Taking It to the Bank: Finance and Real Estate Meet on Energy Efficiency

The Empire State Building–-what better icon to showcase the potential of energy efficiency to literally transform a building and a market? But the story of the Empire State Building (ESB) is really a story about money. So, the Urban Land Institute chose the ESB as the site for its recent forum on “Energy Finance and Real Estate,” a first-of-its-kind meeting of commercial real estate owners and managers, investors, lenders, energy service companies (ESCOs), utilities and public officials to explore how sources of capital are enabling real estate to use energy efficiency to make money. I went on behalf of the Office of the Future Consortium to network on the technical and market benefits of highly energy-efficient tenant spaces. But I left with increased awareness of money as the driver and the gap in transforming existing buildings. I learned that typical financing vehicles for corporate real estate projects include: new asset acquisition, refinance and capital budgeting. Once locked into these mechanisms, it is difficult to finance energy efficiency projects.
For the ESB renovation, financing for their deep retrofit came from a number of sources. Total incremental cost for the project is $13.2 million. Reviewing the existing capital plan through the lens of efficiency suggested that they halt some projects, revise others and add funding for new efficiency projects. Overall, the prioritized group of eight energy conservation measures is expected to save 38% of the building’s energy use and $4.4 million annually. Five of the eight projects are financed through an ESCO contract with a guarantee of 90% of the savings associated with these measures.

Despite high-profile case studies like the ESB, owners are still struggling to overcome the first-cost barrier, especially in difficult economic times. ESCOs have traditionally not been engaged in the multi-tenant office market. New financial vehicles are addressing these challenges by accessing capital and shaping building retrofit markets. Property Assessed Clean Energy (PACE) is one mechanism that has received some recent attention in the residential market, but may not be appropriate for the commercial market due to the diversity of building size and uses as well as challenges as a first position on the loan. However, one variant on PACE for commercial real estate, an owner-arranged option which is individually negotiated, may hold some promise.

Whatever the financial mechanism for energy efficiency, the group agreed that more information about energy savings is necessary for bankers to securitize and sell these instruments to their investors. This process demands more quantitative data and analysis as well as more transparency about building energy use. Measures like real-time monitoring, continuous commissioning and robust measurement and verification methodology that is reliable and auditable are critical in this effort.   

One area of discussion from the ‘Bankers Roundtable’ was to require an energy efficiency audit as a condition of refinance and sale. The group acknowledged that underwriting decisions are based on a multitude of information, and that disclosure of the energy performance of the asset should be among the information included.  Current trends and policies for rating and labeling buildings will increase the need for credible performance information at a sale or lease transaction. But no national standard for this type of audit exists, and the bankers on the panel agreed that a standardized system to collect and report the information was one tangible next step.  
Clearly, informed property owners recognize that energy efficiency is a critical part of their financial and market business plan. If they ignore it, they risk the functional obsolescence of their asset. Hopefully, it won’t be long before their friends in the banking community identify ways to place a value on energy efficiency and ultimately sell it.