Harcourt Brown & Carey’s (HB&C) Client for this assessment was a large non-profit multi-family housing corporation (The Client) with a 30+ year history of emphasis on providing housing for people currently underserved by the marketplace. We worked closely with The Client’s subsidiary as well, which focuses on providing energy efficient retrofits of The Client’s properties.
HB&C was tasked with identifying financing instruments and sources of funds (investors) for financing energy efficiency and renewable energy improvements in all forms of multifamily housing: public, assisted and market rate. To accomplish this task, HB&C performed 8 tasks:
- Identified barriers to funding clean energy improvements in multi-family properties.
- Identified design criteria for financial products that could be utilized for clean energy improvements in multifamily properties.
- Evaluated funding options and financial products that meet the design criteria mentioned above.
- Analyzed the feasibility of new finance products that met The Client’s needs.
- Compared existing financing instruments.
- Prepared a discussion on lender returns.
- Prepared final recommendations.
- Identified and recommended specific partners for specific financing options.
In order to best provide The Client with a well-rounded set of perspectives on financing energy efficiency in the multi-family sector, HB&C conducted interviews with 27 people from various organizations involved in this sector. These interviews have helped HB&C to provide The Client with perspectives on the complexities inherent to this sector. The interviews, combined with HB&C clean energy finance expertise, also helped HB&C make final recommendations based on each interviewee’s experience.
HB&C concludes that no one single finance tool will work for every project, but there is a sequence we recommend The Client follow in evaluating which is best. This sequence begins with a 2-pronged finance strategy, followed by a decision tree to help choose the best finance options for individual projects. Finally HB&C created a list of viable finance options that describes why these options are in fact the best fit for specific projects and properties.
The HB&C team identified the following barriers to providing funding for clean energy improvements in multi-family properties.
Financing by definition, involves a long-term relationship. There needs to be a rationale for the property owner to trust both the project developer and the provider of financing. Trust can be established through some combination of reputation, clear mission/motives, financial stability, experience and individual contacts.
The installation of energy efficiency improvements creates numerous benefits (net reduced energy costs, reduced maintenance costs, improved uptime, increased comfort, job creation, reduced environmental impacts, reduced dependence on fossil fuels) but many of these benefits are difficult to measure and/or do not accrue directly to the property owner. For example, property owners may benefit generally from an improved environment, or reduced dependence on fossil fuels, but they do not benefit directly from such improvements. In addition selecting providers, approving measures, acquiring financing and coordinating the installation requires staff and management time and effort. Therefore, adopting energy efficiency improvements is not an easy decision for the property owner. Uptake of energy efficiency is a function of transactional simplicity.
Property owners are often reluctant to engage in financing arrangements that are based on sharing of energy cost savings – as opposed to financing arrangements that rely on traditional principal and interest payments. Under Shared Savings, the developer/financier and host property share in the value of energy saved. The concept of aligned interests among these different parties sounds appealing in concept. But in practice, the energy services industry has learned time and again that owners balk at proceeding in a relationship in which the developer, whom they view as a vendor, could receive a payment stream that is not a function of costs, and in which that developer may not reveal all costs to the property owner.
Many forms of lien may generally require mortgage holder consent or consent of limited partners. It can be cumbersome and a lengthy process to secure this consent, particularly when multiple mortgage holders hold property liens, and is not feasible if the mortgage is held in a commercial mortgage backed security.
Financing is typically made available to borrowers based on:
- Creditworthiness, including use of and credit performance;
- Ability to pay, indicated by cash in excess of obligations (excess cash flow);
- Willingness to pay, demonstrated by a history of good management practices.
The complexity and subsidies associated with affordable housing often make conventional real estate or business underwriting ineffective for evaluating the credit of affordable multi-family properties. However few lenders have developed alternative underwriting that can take into account the unique qualities of these entities.
Owners are typically reluctant to proceed with transactions that affect their balance sheet, even if these transactions reduce energy-related operating costs.
