Top 5 ways to finance commercial energy efficiency services

May 24, 2016 Written by  Comments Print
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How do you finance a no-brainer commercial building energy efficiency projects or services? First of all there is no simple answer. In fact, to propose an energy efficiency project for a commercial building that makes financial sense can be fairly complex and difficult.

Energy efficiency or “going green” isn't a new term anymore. Plenty of business owners and real estate advocates are fairly familiar with it and its benefits. According to the US Department of Energy, commercial buildings make up about 35% of US electricity consumption, and these buildings spend an average of 30% of their budgets on operating costs (roughly $400B a year). “TALKING ABOUT MONEY THAT CAN BE SAVED!” So it certainly makes sense to be able to shave off a decent chunk of that. However, in the recent years, the issue hasn't been so much in trying to scientifically prove that energy efficiency yields savings. The numbers and case studies speak for themselves. The headache has been with how to finance or pay for such expensive services and explaining the engineering behind the savings in a language that the finance world can understand. In this article, I don't want to bore you with the complicated nitty gritty of what energy efficiency is or how to achieve it. Rather I want to highlight the top five ways you can finance these energy-efficient services in 2016. The industry has evolved a bunch, and while not perfect, financing is much easier to attain than even 3 years ago. But first let me give you a little history lesson. (if you hate history or have a short attention span feel free to click HERE to to dive right into the 5 ways here starting with the best first)

"As an entrepreneur in this industry, initially, I saw our own sales team struggle to simply explain the value of these services, let alone convince the decision-makers to take action. Lucky for us the industry got smarter and more creative, and that helped us find ways to translate the engineering terms into finance terms. BOOM, once that happened, large-scale energy efficiency adopted a whole new appeal"


Industry overview

Our company, greeNEWit, specializes in implementing these energy-efficient services specifically to multi family and class B commercial building owners, property managers, real estate brokers, developers or whoever can benefit by it at any point of the life cycle of such building. Throughout the years we found that individual property managers and their on site maintenance engineers were very receptive to our pitch about energy efficiency. They considered it a no-brainer as we did. In cases where they had autonomous control over their buildings, they would implement our services in a heartbeat. I say “in cases” because that autonomy wasn't always the case. So then what about the other stake holders of those buildings? The owner, the CFO, or perhaps the executive accountant? More often than not, these individuals operated in a separate entity from the property management. It took us some time to navigate through these layers and gain the opportunity to speak to the people who could actually pull the trigger on such decisions. And of course, like in most businesses, this final decision lied in the hands of people that control the finances and/or manage their capital budgets. But that got us only one step closer to changing the game. Other hurdles existed.

Since the type of commercial energy efficiency services I am talking about are rather large, having this conversation with these key decision-makers had to tickle their financial pickle. Complex engineering load shaping calculations, and real time equipment operating reports was not it. Not only that, there also had to be a sensible benefit to the party making the investment. The tenant / owner relationship structure always made this more complex. Since energy efficient services mostly impact the operating costs (in a positive way of course), who's pocket was all this new saved money going to end up in?

So finally when we understood all these complexities and we were able to say: “this is surely worth your investment and we can also provide financing with great terms that fit your operational structure” you can bet we had their attention.

What property owners, CFO’s, decision makers DO NOT WANT to see!

what decision makers do not want to see

What property owners, CFO’s, decision makers DO WANT to see.

what clients do want to see



 Industry Evolution that made this possible

Prior to Obama’s terms, in the rare occasions that large scale commercial energy efficiency projects did come up, the banks didn't fully understand how to underwrite such loans and provide low risk financing for such projects. It was a bit too technical for them to see the payoff. Plus, the nation was spoiled by relatively low energy costs, and the forever-growing real estate bubble took our focus off trying to decrease energy consumption. Additionally, global warming wasn't a widely accepted subject yet, so urgency due to necessity was non existent.

Then the housing market collapsed, and to top it off, the sectarian war in politics trying to discount the importance of energy efficiency didn't give the banks much confidence when it came to opening their money vaults (not to mention the tightness of credit after the collapse).

