Specialized retrofit financing a boon for Johnson Controls

[Correction: This article previously misstated that Empire State Building retrofits were financed by property assessed clean energy financing (PACE). They were not.]

When it comes to considering energy efficiency retrofits, the key factors for building owners -- and biggest past deterrents -- are the cost of the project and financing.

Innovative financing options, however, have helped turn the tide and ramp up growth in the sector.

Energy performance contracting and property assessed clean energy (PACE) are the two financing models that have done the most to spur efficiency retrofits, according to Clay Nesler, vice president of global energy and sustainability at Johnson Controls Inc. (JCI) in Milwaukee, Wisc.

PACE works by adding the cost of the retrofits to the building's property taxes, a model pioneered in Berkeley, Calif., where it was used to finance residential solar energy.

Instead of owners paying for solar or retrofits upfront, lenders fork up the money for the project and owners add the payments to their property taxes over 20 years, so if they were to sell the building, the new owners would continue to pay for it.

Given the rate of default among homeowners, the Federal Housing Finance Agency felt this was a risky investment, since property tax assessments such as PACE would take priority over the mortgage.

Many cities phased it out for the residential market, but it has now caught on in the commercial sector.

"It was such a great idea, a no-brainer, that it moved from private application to commercial applications. For businesses that are already fully leveraged, banks don't want to make loans to them for retrofits. Also businesses tend to flip buildings. So this model works great," Nesler said.

"PACE is a very clever way of addressing many barriers -- when owners don't want to pay for all the retrofits, or when tenants want the benefits of energy efficiency without paying more for it."

JCI is collaborating with the City of Milwaukee on the Milwaukee Energy Efficiency program, also known as Me2. The federally funded program helps homeowners and business owners make energy efficiency improvements on residential and commercial buildings without shelling out money upfront, instead repaying the loans from energy savings over time. It's supposed to be a win-win for everyone -- the city generates local business and jobs through the projects, putting people back to work while owners save on energy costs.

Nesler pointed to a co-op building called Newport that was part of the Me2 program. It had an aging infrastructure but the owner did not want to take on retrofit loans that would be passed on to tenants. Newport will save about $48,000 each year in energy bills, or about $4,000 per month, and -- because of lower interest rates -- will pay a little less than that each month for the loan. That means it will effectively end up paying nothing for the retrofit and will reap the full benefits of the energy savings after the loan is paid off. 

"That's why we're so bullish about some of these new financing models for retrofits," Nesler said.

Another model,energy performance contracting or EPC, helps unlock capital by offsetting the cost of the retrofit through the savings it produces. The way it works serves as an incentive for building owners to authorize projects, since it reduces financial risk and responsibility.

The performance contractor or energy services company undertakes the risk, by arranging third-party financing, in addition to providing turnkey service improvements and guaranteeing the savings over the period of the contract.