Energy use in multifamily housing is either master metered, with all energy costs paid by the owner directly, or individually metered and the tenant pays the costs. Property owners have little incentive to invest in energy efficiency if tenant-occupied spaces if the benefits accrue to the tenant.
For properties that receive a utility subsidy allowance, energy savings for master metered energy sources will accrue to HUD through a subsidy adjustment.
Chapter 2: Design criteria for financial products for energy efficiency retrofits and generation projects in the multifamily marketplace.
The last decade has seen substantial growth in instruments available to finance energy efficiency. Because there is such a broad range in borrowers, properties and technologies, these products are designed to serve certain markets, primarily the residential, institutional or commercial markets. These products also vary in allowable loan amounts, maturities, rates, fees and security depending on the individual market. To identify the most appropriate financial products for The Client’s initiative, HB&C identified the following key criteria.
|Eligible Properties||The federal agencies’ definition of multi-family housing is any property with five or more units. However, due to the impact of economies of scale, and assuming that the typical investment per unit will average approximately $3,000, we are targeting properties with at least 50 units.|
|Use of Funds: Eligible improvements||The projects will include the full scope of lighting replacement and control technologies, central plant, distribution (fans and pumps) and end use HVAC technologies, photovoltaic and thermal solar technologies and cogeneration.
|Acceptable Security/Collateral||For projects willing to refinance, lenders can acquire a lien against the property. However, in most cases, financing will not be considered warranted or feasible as a way to fund projects that average $3 per square foot against a property value of $100 -$200 per square foot or more. The alternative would be second liens or UCC filings against equipment. Second liens will be viewed by most lenders as having little value against these types of properties. UCC filings are typically required by equipment lease companies and should be acceptable to these property owners.|
|Balance Sheet Impacts||Balance sheet impacts can be very important to both for- profit and non-profits owners. Generally, property owners are reluctant to use their limited balance sheet to address operating cost opportunities or to use their capital capacity to invest in what is ultimately a depreciating asset. Consequently, we will work to provide a product that does not impact the balance sheet.|
|Minimum/Maximum Project Amounts||As stated previously, with installed costs per square foot of around $3, and proposed minimum property size of 50 units we believe the minimum loan amount should be $150,000. The lender will establish the maximum financed amount.|
|Acceptable Fees, Rates and Terms||Property owners will prefer no fees, low rates and long terms, these parameters will be established by the lenders and will be used in evaluating financing options.|
|Prepayment Requirements||Property owners will prefer the ability to prepay without incurring penalties. Lenders may require yield maintenance payments for early pay-off.|
Chapter 3: Existing funding options and financial products that meet these criteria to meet the needs of The Client’s projects.
The goal of effective financing is to provide upfront funding to eliminate first cost, preferably at a low interest rate, long term, with a simple process and no onerous obligations. An effective financing product is the result of years of perfecting the origination and servicing process and reducing risk through data analysis, underwriting, default management and use of security. The result of this evolution is that individual financing products tend to be specialized and optimized for the markets they serve. For example, other industries exhibit many differences in origination, marketing and delivery and servicing among financing products for college, home purchase, and auto purchase — student loans, mortgages and car loans.
While energy efficiency project financing has been available since the 1980s, the most highly developed source of funds is tax exempt municipal lease financing for the Municipalities Universities, Schools, and Hospitals (MUSH) market. This market has been the main focus of the energy services industry since the early 1990s. Financing appropriate for multifamily properties has been far less available.
However, interest in this financing continues to increase as federal and state agencies and utility companies work to increase uptake in this sector and low yields in the capital market drive funding into niche opportunities . A suite of existing financial products can serve the financial needs of energy efficiency in the multi-family sector. In addition, new products such as Property Assessed Clean Energy (PACE) and on-bill products may become increasingly important in the multi-family market.
The following table lists each of the financing products that we considered viable for the multifamily market. Many of these will not be available in certain geographic regions or are not a good match for certain owners or project types. The columns in the table compare the limitations and features of each form of financing based on the design criteria identified by HB&C.
For the table below:
Eligible Properties: Defines what property types are eligible for this type of financing.
