Obstacles to Financing Energy-Efficient Retrofits
The lack of commercially-viable financing has been a major obstacle to getting energy-efficient retrofits financed for buildings. Properties that want to upgrade their equipment face major limitations including: limited internal financing resources, caps on budget expenditures, low creditworthiness, multiple stakeholder interests, multi-party leases and the ‘split-incentive’ problem (the benefits of retrofitting a building are not aligned for owners and tenants if capital is put in by the owner & the utility cost savings accrue to tenants).
Internal Retrofit Financing
Buildings often rely on internal funds to finance upgrades and improvements of their energy equipment. In this case, building owners and investors allocate funds from internal capital budgets (‘capex’) or operating budgets (‘opex’). This type of retrofit financing has benefits in that owners can retain all savings realized from energy-efficient upgrades and the process if fairly simple to execute. However, internal financing has limitations in that it requires that the building have a strong balance sheet, assume all of risk from project underperformance, compete for capital resources from other areas and obtain internal budget approvals.
Financing through banks and other institutional lenders requires evaluating the building’s creditworthiness and facility-related factors such as location, occupancy rates and energy consumption. Any existing mortgages on the property may also affect its ability to borrow money. The loan underwriting process will take all these factors into consideration before financing any retrofits. Debt financing has limitations in that borrowing for long-term efficiency upgrades (5-10 years payback period) may not be available, financing terms may restrictive, existing mortgage may not allow additional debt, lower creditworthiness may increase costs of financing.
In lease financing, buildings lease energy-efficient equipment for a fixed term and use energy savings to pay for the cost. Leasing and lease-purchase agreements do not require up-front capital investments. In an operating lease, the building only obtains the right to use the equipment and therefore, does not assume risk of ownership. In a capital lease, the lessor and the building share ownership of the equipment and therefore, the lease payments appear on the building’s balance sheet. Lease financing has limitations in that it requires good creditworthiness, security and some up-front investment, and long term leases may not be feasible.
Associated Renewable offers a simplified and complete retrofit financing solution to buildings that do not qualify for funding through the energy services agreement (ESA) structure. As such, we can finance your retrofits through our financing partners, in case the minimum savings threshold is not achievable (as required for ESA funding). Upon the completion of the project financing application by the building, Associated Renewable distributes the application to our extensive network of project financing partners. All proposals are then presented to the building with financially-backed recommendations on the most beneficial package. To learn more about getting your energy efficiency projects financed, please call us at (212) 444-8215 or email email@example.com