Financing alternatives for energy-efficient upgrades When it comes to financing energy-efficient upgrades to rental properties, building owners used to have a limited number of options. You could pay for building upgrades â€œout of pocketâ€? (i.e., by spending your own cash), which would prevent you from using that money for other expenses, such as purchasing other properties. You could choose to take out a loan (i.e., debt financing) to cover the costs of the investment or renovation, which would increase your debt load and make it potentially more difficult to borrow future funds. You could also employ the leverage approach (i.e., equity financing) to raise the funds, which would impose an encumbrance on your properties. In some cases, you can make use of equipment lease financing (rather than purchasing outright) or equipment rental, which have their benefits and drawbacks as well. Today, building owners have other options for funding energy-efficient building upgrades. Check with your local association, municipality and province to determine if you qualify for an energy financing program. For example, if you are in the Greater Toronto area, you can apply for the City of Toronto Hi-RIS Financing Program.
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You can also pursue third-party investing, which employs a different approach than financing.
Toronto Hi-RIS Financing Program The City of Torontoâ€™s Hi-RIS Financing Program provides low-cost, fixed rate financing (up to $2 million for up to 20 years) to apartment building owners who want to make capital improvements that result in energy efficiency and water conservation benefits. To be eligible for the program, buildings must have three or more storeys, and be located in Toronto; those that qualify can receive financing for up to 10 per cent of a building's current value assessment (CVA). Under the Hi-RIS Financing Program, building owners can use the resulting energy, water and operational savings to offset the costs for building improvements over time. They can access up to $100,000 in incentives from Toronto Hydro and Enbridge Gas Distribution, as well as free support services from the City's Tower Renewal Program. The financing is not a mortgage encumbrance, as it is attached to the property, not the owner, so the owner can access other funding sources to address other building priorities. Hi-RIS uses the province's local improvement charge (LIC) regulations to advance funding to property owners.
Hi-RIS does not use simple payback, which divides the retrofit’s total capital cost by annual energy savings generated, to determine the number of years until the measures pay for themselves. It uses the average useful life of the financed equipment to a maximum of 20 years. This enables building owners to choose energy-efficient upgrades that require significant capital expenditures to reduce energy usage and improve building condition and quality.
“Hi-RIS uses the useful life of equipment instead of simple payback to offer term loans,” said Aderonke Akande, Manager, Tower and Neighbourhood Revitalization, Social Development, Finance and Administration, City of Toronto. “Therefore, measures that have above a 20-year payback are easy to finance using our program. This subtle change allows building owners more flexibility in deciding which measures to finance through the Hi-RIS program.”
The building owner could pay the investor $25,000 per year for up to 10 years, and realize $5,000 in annual utility savings during this time. At the end of the term, the building owner would own the equipment and continue to benefit from the $30,000 in annual utility savings.
Instead of pursuing a financing option, building owners can choose to cover their energy-efficient upgrades through third-party investing. In a nutshell, the third-party investor pays for the equipment and upgrades to the building, and gets paid a portion of the energy savings over a specific term. Energy savings are guaranteed, so that if the forecast savings do not materialize, then the building owner does not pay for those missed savings. At the end of the term, the building owner retains ownership of the equipment. “Since there is no loan, there is no liability on the owner’s balance sheet,” said Matt Zipchen, President, Efficiency Capital. “This allows the owner to use their capital for other obligations, while getting the benefit of having a more energy-efficient building.” For example, suppose that an owner had a $100,000 annual utility bill. After making the energy-efficient upgrades, paid for by the third-party investor, the annual utility bill drops to $70,000. This is a $30,000 annual saving.
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“The building owner pays a fixed monthly rate to the third-party investor based on the projected savings,” said Zipchen. “The total amount is then evened out, up or down, at the end of the year depending on the actual savings achieved.” The process begins with an engineer’s analysis and walkthrough, as well as an initial energy audit. This identifies areas for energy savings, with data to back up the proposal, which covers the level of investment and terms involved. The third-party investor will then conduct a deeper energy audit to ensure that it can guarantee the proposed energy savings. Following installation of the new equipment, it will employ a building automation system (BAS) to monitor energy usage and provide reports to illustrate the actual energy savings achieved. The engineers will also look at updating and improving operation protocols,
which ensures that the system runs well and the building’s team makes best use of the equipment. Third-party investing has a number of benefits when compared to traditional financing. It enables building owners to pay for capital upgrades through operational savings. The investment is not on the balance sheet, and no security is taken on the building, so there is no encumbrance to the owner. Since the third-party investor has a vested interest in the building’s energy savings, it makes them a partner in the process, as they verify through monitoring that energy reduction actually occurs. This is especially critical when many other energy efficiency upgrades fail to meet expectations. “Whenever you’re looking for a third-party investor, make sure to look at their track record and references to see how they’ve done with similar investments,” said Zipchen. “Of course, have your accountant and lawyer review the contracts. It’s also important to understand how the ongoing operations and maintenance of the investments will impact their current procedures,
as the engineer’s specs might be different from their current operation and maintenance specs.”
Conclusion With utility costs continually on the rise, making your building more energy efficient will have significant and ongoing benefits to your bottom line, as well as the environment. That’s why you should be proactive (rather than reactionary) in making energy-efficient investments in your building. When doing your annual capital budgeting, determine how you will pay for energy-efficient upgrades, and where you can best put your financial resources. Using alternative investment options to pay for these upgrades can help you to get more use of your funds, and reduce your energy costs.
By David Gargaro, in collaboration with Aderonke Akande and Matt Zipchen
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Published on Dec 27, 2017