Use of Funds: Defines whether there are limitations on the use of funds for renewable energy, energy efficiency or water conservation.
Required Security: Describes the required form of security.
Balance Sheet Impact: Describes the likelihood the funding is “off-balance” sheet.
Min/Max Project Amounts: Describes the range of acceptable project volumes.
|Forms of Financing||Eligible Properties||Required Security||Balance Sheet Impacts||Min/Max Project Amounts||Fees/Rates/Terms|
|On balance sheet||Established by investor||0% origination/7-9%/5-10 years|
|Operating Lease||All||UCC Filing||Off balance sheet||$25k – $2 million||None/7 – 8%/5 – 7 years|
|Capital Equipment Lease||All||UCC Filing||On balance sheet||$25k – $2 million||None/7 – 8%/5 – 7 years|
|On-Bill Financing||Based on local utility||NA||Potentially off balance sheet||Varies w program||Case by case|
|Subordinate lien||All||2nd or lower lien on property||On balance sheet||Established by investor||3% origination/5-7%/10 years|
|1st Lien, Refi
(Only for properties willing to refinance) (e.g. Fannie Mae program)
|All||Ist Lien on property||On balance sheet||Established by investor||2% origination/4 – 5 %/30 years|
|Based on PACE jurisdiction||NA||Potentially off balance sheet||Varies w program||2% origination/5-7%/up to 20 years|
|Shared Savings||All||UCC Filing||Potentially off balance sheet||$250k – $1 million||No fees, no rate/ 10 year term. Similar to a PPA shared savings compensation is based on units of energy saved rather than generated.|
|Embedded Efficiency Charge*||Based on foot print of provider||NA||Off balance sheet||Based on technical opportunity||No fees/no rate/5 year term|
|501(c)(3) Bond Financing||All||General obligation or revenue||On balance sheet||Upper limit based on credit worthiness of issuer or project||Varies based on issuer|
Financial products are a tool to deliver capital from people and organizations that have money, to people and organizations that need money. Financial products have developed over the years to serve the needs of both those that have and those that need money. The following bullets describe many of the characteristics of these products, with specific reference to how the characteristics apply to energy efficiency in the multi-family sector.
- Scalability: Financial products must be able to attract investors at a scale that is large enough to support the market in question.
- The multi-family sector has relied successfully on traditional real estate secured mortgages. Stand-alone energy efficiency projects will need to be financed through some similarly scalable financing product.
- Simplicity: Financial products need to be simple for investors and borrowers to understand. Borrowers will not make long-term commitments to financial products that they do not understand – or that their existing financial backers do not understand. Investors will not purchase financial products that they do not understand.
- The multi-family sector relies on a complex array of mortgage holders and other investors. Any product designed to serve energy efficiency investments on existing properties must not add new levels of complexity to the market.
- Integration: Financial products need to integrate with other financial products.
- The multi-family sector is dominated by properties with several mortgage holders and other investors. The relationships among these parties is already complex, so any financing that supports energy efficiency must integrate with, and not disrupt, the complex relationships among these existing products.
- Risk and Yield-matching: Financial products need to meet investors’ tolerance for risk. Investors control their risk by taking security interest in real estate (secured, mortgage loans), in equipment (equipment-secured leases), in the assets of a guarantor (personally or other-entity-guaranteed loans), or in nothing (unsecured loans).
- Energy efficiency projects in the multi-family sector will vary tremendously in risk and yield. Stand-alone projects will almost never be able to secure a strong collateral interest in real estate, and therefore will likely be either equipment secured or unsecured, in most cases. This level of security indicates a financial product with a higher risk characteristic than real estate secured products.
- Cost to Originate: The cost to originate must match the dollar value of the financing. Small dollar value financial products need to have streamlined and inexpensive origination processes; larger projects can have more involved and expensive origination processes.
- Stand-along energy efficiency projects in the multi-family sector are generally going to be small projects, requiring a streamlined origination process that is not costly.
- Time to Originate: The time to originate must also match the project. Small dollar value products typically must be originated quickly because borrowers and originators typically have low tolerance for a lengthy origination period in these cases. Larger dollar value products reflect larger projects for which speedy origination is less crucial.