So what made this money eventually available for our industry? One phenomena, that in my opinion was the culprit, was that many regions in the US have developed their own energy efficiency programs to promote the benefits of energy efficiency. This started in the residential sector and eventually leaked into the commercial world. They created pragmatic but complex financial incentives to make low-hanging-fruit energy improvements happen. Good first step, since people at least started thinking about energy use. And since substantial amount of real estate was devalued by the collapse, creating products that add value back to the the lost equity was a conversation that real estate owners and financial institutions didn’t mind having during happy hour.

But how do you implement the larger value add projects? How do you justify the large sums of money required to save enough energy every month to assure an appealing ROI and to improve your buildings inner systems? Sophisticated stakeholders wanted make up devalued equity yesterday, not in 5 to 10 years.

Lots of ideas were thrown around but the important thing is that our industry was stimulated with money to try different approaches, and we have made it a long way since 2008. Every new industry in its infancy (that I ever learned about) goes through these hurdles of growth if they want to achieve widespread adoption.

We have learned from the many strategies that didn't work and doubled down on those that did, and it's a good thing that this learning is still going on and far from over. First and foremost, since we are the energy EFFICIENCY industry, we have to walk the talk. Our market itself has to operate EFFICIENTLY!! Sounds like a no brainer right?, but let's be real, we all know what unnecessary bureaucracy can do to a new market sector....smh

Anyhow, one of the main outcomes of this industry’s growth and systematic learning is that we now have a business environment where energy efficiency is finally viewed by many of the market participants as a resource almost on the same level as traditional forms of power generation, which is huge! That means it can generate lots of Benjamins. And where there is money to be made , innovation happens at a faster rate. This innovation was needed to incubate many initiatives that started to standardize the engineering practices behind all the service options and their implementation methods . Taking that step enabled the marketplace to translate this science into a language that the financial world can understand. And by doing so we we are close to commoditizing energy efficiency, and not too far from banks providing financing for it on the same level as loans for cars or mortgages for homes.

So if you're still awake, FINALLY (drum roll...) you get to check out the TOP 5 WAYS OF FUNDING ENERGY EFFICIENCY IN 2016, and I am starting with the best first.

# 1 PACE (property assessed clean energy)

From following many of our greatest entrepreneurs, we consistently hear how great deals have just the right blend of ingredients(partners). The common denominator, that in many cases helps create the right type of business landscape for a deal to happen in real estate, is the local or state government. Especially for multi-million/billion dollar projects. Since they have influence over policy and can enable creative financial instruments and incentives, being able to influence the right people in those key positions can make or break your deal.

Welcome to the world of PACE financing, and consider this your political partner in this equation. The specifics differ slightly from region to region, but over all it's not too complicated. Once you understand PACE, it's a great option for implementing large commercial energy efficiency services. Essentially what this program or finance vehicle does is that it adds the cost of the energy efficiency project to the buildings assessed property tax value and then can be amortized over as long as 20 years. Secured by a lien on the owner’s property, this added equity assessment is repaid through the property tax bill, now deemed a secure payment stream, which therefore makes PACE projects seen less risky than other forms of financing. It requires state or local law/policy plus a committed finance partner. But just do yourself a favor and please watch this quick YouTube video that perfectly explains it before I ramble on!

If you can see the map below you will find that PACE is now available in 31 states covering about 80 percent of the population in the U.S. greeNEWit has also worked with our local governments in the state of MD to help finalize and launch this program, so Maryland building owners get ready!

PACE financing states map

greeNEWit has also worked with our local governments in the state of MD to help finalize and launch this program, so Maryland building owners get ready!

Industry expert Claire Johnson, from CBJ Energy, also agrees that PACE is a leading finance vehicle and adds “The resulting reduction in utility costs is typically greater than the increase to the property tax bill – hence an immediate improvement in building owner cash flow. Additionally, all costs, including soft costs (project management, quality control, commissioning etc) can be financed.”

And because the building value goes up, this is also a way to justify increased rents down the line and share the cost of the added value with the tenants. This pretty much eliminates the issue of the owner not wanting to improve the building in certain owner / tenant structures where the tenant is responsible for the utility costs. So if the owner doesn't financially benefit from the cash flow generated by the energy savings right up front, they will surely benefit if they sell and the financing stays with the building, benefiting the new owners as well. Plus the real estate values in that community go up, create a potential for local power generation in a microgrid structure, and of course the environmental benefits. YAY everybody wins!!


