Multifamily housing owners looking to retrofit their property face many challenges, often chief among them is project financing. Retrofits that include energy and water conservation measures, a.k.a. deep retrofits, can be an even tougher choice because of the (false) reputation of green upgrades being more costly.
In reality, there are many programs and incentives that enable multifamily housing owners to implement deep retrofits in a hassle-free and cost-effective manner. These options create significant benefits for property owners including increased property value and Net Operating Income.
Accessing Capital For Retrofits
Debt financing can provide the upfront investment needed for an entire retrofit, not just the measures related to energy and water conservation.
- Banks and Credit Unions typically require first lien position and are good for a refinance or an acquisition/rehab and typically for large rehab projects.
- Community Development Financial Institution (CDFI) loans are often available at below market interest rates, but typically for multifamily housing serving low to moderate income residents.
- Government Agencies (HUD, FHA, Fannie Mae, Freddie Mac, USDA-RD, State HFAs) offer a wide variety of programs from straight forward debt to loan guarantees to incentives for a smart rehab. Each Agency has its own slew of programs that multifamily housing owners need to be familiar with to benefit from.
Bridging Financing Gaps
Besides the obvious sources–cash reserves and cash from operations–there are other financing options available to help bridge gaps in project financing:
- Property Assessed Clean Energy (PACE) is a means of financing green upgrades through municipal governments who can invest municipal bond funds or attract private capital for the green upgrades. The investment has to be repaid within 20 years through an assessment added to the property’s tax bill. PACE financing stays with the property upon sale of the property and is easy to share with tenants. PACE financing does not show on the balance sheet of the property.
- Energy Performance Contract (EPC) uses the savings of the green upgrades to pay for the cost of the upgrades, i.e. the utility cost savings are guaranteed by an ESCO (Energy Service Company) and are sufficient to pay for the project financing over the term of the contract. After the contract ends, all cost savings accrue to the owner. EPCs are difficult to execute on individually metered multifamily properties. Financing for EPCs is through private capital sources and is typically off-balance sheet.
- Power Purchase Agreement (PPA) is essentially an EPC, except it is for energy generation (e.g. solar). The multifamily owner (i.e. energy buyer) contracts to buy the energy generated by the seller (owner of the energy generation system), by entering into a PPA. Buyers typically pay no up-front cost (capital is provided by the seller), and purchase the power generated for an agreed-upon price for the duration of the contract. The seller installs, operates and maintains the system typically sited at the buyer’s property. The key advantage of a PPA is that the price of energy is typically lower than that paid to the utility company and does not fluctuate under the contract, which helps with financial planning.
- On-Bill-Financing from your local utility. The utility may pay for the green upgrades and collect the repayment in their utility bill or the utility merely collects for other financiers. The funds can be debt or off-balance sheet, but unfortunately this option is not available in most locations.
Off-bill-financing techniques are available to a wide variety of multifamily housing properties.
Besides these various financing options, there are several incentives available to multifamily housing owners that can help pay for or reduce the cost of the retrofit projects.
- Green Lending Incentives offered by FHA, Fannie Mae, and Freddie Mac that can reduce a property’s Mortgage Insurance Premium and loan costs by as much as 40 basis points.
- Low-Income Housing Tax Credit (LIHTC) is available to qualified affordable housing properties and allocated by state housing finance agencies. Major rehab is eligible for both 9% and 4% tax credits.
- Investment Tax Credit (ITC) is a federal tax incentive that provides a 30% credit for certain renewable energy installations such as solar PV. States such as New Mexico provide an additional state income tax credit (10% for NM).
- Production Tax Credit (PTC) is another federal tax incentive that provides a specific incentive for certain renewable energy installations such as wind power.
- 179-D is a federal tax deduction for energy efficient buildings. The amount is dependent on the efficiency improvement achieved and max’s at $1.80 per square foot.
- Utility Rebates are cash incentives offered by local utilities and vary by utility and the solution installed and can be from negligible to 100% of the cost of the installed conservation solution.
- Grants through federal, state and local government and private foundations can fund green retrofits in multifamily properties so as to subsidize housing costs for tenants or achieve Carbon savings. The Weatherization Assistance Program has provided billions of grants over the past 30 years for green upgrades in affordable housing properties.
- Accelerated Depreciation (MACRS) allows owners to depreciate certain green upgrades such as solar PV quicker (6 years) instead of the 20+ year life of the green system.
- State Tax Credits which vary widely among different states.
Bundled Retrofit Projects
If you’re looking to retrofit your property, the programs and incentives discussed above could provide huge cost savings. They will often cover the additional investment in energy and water conservation measures, subsidizing them enough to bring the payback down to a few years and thus making deep retrofits cost-effective.
To avoid leaving money on the table, multifamily housing owners should always consult with a one-stop-shop retrofit provider to map out the smartest course of action before rehabilitating their property.