- Stand-alone energy efficiency projects in the multi-family sector would generally be considered small projects, thus indicating the need for a fast origination.
- Regulatory Compliance: Financial products and their originator/servicers must comply with a variety of federal and state regulations.
- The multi-family sector is subject to less strict financial regulation than, for instance, the residential sector and may be able to take advantages of more innovative financing structures as a result.
An attractive new financial product would need to be better at accomplishing the goals described above than an existing product. A new product would need to improve upon the existing product by offering:
- A way for new investors to participate in the multi-family sector, or for existing investors to do so at greater levels than previously possible;
- Enough simplicity such that all parties (borrowers, lenders, investors) can understand the new product and its implications for them;
- Sufficient security to attract investors at an attractive cost of money;
- Collateral or security that does not disrupt existing lenders, while providing better collateral or security than an existing loan or lease product;
- Encompass a better or more efficient origination and/or servicing component than is now available for the array of existing financial products;
- Provide the comfort to all concerned that the product complies with any relevant laws and regulations related to investing or lending.
The following table describes the array of existing financial products, with a rating of how well they apply to financing for energy efficiency in the multi-family sector. It shows a wide array of structures that financial institutions use to structure and manage their security and collateral interests, risks, costs, and other factors. And it illustrates a wide variety of products that are now available in the market.
|Equipment secured loan/lease**||M||M||M||H||H|
|Personal/Corporate Recourse Loan**||L||M||M||H||M|
|Efficiency Services Agreement**||M||M||U||M||M|
H=High Ability to Match Goal Effectively
M=Medium Ability to Match Goal Effectively
L= Low Ability to Match Goal Effectively
U=Unknown, Given Limited Experience with Product
**Indicates that this type of financial instrument could take advantage of an on-utility-bill repayment structure. Such a structure may improve credit quality of the financial instrument if it is a borrower’s failure to pay financing charges results in disconnection of utility service, or if the simple fact that the finance charge is collected on a utility bill improves performance. Current California multifamily on bill repayment programs do not allow for disconnection when a customer fails to pay a loan charge on a utility bill.
HB&C does not see that the gap in the market is the result of a paucity of financial products. In fact, the introduction of a new financial product would likely confuse the market and not reach the scale, the simplicity, the integration or the time/cost goals that are required to make a new product successful. The financing gap in the market is far more likely related to figuring out how best to integrate several – and not just one – of these existing financing products to the existing market, to suit the needs of energy efficiency financing.
As a result, HB&C concludes that it would be impractical to create a new financial product for this marketplace.
The table below compares the various financing instruments based on applicability and effectiveness to serve the multifamily industry. The HB&C five key barriers to financing projects in this industry are represented by the headings of the columns and each column describes how well each instrument overcomes each barrier. The final column in the table provides a summary of the advantages/disadvantages of each instrument.
|Forms of Financing
|Will the Owner or Limited Partners have concerns?||Is mortgagee consent required?||Will the instrument meet Off-Balance Sheet criteria?||What is the interest rate?||Advantages/Disadvantages|
|Maybe||May require consent||Residual value payment may be issue for owners||Treated as rent; no interest rate||Simple process, up to seven-year term./Consent may be required|
|Capital Equipment Lease
|Maybe||May require consent||On balance sheet||High single digit to mid-double digit||Simple process, up to seven year term./Consent likely required.
|Maybe||Requires mortgagee consent||Unknown||Mid single digit||For properties with a single mortgage holder, may be feasible. Long term./Acquiring consent from multiple mortgage holders will be challenging.
