Simple Payback. It sounds like the title of a revenge thriller. And indeed it’s a way for co-op and condo boards to get revenge on high energy prices via such “green” projects as solar panels and cogeneration. In fact, simple payback is just one of many factors that can make such capital improvements cost less out of pocket – and eventually pay for themselves. It comes down to three things: cash incentives, tax rebates, and lowered energy bills.
First, federal, state and local agencies can put up part of the money for a project, reducing your upfront cost. Then tax rebates or abatements can lower your property taxes or, in some cases, be passed through to your residents. Finally, your building will have lower operating costs thanks to lower energy bills – leading to savings that eventually add up until you recoup the remainder of your upfront expense. “It’s like a layer cake,” says Richard Klein, president of the solar-energy consulting and installation company Quixotic Systems. “With solar, you can get incentives from federal, state, and city sources, a tax rebate or a tax credit from New York State, and a New York City property-tax abatement of twenty percentover five years on the net of the New York State Energy Research and Development Authority (NYSERDA) rebate.” As for cogeneration – a natural-gas power plant in your building that generates both heat and electricity, also called “combined heat and power” or CHP – NYSERDA has incentive funds available through at least December 31.
Robert Dascoli was board treasurer when his 12-unit co-op at 176 Sterling Place in Brooklyn installed solar panels in 2009. “With all the incentives that lowered the upfront costs, we did an analysis and found that after eight years [of lowered energy bills] the system would basically pay for itself,” Dascoli says. Incentives included a four-year property-tax abatement, a state tax credit for 25 percent of the project cost, a federal tax credit for 30 percent of the cost, and a cash rebate from NYSERDA.
But incentives change from year to year. “The way different incentives come together,” says James Hannah, an executive at the solar-energy consulting and construction firm Bright Power, “it can bring the cost down to 30 to 75 percent of the sticker price.” Or maybe it won’t. “There are a couple of catches,” warns Kelly Dougherty, director of energy management at FS Energy Services, a subsidiary of the nationwide property-management company FirstService Residential. “Even if you’re paying [upfront] just half the cost of a project, that can still be a lot for a building.” Taking out a loan to cover those upfront costs will lengthen the project’s payback time. “As for the tax credit,” Dougherty adds, “a tax professional really should get involved since not every shareholder or unit-owner is going to get that tax benefit. It’s a process, and you need to realize that it may not work for every building.”
Not Easy Being Green
The first step is to understand the terminology. “Be careful using the word ‘green,’” Dougherty cautions. The two most widely known methods of generating electricity onsite are solar and combined heat and power (CHP) systems. But CHP uses fossil fuel. It’s energy-efficient because it creates heat for the building as a byproduct of creating electricity. But the only truly “green,” or renewable, energy for multifamily buildings in the New York City area is solar because, in most cases, wind, geothermal, and wave energy are impractical.
The second step is to look into free technical services available from government agencies. The New York City Retrofit Accelerator is a free city program offering personalized advice on energy-efficiency improvements. Others include the free Building Operator Training program of the City University of New York’s Building Performance Lab, which teaches preventive maintenance and energy efficiency to staffs of small to midsize residential buildings. The nonprofit Here Comes Solar offers free energy-efficiency assessments to small- and medium-size affordable housing, and at a nominal fee to market-rate co-ops and condos.“Before you engage with a vendor that is going to want to sell you a piece of equipment, do some research to make sure you know what you should be looking at when reviewing what projects you might want to take on,” says Dougherty. “Everything is going to sound great with a vendor. A little bit of research pays off.”
Then, just as you’d engage an accountant to do your building’s taxes, you’ll want to engage an energy consultant or a Building Performance Institute-certified energy auditor who can assess opportunities to reduce consumption. Usually this means switching to LED lighting, adding insulation, sealing cracks that allow drafts, and upgrading your energy-control system, among other measures.Indeed, installing these relatively low-cost efficiencies will help you make an informed decision about such bigger projects as solar or cogen. “If you’re considering putting in a cogen system conceivably costing a half-million dollars, and you do the energy-efficiency measures first,” says Arthur Pearson, president of the energy consultancy Barrett Green Management, “you might find you could put in a smaller system costing maybe $350,000.” While this is going on, your energy professional will be investigating what current cash incentives and tax breaks might be available. He or she will then assemble a spreadsheet or other document with the estimated base cost – the so-called “sticker price” – and deductions for various incentives and for the estimated lower energy prices the building will pay.
