Green Retrofits: Opportunities for Savings, Promising New Initiatives

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20 min read

When it comes to green retrofits of existing affordable multifamily rental housing properties to reduce energy and water consumption and costs, the good news is there are well-established procedures on how to approach these jobs and numerous industry and governmental initiatives that promise significant further advances.

The bad news is that there isn’t, and probably never will be, a standard model for the make-up and financing sources for major “stand-alone” retrofit projects – upgrades to existing properties without a recapitalization event such as a refinancing or the use of federal low-income housing tax credits. This is due to property- and location-specific differences, such as variations in the ages and needs of buildings, climate zones, utility rates, available incentive programs, and rules for government housing programs.

Utility Efficiency Gaining Heightened Importance

In December, the U.S. Departments of Energy (DOE) and Housing and Urban Development (HUD) expanded President Obama’s Better Buildings Challenge (BBC) to multifamily rental housing, raising the profile of energy efficiency as a national priority.

In the last few months, more than 50 multifamily housing owners from around the country, both for-profit and nonprofit, have joined the Challenge. These multifamily owners and managers have voluntarily committed to cut energy usage across their portfolios by 20% within 10 years and to share their energy data and strategies as models for others to follow.

The multifamily partners will showcase effective strategies to boost energy efficiency by making lighting improvements, heating and cooling system upgrades, installing rooftop solar systems, and supporting new financing for energy retrofits and green construction. In addition, HUD is piloting a number of policy incentives and flexibilities with multifamily partners that are designed to make investing in energy efficiency easier. While not yet finalized, these incentives, outlined in a statement of policy intent, include:

 

  • Permitting owners of HUD Section 202 and Section 811 PRAC properties to recoup the costs of installed energy efficiency improvements through the budget-based rent-setting process;
  • Allowing temporary additional distributions of residual receipts to owners of Section 8 properties achieving energy savings;
  • Compensating management companies for the additional cost of best practices in energy management by authorizing add-on fees to the schedule of eligible management fees;
  • Expediting HUD approval of “stand-alone” green measures that utilize the reserves for replacement and are not part of a larger rehabilitation project;
  • Soliciting proposals from BBC participants if they wish to use on-bill repayment; and,
  • Making existing HUD Mark-to-Market (M2M) properties eligible for an incentive performance fee if they adopt 75% of the green energy measures and all water conservation measures recommended in the Green Project Capital Needs Assessment. This would extend the policy currently available for Green Initiative M2M properties to previously approved M2M properties.

HUD official Trisha Miller indicated the finalized incentives will be released after internal approval, with the goal for all to be released by the end of September.

“We see our role as being able to facilitate the delivery of technical assistance and support for [BBC] multifamily owners along with DOE,” she said in a recent interview. “One of our policy and programmatic objectives is to work directly with the over 50 [BBC multifamily] owners to date and help them create the tools and implement successful projects that are going to help them achieve 20% portfolio-wide energy reductions.” Miller indicated HUD and DOE will strive to “ensure that this program is successful in reaching affordable and market-rate multifamily owners and that we’re responsive to their needs in how to address and overcome policy barriers along the way.”

Some Proven First Steps

As part of BBC, participating owners will have to track the energy performance of their properties and compare, or “benchmark, their portfolios to other multifamily housing buildings around the country using EPA’s online Portfolio Manager or an equivalent tool.

Some large municipalities (e.g., New York City, Seattle, Washington, D.C.) already have benchmarking ordinances that require buildings above a certain size to report their annual energy usage.

There are some well-established best practices for preparing for multifamily retrofit projects.

Owners – or their property management company – should begin by monitoring and tracking monthly utility consumption and costs at each of their properties (e.g., natural gas, electricity, water), using information from utility bills, even if not yet ready or willing to undertake a retrofit project. This can help to detect monthly spikes in usage at a property that signal trouble, such as a water leak; compare projects within the portfolio or to national averages; and identify the developments it might make sense to retrofit first for energy and water efficiency upgrades.