|Varies||Depends on underlying instrument: “loan, lease, tariff”||Depends on underlying instrument: “loan, lease, tariff”||Varies||May not be considered debt on property owner’s balance sheet, simplicity for consumer, transferability in certain jurisdictions
complexity for investor, scalability questionable
| 1st Lien, Refi
(Only for properties willing to refinance)
|Yes, refi is too much effort out of cycle||NA||No||Lowest possible rates available in mkt||Useful only during refinance cycle. Fannie Mae program may work well. Longest term.|
|Maybe||Would require consent & subordination agreement||No||Medium||Shorter term Subordinate lien holds little value for investors yet requires significant work to achieve.|
|Maybe||May require consent||No||Highest among products available||Most lenders do not offer this product.|
|Shared Savings||Yes, ESCo owns equipment, etc.||Uncertain, but likely to require consent||Unknown||N/A – financing structured as an agreement to purchase a Service agreement||May not be viewed as debt to the property owner/Concept may be challenging to property owners. Cost of funds is not transparent to property owner.|
|501(c)(3) Bond Financing||Depends on the form of the financing instrument||Depends on the form of the financing instrument||No||Low||Most projects are too small to warrant use of a bond instrument.|
|Embedded Efficiency Charge
|Maybe||Consent likely not required||Off-balance sheet||Service agreement||Limited in geographic availability to regions where utility/regulator allowed the structure.|
Lender returns in the energy efficiency financing industry vary with risk. There are two key forms of risk: (a) default severity risk (mitigated in part by the existence of collateral and its effectiveness) ; and (b) energy saving performance risk. There are numerous forms of financing for energy efficiency ranging from first liens to shared savings agreements and the risk associated with these agreements varies considerably.
At the low end of the risk spectrum are mortgages backed by banks and/or the US Housing agencies (Fannie Mae, Freddie Mac). These entities hold a first lien security interest and they do not accept any risk associated with energy savings performance. Consequently their yield requirement is a few hundred basis points above ten year Treasuries.
Lenders that do not take energy savings performance risk and hold a second lien represent the second tier or risk. The return requirement for these lenders ranges from 5% – 10%, and may be a function of their interest in socially responsible investments.
Investors that fund unsecured loans or equipment leases represent the third tier of risk. The investors, recognizing that a second lien has little or no value, seek similar-to somewhat higher returns compared to second lien lenders, 5% – 15%, depending on the borrower’s credit and deal size.
The fourth level of risk is represented by investors that hold no security and are compensated solely from energy savings (shared savings agreements). While these agreements do not name an interest rate, the embedded weighted average cost of funds ranges around 15% (these funds are generally composed of layers of debt and equity).
The Client intends to provide design-build energy and water efficiency projects to multifamily assisted, market rate and public properties in California. HB&C’s financing recommendations will focus on assisted and market rate first, and then public housing (for which financing is readily available). First, HB&C created a decision tree to help The Client navigate the appropriate finance options. Second, HB&C developed a 2-pronged finance strategy for identifying properties. The third section of the recommendations lays out a list of financing options for The Client’s developers to utilize to finance the chosen properties. Finally, HB&C provides recommendations for “Managing the Finance Offer” and “Preparing a Standard Project Descriptions”. Both of the latter recommendations will help facilitate the overall process between The Client’s project developers and lenders.
The purpose of this decision tree is to help guide The Client’s developers in making the best finance choices for their selected projects.
The following strategies provide two paths for identifying appropriate properties for The Client’s developers. These strategies can be employed independently or in parallel with one another. HB&C recommends that The Client’s project developers consider the following steps, some of which would allow the aggregation of groups of properties, for the purpose of selecting their target markets.
- Identify properties that are in the refi cycle or within the no-prepay penalty period of the mortgage cycle and propose refinancing funded by the Fannie Mae Green Refinance Plus program or other source of first lien financing.
- For properties that will not consider refinancing:
- Propose that the property owner ask their existing mortgagee to provide funding for the project, under the assumption that the existing lender knows the property and owner better than any other party, that the existing lender may appreciate the opportunity to make an additional loan, and that consent is not an issue;
- Identifying mortgage lenders with large multifamily portfolios and ask if they would be willing to work with The Client to evaluate their portfolio for energy saving opportunities, assuming that The Client’s projects would produce positive cash flow. The benefit of this approach would be to use the process and documentation from an initial transaction to then streamline the process and eliminate costs for all subsequent transactions by using standard documents, underwriting and subordination.
