Examples power purchase agreements for low income multi family

There are more than 23 million market-rate and subsidized affordable multifamily housing units in the U.S. which collectively produce 107 million metric tons of greenhouse gas emissions annually. Financing decarbonization projects--electrification, energy efficiency, and renewable energy --in multifamily buildings can be challenging due to the sector’s diversity, complexity, and unique characteristics. However, there are a range of financing mechanisms and funding resources available to providers committed to decarbonization.

This primer serves as a step-by-step guide for identifying financing solutions that work for multifamily providers committed to decarbonization. As part of the Better Buildings Financing Navigator, the multifamily housing primer equips sector leaders with the knowledge and tools to evaluate opportunities and solutions in the market. It provides information to highlight financing structures applicable for both market-rate and subsidized affordable multifamily buildings while helping to navigate common barriers and considerations for successful projects.

Electrification is a key component of decarbonization, but the economics of electrification projects are not always as clear as energy efficiency projects due to the physical limitations of buildings that require additional scope to address, utility metering and billing, upfront costs and payback, and the variability of utility pricing.

Safely and efficiently providing heating, cooling, hot water, and electricity to many individually controlled spaces within a single building requires a thoughtfully designed mechanical system. Project standardization is difficult because of the wide variability of these systems among buildings.

Multifamily properties have a range of competing priorities—including maintenance, staff salary, insurance, and other expenses—that require funding from capital and operating budgets.

Most multifamily owners lack the staff capacity or expertise to navigate the evolving energy financing landscape, which may prevent owners from exploring potential projects or maximizing project scopes.

Project Drivers

Identifying the motivations for pursuing a decarbonization project will inform the scope, goals, and desired outcomes.

• Operating Cost Reduction: The primary driver of most projects is the goal to reduce energy and operating costs by implementing energy efficiency projects such as installing LED light bulbs, pipe or wall insulation, energy management systems, and other devices that lower the amount of energy a building needs to keep occupants safe and comfortable.
• System Replacement: The end of the “useful life” for key fossil-fuel-powered building systems, like a gas-fired boiler or chiller, presents an excellent opportunity for electrification. This equipment can be replaced with an efficient system powered by electricity, such as an air or water-source heat pump, to provide heating and cooling. The types of systems that are reaching the end of useful life and the timing at which this occurs impact a project’s scope and types of financing available.
• Local Requirements: An increasing number of states and localities require existing buildings to achieve minimum energy or climate performance standards, and in some cases, issue fines for noncompliance. Adherence to these policies is a crucial driver for many projects. To see which jurisdictions are advancing building performance standards, visit the National BPS Coalitions.
• Carbon Avoidance: Many real estate trusts, banks, and other investors are making public pledges to reduce carbon emissions directly and within the projects in which they invest. To remain attractive, multifamily building and asset owners are focusing on projects that avoid the use of fossil fuels, support building electrification, and use renewable power generation like rooftop solar panels.

Project Co-benefits

Recognizing additional advantages beyond the primary goal of decarbonization contributes to a more holistic understanding of project drivers.

• Maintenance & Operations: Addressing deferred maintenance, resolving chronic conditions that drain staff resources, and responding to tenant complaints or system imbalances are often key drivers in decarbonization projects.
• Resiliency: Evaluating and addressing climate threats to a property — such as flooding, wildfires, extreme heat, cold, and wind events — is essential to enhance a building's ability to protect against climate impacts. Including thoughtful resiliency measures as part of project design reduces the risk of property damage and system failure. In addition to physical threats, more frequent and prolonged extreme weather events can lead to more power interruptions, which are inconvenient and can threaten resident safety. More effective building envelopes, efficient mechanical systems, and onsite renewable generation can work together to mitigate the risks of power interruptions.
• Improved Health and Safety during normal operations: Updating electrical wiring and service to meet current codes is a top priority for any multifamily building operator. Beyond that, eliminating gas kitchen stoves, implementing new/improved ventilation systems, and other safety improvements all contribute to improved indoor air quality (IAQ), which is fundamental to boosting resident health and wellbeing.
• Marketability: Features like induction stoves, electric vehicle (EV) charging, improved ventilation, new windows, air-conditioning, and renewable energy enhance the attractiveness and value of properties and provide clear product differentiation in a busy market.

