Abram Mamet, April 2023
As seen in Housingonline.com: Green Retrofits Signal the Future in Cities’ Push Towards Decarbonization – NH&RA (housingonline.com)
Green Retrofitting in Practice
Well-considered and meaningfully executed retrofits have become increasingly important as communities across the country seek out effective climate resilience strategies. States like Massachusetts, New York, Illinois and Pennsylvania are at the forefront of that movement, having each enacted legislation or initiatives aimed at significantly easing the financial and logistical burdens of retrofitting in order to meet aggressive decarbonization goals.
Retrofitting is distinct from a renovation or a remodel in that it specifically incorporates new technology in units in order to increase their functionality (as opposed to, say, square footage or aesthetic changes). Green retrofitting is doing so with a specific eye on energy efficiency and clean energy.
Though upfront costs may be prohibitive, the long-term effects and benefits of green retrofitting can be dramatic. This is particularly true for large, multifamily affordable housing units, which generally represent aging structures and are occupied by tenants already at risk of being unable to pay high energy bills associated with less efficient properties. For example, a recent mid-scale nine-building retrofit in Brooklyn, NY, cut overall energy consumption by 60 percent, as detailed in a recent report by New Scientist magazine. The buildings received a unique retrofit where most of the work was done on the exterior of the building, minimizing tenant disruption.
The long-term benefits of such impactful retrofitting projects extend to nearly every component of a building, from the tenant to the owner, to the surrounding community, says Ravi Malhotra of the International Center for Appropriate & Sustainable Technology (ICAST), a leading retrofitting company that has been providing the service since 2004. “Green retrofits reduce utility bills, improve indoor air quality and increase residents’ comfort, health and safety, and continue to do so for the lifetime of the installed equipment. In other words, a green retrofit may save x lbs. of carbon emissions and $y in energy costs annually, but those benefits continue over the 15- to 20-year life of the upgrades, resulting in $20y of savings and 20-times the carbon emissions reduction. Retrofits improve property value and Net Operating Income [NOI] by reducing Operating and Maintenance [O&M] costs, improving occupancy and reducing tenant turns.”
Though Malhotra points out that “retrofits are more difficult, complex and expensive than new construction,” the practice is still crucial for the contemporary needs of cities and communities. In the United States, roughly half of all currently built structures will exist in 2050; currently built structures account for about 40 percent of total energy use in the U.S. This energy share is even greater for cities, where urban buildings account for about 60 percent of a city’s overall carbon footprint.
Thus, building decarbonization and increased energy efficiency via retrofitting is a policy priority currently at the front line of many communities’ efforts to reign in human-influenced climate change. Retrofitting is, in many cases, the most effective way to decarbonize, particularly for well-established cities with large, older housing stock and limited space for new construction.
There is no real standard retrofit procedure, and each situation must be unique to maximize energy and future cost savings, “retrofits can incorporate whatever green solution is best for each property,” says Malhotra. “It should all be customized to the property. For example, ICAST retrofits can include basic weatherization, deeper energy efficiency upgrades, healthy home solutions, solar, energy storage, energy management systems and Electric Vehicle charging infrastructure.”
Malhotra says that retrofits that ICAST works on are increasingly focused on removing gas from homes and instead powering properties from electric sources in a process known as fuel-switching. This is a shift from the past when, generally, State Public Utility Commissions have either openly discouraged fuel switching, or simply did not provide guidance for efficient electrification. However, spiking gas prices and an increased understanding of the health risks of gas appliances have caused an upsurge in fuel-switching.
Retrofitting can be costly. ICAST’s whole building retrofits usually top out at $20,000 per unit, for example, and more complicated or specialized retrofits can climb well beyond those numbers – a Brooklyn retrofit cost an estimated $120,000 per unit. These costs in the past have served as a general deterrent against a massive uptake in retrofitting as a practice nationwide.
However, Malhotra says the retrofitting industry has entered “boom times” as “new sources of funding keep coming. The Bipartisan Infrastructure Law (BIL) and Inflation Reduction Act (IRA) contained many billions of dollars for weatherization, electrification, solar, energy storage, energy management, workforce training and more. We’re also seeing increased utility, state and local government funds.”
PACE Loans – A Powerful Public-Private Partnership
One other set of programs that are serving as a core part of today’s financial equation for retrofitting is a product known as Property Assessed Clean Energy (PACE, or C- PACE when referring to commercial). Available only at the local county level, after the state legislature passes a law to allow it, these programs are unique public-private partnerships in which those embarking on a retrofit can borrow money from a private lender and then make repayments via an assessment of their property tax bill. Further, the financing arrangement remains with the property, rather than the borrower, lessening any perceived risk for borrowers and increasing the attractiveness of a retrofit project.
According to the Department of Energy, 30 states plus the District of Columbia have active PACE programs; eight additional states are in the process of establishing PACE programs after having passed legislation enabling them.
Generally, borrowers must work with a third-party lender, who then either collects the money directly from the borrower (who in turn would write off that on their real estate tax bill) or collects the money from the state after a real estate tax bill is paid.
The benefits of PACE loans are substantial, says Sal Tarsia, whose organization, Castle Green Finance, is a leading PACE lender. For borrowers looking at green retrofitting, Tarsia says, PACE loans have a “double benefit for the property owner, because… they get a lower cost of capital,” causing them to have to sink little to no equity in the project, often resulting in “more efficient systems for their property because the extra cost of that system is offset by the cheaper capital.”
PACE programs have existed since the early 2000s and were, until recently, viewed as “the new kid on the block” within the broad range of financial instruments amongst borrowers looking for appealing funding sources for retrofitting projects, according to Tarsia. This limited their appeal, as borrowers simply overlooked PACE loans in favor of more traditional funding options.
Today, however, PACE programs are increasingly popular for green retrofit projects. In part, says Tarsia, this is due to the rupturing effects of the COVID-19 pandemic and the disruption it caused for retrofit projects nationwide. “You had large brokerage shops and developers who had their projects stuck. They were all looking for solutions. And when investors and brokers tend to look for solutions—because the mainstream market is slower or shut down—they look for alternative financing sources. And so PACE jumped from…a less important part of the capital stack” to something that developers recognized as a tool that could “solve our problems right now.”
Though the biggest change in the PACE lending industry is simply increasing awareness and uptake, Tarsia says that what is in state requirements for PACE eligibility is also changing, with many states gradually shifting towards emphasizing resiliency-oriented retrofits. In addition to the usual language about energy efficiency, these states are beginning to include language requiring resiliency pieces, such as “flood mitigation measures, storm resistance and in places with colder climates…hardening of the structure and additional insulation measures to keep the property safe and more efficient from wind and storm.”
PACE is only one kind of financing, of course, with its own set of challenges, such as a required approval from the first lien holder, which can cause many Financial Institutions to decline that approval, says Malhotra. Fortunately, many other types of energy financing exist, including, “Power Purchase Agreements (PPA), which is how most solar photovoltaics get financed. Also, Energy Performance Contracts (EPC), which is how Public Housing can access green upgrades. And the new Energy as a Service (EaaS), derived from Software as a Service (SaaS), whereby an investor recoups their investment from the utility bill and O&M savings.”
Still, Tarsia says that in his estimation, PACE is “one of the best public-private partnerships that have been created, certainly in my career. What I really love about it is that it works well with a lot of other things. It’s extremely complimentary with Historic Tax Credits and Opportunity Zones and works with any other type of product that has been used to incentivize economic development on the real estate side…and we can form the PACE product to a process and methodology in which [the borrower] is already comfortable.”