Finance Strategy #2 – Target properties based on non-financing attributes (technical energy savings opportunity, green motivation, relationships, etc.)
Marketing strategy number two can occur simultaneously or independently of strategy number one. Many property owners today are looking to be “green” or “more sustainable”. There are also property owners looking to just reduce very large energy bills. Any existing relationships The Client has with property owners with these characteristics could provide a pipeline of projects.
Previous sections of this document have described the many obstacles to financing non-public multifamily housing. The good news is that during the last few years numerous initiatives have sought to identify effective financing solutions for this market. While there is far from anything one would consider a “silver bullet”, there are now many options that should be considered. After a developer has identified a property, the first step is the find out if the property has replacement reserves that can be used for the project. This is the simplest form of funding a project. If replacement reserves are not an option, the next step is to identify financing for the project. The following list explains the choices available for these properties and why they are optimal choices for this market.
- Unsecured Form of On-Bill Repayment (OBR)
On-bill repayment refers to structures in which originators (loan, lease, or other financing entities provide capital). On-bill repayment is a collection method for other financial instruments (loans, leases, service agreements), and in some cases may enhance those products. One of the enhancements may come from the threat of utility service disconnection for failure to pay a financing charge collected through the utility bill.
Current California on bill repayment structures authorized through the statewide on-bill investor owned utility finance pilots do not authorize disconnection in the event of failure to pay finance charges. (The utility program may still disconnect for failure to pay energy charges, however). As a result, some of the potential benefits of on-bill repayment are not available to investors under current California utility-based structures.
On bill repayment is generally authorized by a utility commission-approved tariff, and with the finance charge appearing on the utility bill, may in some cases be considered part and parcel of the utility bill. As a result, some property owners and their auditors may not consider that payment to be debt to appear on the owner’s balance sheet. This may be an advantage to some property owners.
2. Unsecured Loan
Unsecured loans to property owners are the simplest form of financing available to the multifamily sector. There is no collateral and the process can be very quick and simple. While the interest rate is higher and terms are typically shorter than secured lending, most owners will find this simple process compelling. Depending on the existing mortgages consent may be required regardless of security. In Illinois, Elevate Energy is working with the IL Housing Development Authority and Enterprise Community Partners to set up an unsecured loan product for subsidized affordable housing. The Authority intends to provide a pool of money to use as loan funds.
- Equipment Lease Finance (ELF)
ELF is the most common source of funds for commercial properties to acquire capital equipment. However, the lease companies’ underwriting models were based on commercial enterprises with Dun & Bradstreet and/or Paydex credit reviews, production costs, sales revenues and business cycles. Lease companies have not understood residential properties with occupancy rates, subsidies, multiple mortgages and replacement reserves. Recently one lease company, Ascentium, seeking to serve the multifamily market created a special purpose underwriting model and has begun making loans to multifamily property owners.
PACE is now available in most jurisdictions in California. Projects discussed here are generally too small for PACE, however, if projects are greater than $250k, The Client should contact the PACE manager and get the rate and term indications on a project by-project basis. Consent represents another issue for this option. A PACE lien would be superior to a mortgage holders lien and the mortgage holder will object to this situation.
- Shared Savings
Shared Savings is attractive because it is not debt as the payments are a function of the actual energy savings. This should reduce difficulties in getting consent from mortgagees. However, most funders of shared savings financing require project sizes of $250,000 or greater and they are not likely to be experienced at underwriting affordable properties. HB&C has, however, identified one shared savings provider that has expressed significant interest in participating in the multi-family market, as described later in this document.
- Subordinate Lien
A subordinate lien product will frequently have little value to the lender as many properties will have little equity and the security will require consent from mortgagees and investors.
The lowest cost, longer term options for funding energy efficiency improvements in public housing is generally bonds. However the transaction costs to issue bonds is typically high and this would not be a feasible option for sub million dollar projects unless there is an existing bond option that would eliminate transaction costs.
