Retrofits Study Drives Lender Confidence in Energy Savings

“Energy retrofits save energy and money.”

“Retrofits are good investments with returns.”

“Retrofits support community development, public health, emissions abatement and economic growth.”

The Deutsche Bank Americas Foundation (DBAF) and Living Cities, a community development group, released a report last week underscoring messages that many of us in the energy efficiency community have been pushing for years.

But these longstanding themes come with a new spin. “Recognizing the Benefits of Energy Efficiency in Multifamily Underwriting”offers a potential breakthrough because it finds that with the right approach, savings projections can give investors the confidence they need to justify underwriting energy efficiency into loans. The report maps steps to incorporate savings into the lending process, increasing the size of the potential loan and unleashing new private capital that could go toward supporting building efficiency. Possible benefits include:

• Stronger cash flows for debt repayment, reducing the risk of default.
• A lower risk profile attributed to the property in question, benefiting its long-term value.
• Direct energy savings to the property owner.

These benefits have potential to help affordable housing tenants, who occupy some of the most inefficient properties in the nation and must pay a disproportionate share of income in utility bills. RMI’s new Superefficient Housing Initiative seeks to address this issue by engaging public housing authorities, community development corporations, architects and builders. DBAF’s lending approach can help disadvantaged households put food on the table, and improve comfort and air quality in homes.

Photo Credit: Steven Winter Associates

The study evaluated the results of retrofit projects across 231 multifamily residential buildings (comprising over 21,000 units) in New York City. Portfolio-wide, building modifications achieved an average annual savings of $290 per unit, and drops in fuel and electricity consumption by 19 and 7 percent respectively.

The authors developed a method to help lenders temper, or “cap,” energy savings projections that appear atypical or overoptimistic. Clear, replicable and customizable to different climate regions, this methodology draws on a combination of modeled and empirical data. As a hybrid approach, it may help account for the fact that buildings are complex, unique and vulnerable to a range of factors that determine whether they consume energy in a predictable or idiosyncratic way.

With funds from the DBAF/Living Cities collaborative, the New York City Energy Efficiency Corporation, a nonprofit financial intermediary, is putting these theories into practice by working with multifamily lenders to underwrite energy savings into loans.

“Participating mortgage lenders would be able to offer a mortgage that is sized to cover the costs of a retrofit scope, which would be repaid by project savings,” notes Sam Marks, vice president, Community Development Finance Group at DBAF.

“The firm has a global commitment to sustainability,” Marks adds. “We see scaling up building retrofits as a compelling aspiration for the bank, because of the alignment between our carbon reduction and community development goals.” Improving housing quality and stabilizing the finances of properties occupied by low- and moderate-income people weigh heavily among these goals.

But the buck doesn’t stop here—literally. “In New York City, a robust ecology of public, private and nonprofit actors work in partnership to develop housing for the city’s low- and moderate-income communities,” Marks says. Similar collaborative efforts are needed to ensure that other cities can also benefit from energy efficiency in mortgage underwriting. The report stresses that tapping into retrofit-ready capital requires the creation of initiatives that develop sound data sets, increase accountability in savings projections and make efficiency measures mainstream in financing.

RMI’s Superefficient Housing Initiative aims to achieve such measures. One key objective driving SHI is data collection.

“By working with leading energy-efficient public housing authorities, RMI’s analysts have access to a multitude of case studies that help identify constraints to residential energy efficiency—whether of a financial, technical or behavioral nature,” notes RMI Principal Architect James Brew. “Sound data collection and analysis are the necessary first steps in ensuring that financial mechanisms support interventions that will achieve real savings at a large scale.” Another SHI goal is to use these data to help owners, architects, and builders in the low-income housing sector achieve significant energy savings with little or no added construction cost. An emphasis on passive design and envelope efficiency serves as the foundation for SHI’s approach.

This confluence of efforts—promoting energy-efficient design principles, improving lender confidence in energy savings projections, and ensuring accuracy and accountability in data collection and auditing practices—bodes wells for the future of energy efficiency in the housing sector and, more importantly, for its tenants. Energy waste in low-income housing is not only detrimental to the environment, but also poses a disproportionate burden on the millions of low-income households that sacrifice necessities such as food and medical care simply to meet monthly energy payments. Opening up capital—both in the form of larger loans and savings on energy bills—affords property owners more room to make investments in energy efficiency, with economic and public health payoffs in their communities and beyond.