Key Considerations

Everything from the size of a project to timing, tax, and regulatory implications can impact the type of funding best suited for a decarbonization project. Reviewing these considerations can help multifamily providers think through a financing approach and implementation plan.

• Project Scope: The project scale, specifications, and budget are key factors of investment considerations. Internal funding may be an option for minor incremental upgrades, such as replacing broken or outdated equipment, but more intensive retrofit projects require third-party capital, such as a loan, lease, or service contract.
• Repayment: Repayment is one of the universal truths of financing, and most decarbonization projects will be structured with principal and interest payments collected over a fixed term. Understanding a property's ability to support additional debt service, and over what period (term or tenor), will significantly influence the project size and scope.
• Affordability: Affordable multifamily properties face additional financing complexities because of the framework of subsidies and regulations that support these properties. Rent restrictions limit the income a property generates and thus the ability to cover the full cost or take on additional debt for decarbonization projects. Recapitalization or refinancing is an ideal time to pursue deep energy retrofits and decarbonization projects when additional capital is available. For projects that are not refinancing, incentives, rebates, or grants from Federal, state, or local governments or utilities can be stacked together to cover the costs of a project.
• Timing: Timing is a critical consideration that can drive the size and scope of projects.
  • Refinance and Recapitalization: If there is a plan to refinance or take on a new mortgage for the property, using the loan proceeds typically emerges as the most cost-effective means to fund improvements and can typically cover a larger project scope.
  • Tenant Turnover: Vacant apartments provide an opportune moment to implement smaller in-unit projects, such as replacing stoves and appliances with more efficient models.
  • Equipment Replacement: The end of a product or system's "useful life" presents an opportune moment for replacement with an updated or more efficient model. Avoiding like-for-like replacements can support building decarbonization and lower operating costs.
  • Capital Improvements: Aligning energy and decarbonization goals with planning for capital improvements such as façade repairs, lobby renovations, or ventilation overhauls, is advantageous because upgrades can be completed incrementally within the capital needs budget and timeline.
  • Financing Term: The amount of time current investors plan to own the building will impact the type of financing pursued. Financing with shorter terms will benefit those who plan to sell the property in the foreseeable future, while longer-term funding can be attractive to those who plan to hold on to the building for 10+ years.
  Overview of Financing Options

  Determining the scope of a project and phasing of work while balancing desired outcomes with potential impacts on building operations is a considerable undertaking. Establishing a plan for how a project will be financed and repaid is another key factor in the decarbonization process.

  Traditional Financing

  Owners of multifamily properties may look to traditional financing options such as leases and loans to cover the upfront costs of decarbonization like energy efficiency or renewable energy projects. Most leases and loans are secured, meaning that the debt is backed by some form of collateral (generally the building or energy equipment) in the event of a default. These financing options traditionally require obtaining consent from existing lenders on the property. Unsecured leases and loans are sometimes available, but interest rates for these options are higher.

  LOAN OR DEBT FINANCING
  Multifamily providers may use debt or loan financing to fund decarbonization improvements directly. It is common to use loan proceeds from a mortgage refinance to fund capital improvements, including energy efficiency and decarbonization projects. If mortgage refinancing is not an option, a subordinate loan, also called a junior lien, from your mortgage lender or another bank is an option to finance the improvements. These loans are collateralized or secured through the real estate asset, which helps to lower the cost of financing. Community Development Financial Institutions (CDFIs) and other mission-based lenders are actively funding projects in the multifamily space. Many may be able to provide technical assistance or grant funding to lower the cost of project financing. Read more.
  