Tax Exempt Lease
When bond financing is not feasible, the most frequently used form of funding for public properties is tax-exempt municipal lease financing but that was not always the case. In the early years of the energy services industry, the ESCos frequently offered shared savings contracts, acceptable to some commercial property owners because it was a non-debt funding solution. However the ESCos balance sheets could not accommodate many shared savings transactions and soon the CFO’s were telling the business units to find ESCo clients who could source their own financing. This led the ESCos to the MUSH market and to eventually tax exempt municipal lease financing conditioned with subject to appropriations clauses to avoid voter approval (this terminology treats the multi year ESCo agreement as a series of one year agreements). While the numbers are proprietary, approximately 84% of the ESCos $5.3 billion in annual contracts were with MUSH clients in 2011 and according to HB&C discussions with industry professionals more than 50% are funded with tax exempt lease funds. Therefore lease financing is the most appropriate choice for the public market. There is possibly one limiting factor. In the past, the lease companies wanted to insure that savings estimates would be realized so that funds otherwise available to pay utility costs would be available to service the debt. This meant that a guarantee from an ESCo with a strong balance sheet was necessary. This could mean that The Client might be required to procure third party savings guarantees (offered by insurance firms such as Energi, Peabody MA). However, recently lease companies have become more comfortable with ESCos and their project technologies and have begun to fund projects without guarantees. Consequently, tax-exempt municipal leasing is the most common form of performance contract financing.
Shared Savings is attractive because it is not debt as the payments are a function of the actual energy savings. This should reduce difficulties in getting consent from mortgagees. However, most funders of shared savings financing require project sizes of $250 or greater and they are not likely to be experienced at underwriting affordable properties.
HB&C recommends that as The Client begins to establish its development pipeline of clients that it build out a business process that includes the following sub-processes:
- Property survey/audit
- ECM development with costs (pricing, rebates, etc.) and savings
- Proposal generation
- Contract negotiations
- Design engineering
- Project management
As projects work through the pipeline, the financing strategy should be identified early in the process and potential sources of financing be contacted so that they can perform pre-qualification with public information and provide a rate and term indication for the project proposal.
What the ESCos learned decades ago when trying to provide financing to the commercial properties was that after spending significant time and resources proposing third party financing, the commercial client would “shop” the offer to its bank(s) and source of capital and usually one of these entities would negotiate to provide the financing. This occurred because the entities’ financiers had far greater underwriting knowledge of the entity than any third party, could understand the positive impact of the project on the business and preferred not to lose business to a competitor. Consequently, The Client should also prepare a project description template detailing scope, costs, cash flows, maintenance savings, savings to replacement reserves, utility rebate acquisition and savings guarantees that can be shared with the entities existing mortgagees and banks. This will help The Client “sell“ the financing opportunity to their trusted financing partners.
Chapter 7: Partners that can provide origination and servicing for implementation, and capital to fund the proposed models.
|Financial Instruments & Partners|
|Property at point of refinance OR Property is within the no-prepay penalty period of the mortgage?
|Mortgage Product (1st Lien)||Fannie Mae (“Green Preservation Plus” Program) or a mission focused lender (e.g., One Pacific Coast Bank, etc.)
Recommended Partner: Fannie Mae
|Property is not at a point of refinance OR Property is not within the no-prepay penalty period of the mortgage?||Unsecured form of on-bill repayment, an unsecured loan to the property owner, an equipment lease, PACE, shared savings, second lien||On-Bill: Various OBR programs in CA
Equipment Lease: U.S. Bank, TIP Capital or Ascentium Capital
PACE: Various PACE programs in CA
Shared Savings: Toronto Atmospheric Fund, Noesis or Metrus
Toronto Atmospheric Fund
Enterprise Community Partners
|Major property event happening?||Bond Financing||Municipality|
|Bonding not an appropriate option?||Tax Exempt Municipal Lease or Shared Savings
(Note: If subject to appropriations language allows new debt)
|Tax Exempt Municipal Lease: U.S Bank or Ascentium Capital
|Subject to appropriations language does not allow new debt?||Shared Savings||Shared Savings: Toronto Atmospheric Fund, Noesis or Metrus
Toronto Atmospheric Fund
In addition to the details above, HB&C looked into the question as to whether The Client could be compensated by a financial institution. It is not uncommon for a financing provider to pay a broker or “finder” fee to a party that sources financing opportunities and HB&C suggests that The Client consider this discussion with each financing partner. In discussions with ESCos, HB&C determined that property owners are typically very unsupportive of the ESCo project developer earning fees from the financing .