Owners or managers with only one property may be able to get by recording this data on a spreadsheet. However, for larger portfolios and greater sophistication, there are Web-based tools that can make the task easier as well as permit benchmarking of individual buildings or entire portfolios. Among the most popular for collecting and analyzing data are WegoWise, by New Ecology, Inc., and EnergyScoreCards™, by Bright Power. In addition, there are other commercial firms that offer utility tracking and billing services.

Another resource is EPA’s Portfolio Manager (http://tinyurl.com/n5zewtb), which is being expanded for multifamily residential properties. This will be permit comparisons of the energy and water consumption of a building or entire portfolio with other similar buildings or portfolios.

Tracking utility usage and costs is easiest if a property is master-metered for utilities, where the owner pays all the bills. In properties where residents pay for some or all utilities, it can be tougher to get the utility data information for units in order to determine the total utility usage for a building. LINC Housing Corporation, a nonprofit affordable developer/owner based in Long Beach, Calif., has solved this issue with a lease provision in which residents consent to the release of their utility bills from the utility companies.

The Next Step

A common next step is getting an energy audit of a property. Under this, a third-party specialist makes a comprehensive review of the property (design, condition, systems, operation, etc.) and its utility usage and costs and recommends specific improvements and steps for improving energy and water efficiency. (For article on energy audits, see p. 30)

According to sources, usually the simplest, most cost-effective retrofit measures to make (i.e. those with the lowest cost and fastest payback period) are water conservation improvements. Common measures include replacing leaky flappers in toilers, “rebuilding” toilets in apartments so they use less water per flush, and installing low-flow shower heads and faucet aerators. (For article on water conservation, see p. 33.)

Darien Crimmin, Vice President of Energy and Sustainability at Boston-based WinnDevelopment, said water and sewer rates historically have only gone up, unlike electric and natural gas prices, which have fluctuated. Since 2009, he said natural gas rates have generally fallen about 30% while water and sewer rates have risen 15%.

Installing more efficient LED or fluorescent lighting in common areas and at exterior locations can provide additional energy savings. LED lighting has come down in cost.      Another simple step is paying for “retro-commissioning.” Under this, a specialist examines the systems in a building to determine whether they are being operated and maintained to achieve maximum efficiency. If not, fine-tuning adjustments and equipment modifications are made.

Energy Efficiency Measures

Before major steps such as replacing heating and cooling systems, owners should make sure the building “envelope” is sufficiently tight, to avoid installing more costly, oversized systems. This involves checking areas for loss of heat (in cold weather) or cool air (in warm weather) and correcting deficiencies. Common remedies are “air sealing” openings or cracks in walls, ceilings, and attics; better insulation; or weather stripping around windows and exterior doors. A “blower door test” can show where air filtration is occurring.

Common energy upgrades include replacing outdated appliances with efficient Energy Star appliances (e.g., refrigerators, dishwashers) and installing high-efficiency boilers and heating, ventilation, and cooling (HVAC) systems.

Some owners install solar domestic water heating and/or solar photovoltaic (electricity-producing) systems that utilize solar panels located on building rooftops or carports.

“The price of solar is finally coming down to where it’s starting to make sense to owners,” says Jared Lang of the National Housing Trust. “You can point to several companies and a lot of housing projects that have gotten solar in the past year because the prices came down.”

With solar there are two options. Owners can buy, install, and own the solar equipment themselves, and claim the 30% federal investment tax credit. Or they can essentially lease the equipment from a third party that installs and owns it and claims the solar tax credits. In this case, the property enters into a long-term power purchase agreement (PPA) with the vendor to pay a specified rate (initially below-market) for the solar-generated power for a specific period.             Solar PV systems in affordable properties generally just supply power for common areas.

In existing properties, the viability of solar hot water and PV systems depends heavily on local electric utility rates, whether there is enough rooftop or other space with sufficient exposure and property orientation for solar panels, and the availability (or lack) of state or utility incentives, such as grants and rebates. In California, for example, the MASH Program provides attractive solar incentives.

