torchlight #28 | paving the way

8/14/2019 Torchlight #28 | Paving The Way

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TorchlightPaving The Way

By: Nancy E. Anderson, Ph.D., Executive Director, The Sallan Foundatio

Issue: Torchlight #28

Date: January, 2010


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1 2010 The Sallan Foundation, Inc. All rights reserved. http://www.sallan.org

Torchlight #28

Paving The Way

To amend the old adage, the road to hell is paved with good intentions that cant be financed. What

does this have to do with making energy efficient building New Yorks new normal? Since theCitys greener greater building legislation does not directly require building owners to undertake

energy-efficiency upgrades beyond lighting systems, skeptics have said not much will change. Even

optimists like me, who point to the new requirements for alteration work to comply with the energy

efficiency code, have to admit that the Building Departments enforcement resources will be

limited. But Im still an optimist grim real estate market and the great loan drought aside because of the potential game-changing power of building benchmarking and PACE financing.

As Torchlightreaders know, I believe that collecting and disclosing data on a propertys resourceconsumption and comparing that data to that of similar buildings will prove to be useful knowledge

for owners, renters, buyers, underwriters and financial backers. Oh yes, and government policy

makers too. Consuming more energy than is needed, overlooking tax benefits, favorable financing

opportunities or failing to capitalize on demand for more environmentally friendly building are

proxies for management thats not making the most of its assets. But I admit that readers shouldnt

just take my word for it so Ive spoken with TIAA-CREFs Nicholas Stolatis, Director of Strategic

Initiative Assets Management.

TIAA-CREF manages the retirement investments for many in the academic, medical, cultural and

research fields and is one of Americas largest institutional real estate investors. Its portfolio

includes some 200 office buildings. Since launching its benchmarking effort in 2007, Mr. Stolatis

has used Energy Star Portfolio Manager software to measure and compare the energy consumption

of the retirement funds holdings and he gives this software high marks. TIAA-CREF tackled its

commercial buildings first and, starting with the rollout of updated software last year, it is

benchmarking the 12,000 units in its multifamily property portfolio too. On average, benchmarking

updates in office buildings take just fifteen minutes, although setting up the initial effort does takemore time.


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Torchlight #28

Paving The Way

For Mr. Stolatis, benchmarking is not a one-shot deal. Building data is regularly updated in order to

track progress and identify opportunities for doing better. Finding opportunities to do better include

the installation of new ice-thermal storage equipment in TIAA-CREFs Manhattan headquarters,

which initially received a low Energy Star rating. More typically, however, non-capital expense

opportunities like improving operations and educating tenants are the preferred paths. Overall, the

TIAA-CREF portfolio has cut its energy use by 7.5% since 2007 and avoided $8 million in energy

bills. As a fiduciary institution, TIAA-CREF is always mindful of the bottom line. While

professional appraisers have yet to say whether there is direct and quantifiable value for energy

efficient commercial and residential real estate, Mr. Stolatis is confident in saying the reduced

operating expenses mean higher building value. For him, energy efficiency and benchmarking are

part of a holistic and prudent way to manage buildings.

Lets look at what public policy is doing to help other, typically smaller property owners pay for

energy improvements. A March 2009 Snapshot by Mayor Tom Bates spelled out the Berkeley

FIRST initiative. Berkeley, California through its own financing authority raised a pool of $80

million to provide up-front financing of as much as $37,500 to a property owner who wants to

install solar power roof panels. The loan is repaid over twenty years through an add-on to property

tax payments at zero percent interest (with a one percent charge to cover administrative costs). The

loan goes with the property, which means if the building is sold, the obligation to repay goes to the

new owner. The town of Babylon, NY offers a similar program to encourage energy efficiency

upgrades that will cut CO2 emissions from existing buildings. The orientation of both these

programs is toward residential owners who have twenty-to-thirty year mortgages and these long

repayment times are congruent with a home or multifamily mortgage time frame.

Expanding on this model, eighteen states now authorize PACE (thats Property Assessed Clean

Energy) bonds or taxes. New York is the latest state to join in and theres good reason to believe

that the New York City Council will be considering PACE bond legislation in the near future.[After

this Torchlight column went to press, Council Speaker Christine Quinn announced her support

for PACE bond type legislation in herState of the City address.]Before that happens, however, theState law may need some tweaks. New Yorks statute, as written, requires municipalities that issue
http://www.sallan.org/Snapshot/2009/03/another_berkeley_first_1.phphttp://sallan.org/pdf-docs/Quinn_SOCSpeech_2010.pdfhttp://sallan.org/pdf-docs/Quinn_SOCSpeech_2010.pdfhttp://www.sallan.org/Snapshot/2009/03/another_berkeley_first_1.php


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Torchlight #28

Paving The Way

PACE bonds to be recipients of federal stimulus funds. Although New York City has applied for

block grants from the US Department of Energy, it wont learn whether it will receive funding until

Spring 2010; amended legislation would allow municipalities to move forward without federal

stimulus funds in hand.

The Natural Resources Defense Council, a well-known green advocacy organization, champions

PACE bonds as one of several innovative instruments to finance energy efficiency improvements.

Enactment of local PACE legislation would create an entirely new revenue stream for greening the

Citys biggest energy consumers, its buildings. According to NRDC, New York City would likely

issue PACE bonds through a new local development corporation or similar City subsidiary. PACE

bonds cannot be plain vanilla general obligation bonds guaranteed by property taxes because they

are taxable revenue bonds. Repaying a PACE bond would be guaranteed in two ways. First, a

loan to a property owner would be structured to make monthly energy savings greater than monthly

loan payments. Second, PACE bonds would have a super-lien status, which means investors are

paid before mortgage holders in cases of bankruptcy or loan defaults.

The PACE model offers financing to owners who voluntarily undertake energy-related upgrades.

The statutory language would need to spell out whether PACE funds would be available for

upgrades required by law because the emphasis so far has been on voluntary actions. Legislation

should also be careful to distinguish the needs and financial facts of single-family or multifamily

residential owners from those of office building landlords. For instance, loans for office buildings

are much shorter than home loans and owners of commercial property often calculate their decisions

in terms of a one-to-four year return on investment.

Fine print aside, the direct benefits of making PACE financed investments in a buildings energy

efficiency are quite clear. By reducing consumption they act as a hedge against price volatility or

escalation in the cost of fuel and electricity. PACE bonds could potentially benefit rent-controlled or

rent-stabilized tenants in New York City if building upgrades financed in this manner were not

deemed to be major capital improvements (MCIs) that raise rents. In addition, a PACE-financed

investment is a good way to position a greener property in a competitive marketplace.


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Torchlight #28

Paving The Way

Now for the hardest parts. PACE legislation will have to define the public purpose to be served by

such financing. Babylon, for example, identified its intended public purpose by defining carbon

dioxide emissions as a solid waste so as to allow its pre-existing solid-waste financing to cover

energy-efficiency building improvements. Passage of a PACE bill will be determined in part by the

buy-in of typical mortgage lenders. Their concerns over the impact of new super-lien debt on

properties with existing mortgages will have to be addressed. So too, bond buyers and underwriters

will have to be convinced that PACE investments make sense. Finally, legislation must grapple with

the vexing issue of what happens if utility rates soar, so that even model energy consumers are

forced to pay much higher bills while keeping up with PACE and mortgage obligations.

Can legislation resolve these issues and launch financing thats innovative, effective and prudent? I

think so. Will New York Citys new benchmarking legislation raise the level of awareness about

building performance and generate support for energy improvements? I am optimistic.

Nancy Anderson is the Executive Director of The Sallan Foundation.

torchlight #28 | paving the way

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