  GREEN MORTGAGE
  Green mortgages have preferential lending terms and typically come with lower interest rates or higher debt-to-income limits to incentivize improving energy and water efficiency. These mortgages are available to building owners who can demonstrate that a property meets verified energy efficiency standards. HUD offers various programs and resources, such as a mortgage insurance premium discount for properties retrofitted to a certain standard for market-rate and privately owned affordable housing. Fannie Mae and Freddie Mac also offer loan programs for qualifying multifamily owners.
  

  EQUIPMENT FINANCING
  Projects that include the installation of one large piece of equipment or multiple applications of the same technology could consider equipment leases or loans as a financing option. Loans or leases for specific equipment are available in a variety of applications, including directly through vendors and installers. Leasing is also a popular option when combined with an agreement for the vendor to operate or maintain the equipment. Read more.

  Specialized Financing

  Specialized financing mechanisms are available to help overcome upfront costs and other financing barriers that have historically stalled or limited uptake for building decarbonization. Commercial lenders offer some of these products, as is the case with Commercial Property-Assessed Clean Energy (C-PACE) financing, but energy performance contracts or service agreements are typically provided by firms specializing in project design and installation in addition to financing. These products are different than traditional financing options because they require different types of collateral or are unsecured “off-balance sheet investments”.

  COMMERCIAL PACE
  Commercial Property-Assessed Clean Energy (C-PACE) is a financing structure in which building owners borrow money for energy efficiency, renewable energy, or other projects and make repayments through an assessment on the property tax bill. The financing arrangement remains with the property even if it is sold, facilitating long-term investments in building performance. Private investors or government programs may fund C-PACE, but it is only available in states with enabling legislation and active programs. Due to the position of the C-PACE lien ahead of the mortgage in the capital stack, consent from existing lenders is required and, in some markets, has been challenging to obtain. Read more.
  

  ENERGY PERFORMANCE CONTRACT
  Energy performance contracts (EPCs) are an option to implement and finance energy upgrades under one contract and are best suited for larger projects ($5 million or more). Under an EPC, a provider coordinates installation, maintenance, and financing of efficiency improvements for a building (or portfolio of buildings) and is paid from the associated energy savings or a pre-determined fee. EPCs have gained traction in public housing authority properties where projects are repaid through operational savings, avoiding the need for debt-based financing. However, most EPCs are financed by an “on-balance sheet” loan or lease provided by the EPC provider or a 3rd party. Read more.
  

  ENERGY SERVICE AGREEMENT
  An energy service agreement (ESA) is like an energy performance contract such that it provides a vehicle to install and finance upgrades. However, it is designed to be an “off-balance sheet” financing solution, with regular payments treated as an operating expense. The ESA provider retains ownership of the equipment for the duration of the ESA term and pays for maintenance to ensure reliability and performance. At the end of the contract, the customer can elect to purchase the equipment or extend the contract. Read more.
  

  POWER PURCHASE AGREEMENTS
  Multifamily building owners may use a power purchase agreement to buy the electric output from an onsite energy generation system (e.g., solar PV or geothermal systems) installed, owned, and operated by a third-party developer. Some affordable multifamily building owners are launching their own solar PPAs to take advantage of tax credits and income from the sale of resilient electricity to residents. Read more.

  Additional Funding Opportunities

  In addition to financing, funding opportunities are available to support project development and lower capital costs. These often take the form of grants or rebates. Below are resources that track federal, state, and local funding opportunities. Program deadlines and eligibility requirements are subject to change, so check with local administrators for updated information.

  • HUD Funding Navigator: The U.S. Department of Housing and Urban Development lists federal funding opportunities to support climate resiliency, energy efficiency, renewable energy integration, healthy housing, workforce development, and environmental justice in HUD-supported communities, programs, and properties. Visit the HUD Funding Navigator to learn more.
  • Database of State Incentive Programs: Many state and local governments and utility companies have established programs that specifically target energy efficiency and clean energy projects within their borders. These programs can often provide loans at lower rates and/or more flexible terms than traditional private sector lenders, as well as direct incentive programs to lower the total cost of work. More information on state and local programs is available from the Database of State Incentives for Renewable Energy.