The federal government is promoting solar as well. President Obama’s Climate Action Plan sets a target for the installation of 100 megawatts of on-site renewable energy systems at federally assisted housing properties (e.g., HUD, USDA Rural Development, LIHTC).

“We’re working together with our agency partners to develop policy guidance and to identify projects that have capacity to bring more on-site renewables into their portfolio,” says HUD’s Trisha Miller.

“The window of opportunity to act is now,” says Darien Crimmin of WinnDevelopment, noting the 30% solar investment tax credit is scheduled to expire at year-end 2016. “WinnCompanies has almost two megawatts of solar PV installed throughout the country and we’re ready to build more solar in those states which have adequate solar incentives,” he said.

Funding for Retrofit Improvements

Incorporating extensive green features in newly constructed multifamily buildings or in existing buildings undergoing an acquisition/rehab transaction is very feasible. Tax credit equity, debt, and gap sources can fund these elements as part of the overall project budget.

Finding the dollars to pay for stand-alone energy and water efficiency retrofit projects in existing affordable multifamily properties can be tough. They generally have limited excess cash flow to pay for improvements and the current equity investor and lender will usually not want the owner to add debt to the property.

In some cases owners may be able to tap project reserves or excess cash flow.

If a property can be refinanced, money can be raised as part of that transaction. Fannie Mae, in partnership with HUD, offers a Green Refinance Plus mortgage, which can provide extra funds to pay for energy and water efficiency improvements.

Typically, owners and managers turn to state and utility incentives and programs (e.g., grants, rebates) to cover in full or part the cost of retrofit improvements. However, these incentives and programs vary widely among states – and even within states. A good online resource listing federal, state, and utility energy efficiency incentives is at http://www.dsireusa.org.

Multitude of Initiatives

There are numerous promising initiatives in the field.

For example, the National Housing & Rehabilitation Association, with support from the John D. and Catherine T. MacArthur Foundation, has launched a new Preservation Through Energy Efficiency Initiative to educate multifamily developers, owners, managers, and others participants about the opportunities for utility savings improvements in affordable housing properties, the specific steps to take, and financing sources. As part of this, NH&RA is building an online knowledge library and has scheduled five initial regional “Road Show” events, the first on April 3 in Philadelphia. (See p. 13 for details.)

The National Housing Trust, along with other partners, has been actively working to persuade utility companies in a group of target states to start, expand, or enhance programs providing significant funds for energy efficiency improvements in existing affordable multifamily properties. The campaign has already reaped successes in some states (e.g., Pennsylvania, Maryland) and the effort is continuing.

“We’ve seen, and I think we’ll continue to see, more interest in that private-sector response to the need for energy efficiency in affordable housing,” says NHT President Michael Bodaken, “because it helps align our interests with the interest of utilities – their need to meet certain energy efficiency goals. And existing affordable housing is a terrific way for them to think about meeting their goals and it’s a win-win.”

Enterprise Community Partners, a national nonprofit, has been busy as well.           Working with Bank of America, Enterprise has developed and is testing an innovative financing mechanism to accelerate and scale green retrofits in affordable multifamily housing portfolios. Enterprise has fully committed $5 million from a capital award received in 2011 – along with another $1.7 million from public and philanthropic sources, to make nine loans to eight “high-capacity” major nonprofit owners to finance energy upgrades to 81 buildings containing 2,041 affordable apartments, with the goal of achieving 20% average annual energy savings. Part of a $500,000 grant from Bank of America is funding related critical services for the borrowers.

Enterprise’s Esther Toporovsky said the loans were in the form of a 3%, 10-year line of credit, thereby keeping them off each sponsor’s balance sheet. “We’re going to see the savings start to result probably at the end of 2014, beginning of 2015, because the retrofits are in place now,” she said.

According to Enterprise’s Thomas Osdoba, this approach enabled one loan to be made to each owner to fund improvements to their portfolio rather than a separate loan for each property. “That helped to reduce some of the transaction costs and so forth,” he said.