The HB&C team spoke with the following organizations/individuals to assist in this project.
|Resources Contacted as of July 10, 2014|
|Bank of America||Amy Brusiloff|
|Beacon Communities||Matthew Tobyne|
|Bellwether Enterprise||Jay Helfrich|
|Chicago Investment Corporation (CIC)||Jim Wheaton|
|Colorado Housing and Finance Authority||Tim Dolan|
|Elevate Energy||Abby Corso/Anne McKibbon|
|Energy Programs Consortium (EPC)||Mark Wolfe|
|Enterprise Community Partners||Andy Geer|
|Evans Multifamily Services||Dave Evans|
|Fannie Mae||Chrissa Pagitas, Donna Varner|
|First Atlantic Capital||Anthony Nickas|
|Hannon Armstrong||Jody Clark|
|Joule Assets||Stephen Filler|
|Michigan Saves||Terri Schroeder|
|Municipal Lease Advisors||Renee Piche|
|National Housing Trust||Michael Bodaken, Jared Lang|
|One Pacific Coast Bank||Randall Leach|
|Structured Finance||Jean Dunn|
|Toronto Atmospheric Fund||Tim Stoate|
|VEIC||David Barash and Peter Adamczyk|
|WINN Development||Darian Crimmin|
YieldCos and REITs
YieldCos and REITs are frequently in the clean energy financing news. Both instruments are investment vehicles – giving investors a way to participate in an industry and earn bond-like returns. These instruments should be thought of as sources of funds rather than instruments. In general HB&C contends that the LINC opportunity is primarily about the funding instrument whether it be debt, secured or unsecured, a lease or a service agreement, rather than the source of funds.
There are a dozen or so YieldCos, almost all invest in wind, solar PV or hydro-power purchase contracts that provide mostly regular periodic payments have been. According to press reports, renewable Yieldcos attempt to return 10% to their investors. While a Hannon Armstrong YieldCo includes energy efficiency assets and recently Joule Assets have promoted the idea of energy efficiency YieldCos, the vehicles require hundreds of millions in volume to be marketable. Consequently, it is not highly likely that the LINC initiative would generate sufficient volume to interest these developers. However HB&C spoke to Stephen Filler of Joule Assets and Mr. Filler expressed an interest in speaking with The Client and learning more about their business model.
While REITs are structured under different rules than YieldCos, they should also be considered an investment vehicle that individuals to participate in an industry, in this case real estate. Hannon Armstrong has created the first energy REIT. HB&C spoke to Jody Clark of HA and she said that HA’s REIT is only a source of funds and that the affordable housing financing question is about the obligation with the property owner.
HB&C concludes that while the growth of these vehicles are increasing and both may have impact on energy efficiency as a source of fund, the current challenge is to identify a financing instrument that property owners, their investors and mortgage holders will consider acceptable.
 Additionally, HB&C includes an “alternative funding options” appendix focused on Yieldcos and REITs in this document. At this time HB&C concludes that while the growth of these vehicles is increasing and both may have impact on energy efficiency as a source of funds, they are as yet not going to be significant players in the multi-family energy efficiency market. .
 The equivalent of a PPA but for energy efficiency, a portion of the savings is used to compensate the provider
 Constellation Energy offers a program under which the cost of the efficiency project is embedded in the cost per kWh
 Please see Appendix B for Ascentium’s lease application and process.
 Please see Appendix C for CA PACE contacts
 Please see Appendix B for Ascentium’s lease application and process.
 Please see Appendix C for CA PACE contacts.
 This information is based on a recent review of ESCo proposals for Hamilton, MA and interviews with ESCos (names withheld at the request of the interviewees).