# 2 Plan ahead and be strategic with Capital Budgeting

Knowledge is power, and information is the currency!! This would have been my #1 option, but let's face it, time is money, and if your organization doesn't already employ a knowledgeable expert in energy efficiency and sustainability, this option is easier said than done. So keeping this in mind, let's discuss this strategy. Not all energy efficient upgrades have to be large ticket items. Many of the small upgrades can always be made strategically using your existing capital budgets, and this is a great way to start. Being aware of your local incentives may also provide additional capital for upgrades that you once thought wouldn’t fit into your planned capital budgeting. Major lighting retrofits have commonly rebated and incentivized upgrades in the recent years. So if you are planning on grabbing those long lasting, low energy consumption LEDs, now is the time! There are many layers of these incentives; federal, state, local, and regionally provided by your utility programs among many. And like greeNEWit, there are probably other consultants in your region familiar with the details of these incentives that will help eliminate the headaches driven by rebate processing. The cost of doing nothing is much greater than reaching out to an expert and letting them assess your portfolio. The cost of this assessment / audit is small relative to making a mistake of not being empowered by this info.

Even big ticket energy efficiency items can be handled in house and in fact most commercial energy retrofits up until the recent years have been financed through these capital budgets or reserves. However, there are some drawbacks if you don't have the most up to date information. This is where those costly mistakes occur.

Let's say in scenario ONE 90% of your current water heaters still have at least another 4 to 5 years of life expectancy in them, but the rest need replacement. As the decision-maker from the capital budget perspective, you will most likely wait another four years before having to replace the majority of them, and only replace the 10% that need it now and do it with a new traditional model(a little more energy efficient with a 7-10 year life span) from your current distributor.

In scenario TWO, 90% of your water heaters need replacement, you have the funds ready to go, and are even considering replacing 100% of them now because a discount is available and you can also save on installation and maintenance costs going forward. Again you come out of pocket, and feel fairly good that you were savvy and got the new energy efficient appliances with the above mentioned savings.

But in both scenarios if you had the latest info you could have added a revenue generating asset to your balance sheet(who ever though a water heater would fit that category), and appliances with greater efficiency than even the latest traditional non SMART models and all that with a 15 year operational expectancy.

Depending on the size of your business, these strategic decisions may be a little tougher to make than you would think, especially if your maintenance or sustainability engineer is bogged down with routine maintenance and can’t effectively communicate with the CFO, who is only thinking of the bottom line. Reach out to your third party experts (hint hint greeNEWit ) when making these decisions, you never know when a local incentive becomes available that will cover 60% of your costs, or when a new SMART technology becomes available that can even generate residual revenue for years to come. It's not BS, that's where we are heading.


#3 BIG DATA + Sophisticated Green Investor + Standardization

As the industry continued to evolve, a number of needed initiatives emerged. Various experts joined forces to cleanup many standards that were already in place, created new improved standards, and basically put together updated guidelines that all market participants could understand. Great examples of such initiative includes ICP (Investor Confidence Project), which has been instrumental in providing this ecosystem and opened many financing opportunities. Without this ecosystem and industry participation, contractors, software tools, big data, green banks and investors wouldn't be able to nicely play together to introduce products into the marketplace that the consumer would understand and deem as no-brainer.

Matt Golden, the leading force behind ICP, said “it's actually fairly complex to propose a large commercial project to the consumer or a bank without being able to show it to them through a financial lens"

Software + big data + engineering standardization were a necessary evolution behind creating this financial lens. It allowed contractors and building owners to streamline the methods behind collecting data in the upfront building analysis. This analysis helped to determine whether or not a profitable energy efficiency service or project should be considered. And the analysis output finally looked like a profit and loss report, so once the lenders integrated with this process they were closely watching to see if the next report spits out a green light for another prospective energy retrofit customer. One such platform that has made a lot of headway with this process is Noesis, and I am not going to list stats but the use of their platform has provided a ton of financing since their inception. Other derivative solutions include wegowise and Lucid among many others.

