Potential capital investment costs can quickly put energy efficient retrofit projects on the backburner for many commercial building owners. Yet, once energy efficient equipment and practices are put in place, potential energy savings – from 10 to 50 percent according to Pike Research – can often quickly recoup those investments. As energy prices continue to rise, now is the time to bring energy efficiency back to the forefront with some creative financial planning options aimed at helping building owners realize sustainability goals for their properties.
Performance Contracting – With performance contracting, building owners work closely with an energy service company (ESCO) that guarantees to reduce energy consumption by installing modern, energy-efficient products and overhauling facility operations according to industry best practices. Although a capital investment is needed up front, the improvements typically soon pay for themselves with the savings realized from reduced electricity, fuel and operating costs. This is often a good option for large buildings looking to reduce overall energy costs and see immediate savings.
Property-assessed Clean Energy (PACE) Bonds – In some areas, PACE legislation allows municipal governments to offer bonds to investors and then loan that money to businesses interested in energy retrofit projects. The loan is billed back over 20 years through a special property tax assessment. This arrangement is more desirable to lenders, as it offers security of repayment. However, one disadvantage to this option is that Fannie Mae and Freddie Mac will not underwrite mortgages for properties with a PACE assessment. Check with your local officials to see if this is option is available.
Shared Savings Agreement (SSA) – Building owners looking to make improvements without incurring debt should consider an SSA. In this arrangement, an ESCO offers, through a third-party company, a set of building improvements guaranteed to provide energy savings. A set percentage of the total energy savings is paid monthly to the third-party company. These agreements usually last 10 to 12 years and include a performance agreement with the ESCO to maintain the new equipment and improvements. After the agreement ends, the equipment belongs to the building owner – as do all of the continued savings.
Capital Lease – A capital lease offers building owners the opportunity to lease energy-efficient equipment from a project financier. For the duration of the lease, the equipment is considered a capital asset, which allows the building owner to account for depreciation and gain tax advantages (check with your tax advisor to see if you qualify). Once the timeframe of the lease has been met, the equipment becomes the property of the building owner.
On-bill Financing – Utilities may offer on-bill financing to building owners. The utility will pay for energy improvements and simply include the loan repayment in future energy bills.
These financial options and others are worth looking into now, as the savings realized will often more than make up for the initial expense. According to Pike Research, if all commercial space built as of 2010 were included in a 10-year retrofit program, the savings in energy expenses would have the potential to reach more than $41.1 billion each year! In addition to energy savings, retrofits have been known to increase property values. Increasing the energy efficiency of a building not only makes financial sense, but environmental sense as well. Preserving resources and keeping the air clean are important factors many consumers and clients are taking into consideration when selecting businesses for their needs.