well,” he says.
Not everyone is an unequivocal fan of shared savings agreements. “It’s a wonderful idea if you don’t have the ability to borrow money, but I think most co-ops and condos would be able to borrow – and could do so at a lower rate,” says Andy Padian, vice president for energy initiatives at Community Preservation Corporation, a non-profit lender for affordable housing in New York that covers both the rental and co-op/condo markets.
If an underlying mortgage is preventing a building from taking on new debt or refinancing, it might even make sense to wait rather than take a deal with a higher interest rate for the life of a contract, according to Padian. “Even if it’s five years down the road when their building can refinance the debt, why shouldn’t an energy plan be part of the refinancing plan?” he says.
The Wrong Approach
Often, Padian notes, co-ops and condos take the wrong approach with their traditional lender. “People tell their banker, ‘I want a green loan,’ and the banker doesn’t know what to do,” he says. “But, if you go in and say, ‘I want to replace our boiler because it is past its useful life,’ there is not an engineer or a banker who is going to object to that. A loan goes bad really fast when a boiler goes bad. When there is no hot water in a building for four months, people stop paying. It’s always better for a cash-flowing occupied co-op to plan for this as part of refinancing their debt rather than taking it as a magic-bullet, one-shot deal.”
Not every green project is a good candidate for a shared savings deal. “The metrics have to be straightforward,” says Korn. “You need to demonstrate that the savings are real.”
The three that top the list are boiler conversions, lighting fixture upgrades, and switching over to cogeneration systems. Another lender that finances shared savings agreements is the New York City Energy Efficiency Corporation (NYCEEC), a non-profit that works to help buildings meet the city’s green goals. In its 18 months of operations, it has closed or arranged financing for projects in 32 buildings.
The average size of NYCEEC-financed projects is about $2.5 million, but the range is wide. The terms cover up to seven to ten years and financing can often be had at around 6 percent, says Susan Leeds, chief executive officer of the corporation. Their deals generally work like this: say a condo wants to install a cogeneration system and go from oil to gas. The project costs $1 million. An equity investor, secured by the contractor, fronts 20 percent of the total cost and NYCEEC makes a loan to the contractor for the remaining 80 percent. Every month, the condo repays the contractor (using money that it would have spent on more costly energy bills) and every quarter, the contractor repays NYCEEC. The project has the interest built into the shared savings agreement.
“The benefit of the [shared savings] is that the contractor is invested in the project saving money,” says Leeds. “They have a motivation to find the best contractors and the best equipment. That is the best way to save money.”