This spreadsheet will evolve as more precise pricing comes in from contractors bidding on the job and as the availability of incentives is confirmed. If these rough numbers indicate that such projects are still beyond your means – even with financing options – you can at least add them knowledgeably to your long-range capital planning. “Each building is different,” says Lewis Kwit, president of the consultancy Energy Investment Systems. Sometimes, it’s not easy to get into certain spaces to install equipment, he says, so you need to do some limited demolition. You might decide to include additional engineering and controls that may be applicable for a future project. But such costs are not directly related to the green upgrade itself and might not be reimbursable.
Dollars and Incentives
Let’s say your ballpark estimates suggest you might be able to swing a solar or cogen project. Your next step is to have your energy professional help you prepare a proposal for a contactor. “Work with a contractor who not only has experience in installing the type of project you’re contemplating but also experience in working with NYSERDA and Con Edison,” suggests Jay Merves, an executive with the nonprofit New York City Energy Efficiency Corporation. The contractors should be familiar with the incentives those entities might make available. The energy professional generally serves as project manager for such an undertaking and will file the paperwork for incentives and coordinate payments.The available incentives change periodically, and tax breaks can differ between condos and co-ops. A co-op, for instance, can pass its tax credit through to most shareholders, who individually can file for it on their income-tax returns (the exception could be lower-income shareholders, such as retirees, who may not make enough for the credit to matter).
Determining the source of the upfront money – the reserve fund, an assessment, or a loan – will affect how you proceed. The New York City Retrofit Accelerator can point you to vetted lending partners specializing in energy-saving projects. “There are organizations that will do a project for a condo or co-op at no upfront cost and then charge them for power produced,” says Merves. “These are called power-purchase agreements. A number of companies do that. An energy-service agreement is another way: you get charged based on the amount of energy you save.” Power-purchase agreements are a staple of Green Street Solar Power. “We will invest all the capital to build the project and sign a long-term agreement with the customer to provide them power at a defined contract rate,” says co-founder and president Jason Kuflik.
Despite all these options, and despite the energy savings that will eventually pay back the cost of upgrades, many boards are hesitant to go forward. “There was a building in Brooklyn,” Klein remembers. “Great roof, beautiful building using a lot of electricity and spending a lot on oil.” A projected solar project would have given the building both a federal and state tax credit, plus $350,000 cash from NYSERDA. Payback of the upfront cost was just two years. “I had one brief meeting, then I could never get back in front of the board,” Klein says. “One guy in the building was skeptical. And it was really frustrating and the program went away and they lost $350,000 in free money.”
That resistance may begin fading as new blood infuses co-op and condo boards. Observes Kuflik: “We’re seeing a new generation of people having more awareness and more of a drive toward energy-efficiency and solar.”
LEARNING THE LINGO
When seeking out incentives and rebates, you should become familiar with common terms. Here are a few you’ll probably run across:
Generally this refers to the number of years it takes to recover the cost of the project through the money you save from lowered energy bills. (The term “simple” means such factors as inflation and the interest rate on a loan taken to finance a project are not considered.) Simple payback is calculated by dividing the net cost of the project by the annual savings. “Let’s say you have a $100,000 project,” says Jason Kuflik, co-founder and president of Green Street Solar Power. “You have a 30 percent tax credit, so you’ll recover $30,000 through lower taxes. Then there will be roughly $12,000 from NYSERDA in the form of a cash incentive, which is usually paid in thirds once the project hits certain milestones.” Over four years, Kuflik says, “you’re going to get a little bit shy of $20,000 in property-tax abatement, So the remaining $38,000 can come from energy savings.” If you’re spending $6,000 less a year on energy, your simple payback would be a bit over six years.
Return on Investment (ROI)
ROI is a performance measurement. It is expressed as a percentage and is used to determine whether the project is a good investment. It’s calculated by dividing the savings over a specified number of years by the cost of the project. “Typically, a period of five or ten years is chosen,” says Barry Korn, managing director of Barrett Capital. “Some people like to go 20 years, but I think that’s just way too long.” It depends on the components, adds Arthur Pearson, president Barrett’s energy consultancy: “A boiler’s going to last 30, 35 years. You’ve got to look at it based on the longevity of the item you’re installing.” Solar panels are most commonly measured over a 25-year period.
Net Present Value (NPV)
“NPV is based on your investment today and all the economies one will receive over the lifespan of the project,” says Kuflik. “What is that value worth to me today?” Take a $100,000 system in which all the incentives and energy savings come out to $300,000 over its lifetime. If, over that lifetime, you instead had invested that $100,000 at 5 percent interest compounded annually, that would yield $238,636 in interest. In this hypothetical example, you would have a positive NPV, since that interest amount is less than the $300,000 you had saved over the same period.