Quick overview of Noesis


#4 ESCOS (Energy Service/Savings Company) Performance Contracts

One practice that's a little outdated for commercial real estate and more prevalent in the past, has been to make performance guarantees on the savings generated by the retrofit projects. The financing was essentially provided upfront by the energy contractor or their partners, and they took a stake in assuring that the savings generated on a monthly basis would pay for the financing provided up front over a specified term. Often times, the contractor would also take a piece of those profits to give them an extra incentive to perform. I'm guessing the reason this was popular in the past was mainly because banks still didn't understand how to underwrite such loans and the energy contractors with fat pockets figured they know what they're doing so they would finance projects that would end up paying for themselves in a fairly short time. However in the commercial world, or private sector, tight regulation is not a popular practice and over time many of these deals failed. Primarily because it was difficult to mandate certain operational parameters, which were necessary for the energy savings to be greater than the calculated repayment for the project costs.

Now if you are operating a government building, a university campus, or a hospital where tight operational regulations can be enforced this is still the option for you! For these operators the word “Commercial” only applies to the system and technologies these buildings inhibit from an engineering standpoint. Nevertheless a performance contract through an ESCO is the way to go. Sean P. Roddy, an expert on this subject explained it perfectly:

“Performance financing assists in implementing energy efficiency improvements and covers the cost of the equipment needed. Properly structured performance contracts can be treated as an operating expense. This can help lower the capital budgets of the municipality and the amount of bonds necessary to pay for the capital improvements.” He adds “Using a tax exempt lease purchase agreement to finance the improvements will allow the government agency to utilize money that is already in their annual operating budget for utility expenses in order to pay for and install upgraded energy equipment. This equipment at the end of the lease term will become the property of the government agency.”

So if you are local government agency you need to be seriously considering this.


#5 Regional Energy Efficiency Programs

Energy efficiency programs sponsored one way or another by your utility or in some case through your local government have become very popular over the last 6 years. Many of them provide a great first step to put some money on the table but more importantly get the conversation about energy efficiency services started. While not perfect, they have become smarter and leaner resulting in more moolah and incentives being available to the rate payer(the Commercial building operator or tenant). Not only can this provide comprehensive commercial energy audits next to nothing but it’s a great way become eligible for the rebates I mentioned in option #2 or can get you plugged into the software platforms mentioned in option #3.


In greeNEWit’s case our regional utility program has enabled us to provide no-cost energy efficient services and small upgrades to multifamily building owners (on the tenant side first). This was the case for both master metered and individually metered properties. That was followed up by assessing the rest of the site’s common space, parking lots, garages, amenities spaces, etc and being able to offer up to 60% in rebates for larger upgrades. Being able prove our expertise through these services opened up the conversation for even larger projects and at that point our reputation and know how put those projects in motion. Our combination of experienced engineers and knowing which financing is the best option is taking many of our clients into the 21st century of sustainability. This may not have been possible without participating in our utility’s energy efficiency programs....



Some experts argue that its was the embarrassing financial landscape of the US that propelled our industry forward and money needed to be made quickly. Some argue that it was a conscious theology of the democrats in congress that accepted global warming and therefore funded the birth of our industry. Some say our industry was jump started out of necessity, in states like California, that weren't spoiled by cheap energy, but in fact got the short end of the stick and not only were their energy costs astronomical but they had a hard time creating it. I personally believe it was all those, it just depended what part of the country you were in. I even believe that global pressures from countries that lead the renewable energy and energy efficiency revolution gave us a little kick in the ass, and we don't like to be behind in the dust. Wasn't that how we got to the moon? LOL. Whatever your opinion is I would love to hear it, but my conclusion is that no matter what political landscape we will face in 2017, it won't hurt our industry. It's cheaper and more lucrative NOW to build a solar power plant VS a coal power plant. Since energy efficiency combined with renewables and the smart grid actually produces money, not to mention saves a lot in operating costs I don't see how our next president can argue with that. Plus you can't outsource those jobs, until we build AI robots. So whether we get stuck with the real-estate loving billionaire or the corporate's favorite democrat who actually believes in global warming, “everything’s is gonna be alright!!” - Bob Marley