Friday, December 2, 2011

Connecting the dots for energy retrofit lending

by Clare Duncan, National Housing Conference

There are savings to had in housing by making our houses and apartments more energy efficient and healthier. There are also productive investment and job creation opportunities to be had by financing green retrofits. So why haven't we connected these dots? (Readers of this blog will have seen a related point in Jeff Lubell's recent column).

Partly, it's that lenders have trouble deciding which are the right investments to make--they need certainty in their investments. It's hard to know before the fact whether energy efficient lighting will pay back quickly (it usually does) or whether super-efficient windows will do so (often they won't).

So, it's encouraging that a forthcoming study tackles the issue directly.

Deutsche Bank Americas Foundation and Living Cities are expected to release a report soon that documents the energy savings of multifamily retrofits. The report, conducted by Steven Winter Associates and HR&A Advisors, examined nearly 19,000 affordable housing units in New York City that have undergone energy efficiency retrofits. It finds that these retrofits resulted in 19 percent savings on fuel bills and a 10 percent savings on electricity which translates into $240 in fuel savings and $70 in electrical savings per apartment yearly.

While energy-efficiency retrofits are becoming more common, there is still very little data that shows that these retrofits result in any real savings. This report is one of the first to prove that straightforward fixes such as efficient boilers and compact fluorescent light bulbs provide such savings. The authors also hope that the report will help improve lending practices by convincing lenders to underwrite larger loans based on the projected savings of retrofits; Lenders haven’t been doing this because the lack of available data proving such savings.

Lenders have also expressed concerns that energy audits, which shows opportunities for increased efficiency and savings, aren’t always accurate and overstate potential savings. To combat this concern, the study created a tool for lenders to confirm the accuracy of energy audits. Using the data, they divided the NYC multifamily housing stock into categories based on age, heating system, electrical infrastructure and other factors. Lenders can then apply the study data to building types to determine potential savings and check the veracity of energy audits.

Part of the question of giving lenders certainty in their investments is the realities of real estate lending, which requires income to pay back debt and collateral to secure that debt. To this point, in June, Recap Real Estate Advisors released a related white paper titled Multifamily Utility Usage Data: Issues and Opportunities for Living Cities and the MacArthur Foundation, which was discussed at the Green Affordable Housing Coalition’s Green Retrofit Financing Forum in July. The paper identifies major utility databases in use or development for privately-owned multifamily rental housing (market-rate and affordable) and explores how they interact with simulation models that predict energy usage for multifamily retrofits and national green building standards. It also reinforces the need to build energy retrofits into full property recapitalizations that can provide lender certainty and enough capital to make transactions work.

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