Here at NRDC’s Center for Market Innovation, we spend a lot of time thinking about how to establish market conditions and mechanisms that will create a “new normal” for energy efficiency finance in existing buildings.
“New normal” means property owners prioritize energy efficiency and see it as a key part of a successful real estate business model: Tenants demand efficient space, leases are written to enable equitable sharing of retrofit costs and benefits between owners and tenants, a green-collar retrofit workforce is poised for action, and of course banks are lining up to finance commercial building retrofits.
Yesterday, the White House announced the Better Buildings Initiative (BBI.) If the BBI’s key provisions are carried out, they will lay a strong foundation for this inherently bi-partisan new normal which is job-creative, private-sector stimulating, and environmentally beneficial.
- Tax Incentives: the current energy efficiency incentive provided for commercial building owners in section 179(d) of the tax code is getting a makeover, in large part because the energy savings threshold under 179(d) has been hard for owners of existing buildings to attain. In addition, the tax incentive as it currently exists is structured as “deduction.” Tax deductions (which reduce taxable income) are good, but as we have seen in the solar market, tax credits (which are a dollar for dollar credit against taxes owed) can be better.
- The BBI proposes to structure the incentive as a tax credit rather than a tax deduction, and we expect that this new incentive will function on a sliding scale, meaning that the more energy building owners save, the higher the tax credit they will receive. There is also a possibility that the new tax credit will be transferable to third-parties. NRDC has been advocating strongly for strengthened third-party access to tax incentives associated with retrofits: the ability to transfer tax benefits to third party retrofit financiers is a surefire way to attract new investors to the retrofit finance space.
- Department of Energy loan guarantee: In the current climate, even if a building owner is sophisticated enough to want to retrofit her existing building, she will have enormous difficulty getting her retrofit financed. Given the prevalence of commercial buildings that are over-leveraged or underwater, lenders are unwilling to take a subordinate lien on a commercial property. The retrofit technologies themselves have little collateral value. Thus, traditional asset-backed lending has not been a viable mechanism for retrofit finance. Because building owners in most cases lack the will or ability to finance retrofits themselves, the very low level of commercial retrofit financing means a very low number of commercial retrofits take place.
- In the works under the BBI is a new pilot program through the Dept. of Energy to guarantee loans for energy efficiency upgrades at hospitals, schools and other commercial buildings. Even in the current climate, loan guarantees will make all the difference in getting national banks to begin lending to commercial building owners for energy efficiency retrofits. A proposal under BBI would also work through the Small Business Administration to encourage existing lenders to take advantage of recently increased loan size limits to promote new energy efficiency retrofit loans for small businesses.
Aside from the much-needed market mechanisms described above, BBI presents welcome initiatives such as green job workforce training, a challenge to CEOs and Universities to retrofit their own facilities, and a “Race to Green” program that will provide competitive grants to states and local governments that improve existing building codes and institute building energy performance standards.
Read the full BBI story in the White House press release.
The principles that informed the BBI, if implemented and scaled nationwide, will kickstart a wave of commercial building retrofits, producing much-needed data on retrofit payback periods, which in turn will attract more investors, enabling more retrofits. After years of scant progress in the commercial building retrofit finance space, the "new normal," which we desperately need for the sake of our environment and our economy, may finally be coming into view.