Commercial Sector Financing Needs and Opportunities
Large commercial buildings use a great deal of energy and often offer attractive payback periods for energy efficiency investments. As a result, some programs funded by the American Recovery and Reinvestment Act of 2009 (ARRA) now support energy efficiency or in some cases onsite renewable energy projects in this sector.
The clearest incentives in the large commercial sector are usually for investment in buildings where the owner pays the energy bills or the tenant has a lease term that is longer than the payback period on the project. If the owner of the facility is different from the party paying the energy bills (e.g., a tenant), then the incentives to do efficiency projects are “split” between the tenant who pays the energy bills (thus benefiting from the efficiency improvements) and the owner (who pays for the efficiency but receives no direct financial benefit).
In cases where the property owner is also the property occupant, the financial benefits of clean energy investments are clear. They include lower operating costs and increased cash flow, improved services and potentially higher occupancy rates, higher property values, and a contribution to overall building upgrade and system replacement needs. Financing helps property owners pay for the large upfront investment costs of clean energy projects. This section of the guide provides background and options that are clearly applicable to buildings where the owner and occupant are one and the same, or the property owner pays the energy bill; some of the options presented below may also be applicable to tenant-occupied facilities where the tenants pay the energy bill.
For the purposes of this section, and for many ARRA-supported programs, the “large commercial” sector is defined as including commercial buildings such as offices, malls, hotels, and retail stores, along with nonprofit facilities (private nonprofit hospitals, schools, higher education, YMCAs, museums, etc.). Some programs also include industrial projects under their large commercial definition. Following the general discussion below, the sections on Financing Structures and Uses for ARRA Funds to Support Large Commercial Energy Efficiency Finance present several financing structures and related uses of ARRA funds that are being developed to finance large commercial sector building projects for clean energy improvements.
Rationale for Promoting Clean Energy Finance in the Large Commercial Sector
The large commercial buildings sector offers a good target for government-supported clean energy financing programs. Project economics are typically quite strong, with simple payback periods in the 3- to 5-year range, compared with paybacks of 7 to 12+ years in the residential sector. Energy savings and carbon emissions reductions are commensurately higher than in the residential sector as well. ARRA-supported local government energy efficiency and renewable energy finance programs can achieve a range of public objectives: create jobs, promote investment that improves local properties and economies, and reduce greenhouse gas emissions
Financing Gaps and Barriers
Commercial real estate is generally facing restricted access to credit due to the recent financial crisis that is still unfolding in the sector. Real estate values are down. Buildings are often owned by special purpose entities whose balance sheets may not sustain additional borrowing. Some owners face restrictive covenants from first mortgage holders. Thus, financing gaps exist in the commercial buildings market that warrant public policy intervention. ARRA-supported local government energy efficiency/renewable energy financing programs can help fill those gaps and demonstrate sustainable, scalable new financing structures.
Several financing mechanisms are being developed and tested to finance large commercial sector projects supported by ARRA funds. They include the following, which are described more fully in the section on Financing Structures:
Energy Service Company (ESCO) Project Financing, with various types of energy service agreements, which can include loans or leases direct to property owners.
Tax-Exempt Bond Financing, which funds projects directly for eligible nonprofit and industrial facilities.
Commercial property-assessed clean energy (PACE) financing structures, where financing payments are collected with the property tax and secured by a tax lien, can also apply to large commercial building projects. PACE financing is described in the section on Commercial Property-Assessed Clean Energy Financing
Developing and marketing financing programs that aggregate many projects together is particularly important to achieve scale in the large commercial market. Successful programs require state and local governments to partner both with the financial institutions providing the financing as well as with other market actors—energy efficiency companies, ESCOs, utilities, end-user associations, etc.—that can market the financing and related products while selling and developing projects for investment.