Separately, in 2011, Enterprise’s Community Loan Fund provided a roughly $1 million, 10-year line of credit at 3.75% to the WinnCompanies, which funded major retrofit improvements at a 307-unit multifamily community in Massachusetts. The line of credit underwrote 80% of the forecasted energy savings to repay debt service. The loan was combined with 25% equity from utility rebates, and personal guarantees were required from the owner as collateral.

Enterprise is also leading a collaborative group of organizations, using a HUD grant and other funds, to support and test a variety of green services and retrofit models. Partners include CNT Energy, Enterprise’s PartnerPREP Initiative in New York, and two nonprofit affordable multifamily owners – Hispanic Housing Development Corporation in Chicago and LINC Housing in California. Already 8,000 housing units have been retrofitted.

Part of this effort is to explore the potential for community-based energy services companies, or ESCOs, which have been used as a vehicle for making energy efficiency improvements in commercial buildings and some public housing but generally not for privately-owned affordable housing developments such as HUD-assisted and LIHTC properties. In general, an ESCO is a firm that enters into an energy performance contract agreement with the building owner, designs the scope of work for a retrofit project and makes the improvements, and guarantees the projected savings. Usually, though, the owner has to find the funds to pay for the work.

Similarly, WinnCompanies has created an “open market” ESCO, a new energy services company that promotes vendor transparency. The ESCO has established a credit-enhanced multifamily loan fund, leveraging a HUD Energy Innovation grant with private dollars and state funds to deliver off-balance sheet financing for retrofits of affordable multifamily properties. Crimmin said the company is expanding its financing to include renewable energy as well as energy efficiency services.

The Stewards for Affordable Housing for the Future (SAHF), a nonprofit organization representing a network of 11 major nonprofit housing sponsors around the country, is making progress in testing the use of a private ESCO combined with third-party financing for energy retrofits to affordable multifamily properties. The pilot involves seven sample HUD-assisted and LIHTC properties of a couple SAHF member nonprofits. Under this, through an energy performance contract, the ESCO – Johnson Controls, Inc. – will do the retrofit work and guarantee the savings. The retrofits will be funded by loans from the Low Income Investment Fund, a community development financial institution, and a DOE grant of $500 per unit, according to Richard Samson, president of SAHF Energy, a unit of SAHF.

Split Incentive Hurdle

A key piece of the pilot is an agreement by HUD to permit the owners, for the initial seven sample properties only, to effectively keep the additional financial benefit resulting from the retrofit improvements during the term of the loans. As a result, the agency will pass on to the owners rather than keep the savings generated by the reduced HUD utility allowances resulting from the improvements.

A utility allowance is a prescribed set amount that reduces the rent paid by residents of subsidized apartments (e.g., HUD, LIHTC) to take into account the amount they pay for a utility.

HUD’s policy flexibility for the SAHF demonstration is a promising inroad toward overcoming a major deterrent to owners making green retrofits to existing affordable multiple properties: the “split incentive” issue.

Under HUD and LIHTC program rules, owners generally have no incentive to spend money for energy and water retrofits to their existing property where tenants pay for their own utilities; they can’t reap the resulting financial benefits, which flow instead to the tenants or – in the case of HUD-assisted projects – to HUD, which reduces its utility allowance or subsidy. In addition, some HUD programs restrict the ability of owners to tap their project’s residual receipts or surplus cash flow to pay for improvements.

HUD official Trisha Miller said the Department is exploring future options for utility allowance reform.

There are already opportunities for owners to benefit from retrofit projects in the LIHTC program.

IRS regulations permit state housing finance agencies (HFAs) to approve utility allowances for certain LIHTC units calculated using several alternative methods. These alternative methods, such as computation by a professional engineer using certain software and based on actual consumption, can produce a more accurate – and smaller – utility allowance for energy-efficient properties, thereby providing greater net rental income for the owner.

It is unclear how many state HFAs currently allow and approve utility allowances computed using the alternative methods. But some states are making the process more user-friendly.

California has developed a calculator that facilitates more favorable utility allowances for energy-efficient LIHTC projects. In addition, Indiana’s HFA is taking steps to develop an online calculator that could be used under all of its multifamily housing programs, including LIHTC and HOME. (See article on p. 35 for details.)

