Despite the clear economic benefits of improving the energy efficiency of commercial and large multi-family buildings, lack of access to attractive financing has been a major barrier to widespread deployment. A number of factors have stopped the flow of capital to commercial efficiency upgrades or severely limited the market to self-financed projects. These factors include building ownership structures that do not have the credit or collateral needed for capital formation and a perception that efficiency investments are a higher-risk investment than they are. They also include landlord-tenant relationships that require capital expenses, such as energy efficiency upgrades, to be contributed by building owners while tenants pay ongoing operating expenses, including utility bills for energy, and thus gain any savings from such upgrades. Growing the size of the capital market willing to invest in energy efficiency projects, and lowering the cost for building owners are key to scaling commercial retrofits and overcoming the split incentives between owners and tenants.
How do we unlock financing?
Reduce the risk: Efficiency projects carry two types of risk. There is a risk that the upgrade project will not deliver enough savings to pay the cost of work. This is largely a non-issue for large projects because energy service contractors will guarantee their performance. There is also a risk that the building owner will fail to make the payments on the project loan. Loan loss reserves, loan guarantees and other credit enhancements have been used to reduce this risk in some markets, but to date there is not a strong, widely available national program to insure or guarantee the credit risk of building owners undertaking efficiency upgrades. Such a product would facilitate lending to buildings held in complex ownership structures that do not have credit or collateral.
Sign better leases: In many buildings, owners pay the costs of efficiency upgrades, while the benefits of lower energy use are enjoyed by tenants. Leases that pass through both the costs and benefits of energy efficiency measures avoid this problem of split incentives. Leading by example, the government could require such leases in any space it rents.
Build a track record: Leasing analyses are already starting to show that energy efficient buildings have lower vacancies and higher rents than unimproved buildings. This translates directly to the bottom line for building owners. As more data is generated, banks and insurance companies will begin to value energy efficiency. The government can play a simple and high-impact role by collecting an estimate of the energy and transportation expenses that Fannie Mae and Freddie Mac loan applicants can be expected to have as homeowners.