Other Efforts

SAHF has also used a federal grant to develop a new “EZ Retrofit” software tool now being tested on two properties in Montrose, Colo., and Danvers, Mass., said Samson.     Designed to provide a low-cost version of traditional commercial energy audits, the tool allows for energy data about an affordable multifamily property to be loaded in. It then recommends, from a list of possible energy conservation measures, those that would benefit the property, their cost and payback period under different assumptions, and the estimated savings. “It’s really focused on the smaller properties where owners don’t have the resources to buy an expensive investment-grade audit,” says Samson.

Finally, SAHF and the California Housing Partnership Corporation are establishing a demonstration in California to test the viability of an “on-bill repayment” system for financing energy efficiency improvements in affordable multifamily properties. Under such a system, an owner obtains some of the funds to pay for a retrofit project from a utility company and gets a loan to finance the rest from another source. The loan is repaid through regular utility bill payments for the property that are less than the projected savings from the measures installed under the program.

“We’ve got a pipeline of seven properties from which we’re going to do five in southern California in the next several months,” says Samson. SAHF and CHPC are in the process of negotiating an on-bill servicing arrangement with Southern California Gas, under which the company would manage on-bill repayment for the five properties for all of the utilities (electricity, natural gas). The Low Income Investment Fund will provide loans to the owners to help finance the retrofit costs.

As part of this initiative, Southern California Gas and Southern California Edison have each designated a single contact person for the property owners to inform them about all their available energy efficiency rebate and incentive programs.

Final Advice and Thoughts

            Sources pointed out a few other things that owners and managers should keep in mind in planning or contemplating retrofit projects – and after completing them.

According to Matt Holden, president & CEO of Portland, Me.-based Sparhawk Group, the proper operation and maintenance of energy-efficiency systems and equipment installed in a building are essential for assuring that the expected utility cost savings are actually achieved. This means proper education and training of building engineers and maintenance staff and creating a thorough and user-friendly operations and maintenance (O&M) manual that can be easily understood and followed by employees and outside service providers. Such a manual has the details of each system and its components and spells out the proper settings and maintenance procedures for peak efficiency. It can be a valuable reference guide for outside contractors coming in to make repairs.

WinnDevelopment’s Crimmin said the company now requires commissioning of all major projects and is developing templates to standardize operations and maintenance information. Once completed, he said the templates will provide a valuable resource for both site staff and contractors to ensure that efficient operating information is clear and easy to follow.         Finally, Crimmin noted that changing technological advances can warrant revisiting properties that underwent a retrofit just a few years ago to make further improvements. “There are always opportunities to do more; that’s what we’ve discovered,” he says. “Even properties where we replaced lighting five years ago, we can go back today and look at LED lighting, which wasn’t reliable or cost effective five years ago. Technology is evolving and therefore retrofits are not static. It’s not as if once everything is done we can walk away.”

Sidebar

Enterprise to Update Green Communities Criteria

Enterprise Community Partners will soon start the process of revising the current version of its Enterprise Green Communities Criteria, the voluntary national green building standard and certification program for affordable housing properties.

In an interview in early February, Krista Egger, Senior Program Director, Green Communities, said the revision process to update the 2011 Enterprise Green Communities Criteria will begin within three months, with the plan to release the new 2015 version in the first quarter of next year.

Under the update process, she said, Enterprise will circulate a draft proposed version of the 2015 Criteria to stakeholders to get their comments, meet with various experts in the different standards categories to learn about new developments, and run the draft by selected developers and policymakers. She said the initial draft will be a “redlined” version of the current 2011 Criteria marked up to show proposed changes and additions.

“We’re planning on keeping the same focus areas that we have in the Criteria currently, but add focus areas in resiliency, active design guidelines, and health,” said Egger.        Resiliency is the capacity of buildings to better weather natural disasters. An example of active design is putting stairs front and center in a building and elevators around the corner to encourage people to use the stairs and walk