A Model for Financing Multifamily Energy Efficiency

Outside the national spotlight, at a community development financial institution (CDFI) in Chicago, a high-performance program has been financing energy efficiency since 2008. This program could become the seed of one or more vastly larger projects to fund retrofits for affordable apartment buildings nationwide – if resources are available.

Jack Markowski, president and CEO of Community Investment Corporation, said the main ingredients of his program are a willing lender that leverages capital resources, a granting organization that provides a loan-loss reserve, and a skilled team of energy experts that oversees and evaluates the retrofit. 

American Council for an Energy-Efficient Economy evaluated the program offered by Bank of America that funded this as a pilot. The report was published in 2016.

CEFF: I’d like to start with some specifics about the program. What is it called? When did it begin?

Markowski: The title is Energy Savers. It started in 2008. It’s still going on. It’s the largest program of its kind in the country.

It’s a program to provide financing for energy-conserving retrofits in multifamily affordable housing. That’s what our niche is. It’s not about owner-occupied housing.

Since 2008, we have provided $28.6 million in loans and grants to over 7,000 units of housing. The capital for our program primarily came from the MacArthur Foundation and Bank of America. Bank of America lent us $8 million as a program-related investment (PRI). And the MacArthur Foundation provided us $6 million as a PRI.

There were some government sources – the City of Chicago and the Chicago Metropolitan Agency for Planning (CMAP) – that gave us $3.5 million for loan-loss reserves. That enabled us to make what would be considered pretty aggressive second-mortgage lending on affordable apartment buildings.

Most people in their right mind would not think it was smart to make 3-percent loans as second mortgages on affordable rental housing. We were able to do that because the loan-loss reserves were there to cushion us.

The losses have been very minimal. So far, we’ve only had $116,000. They were covered by our reserve. It’s been very good performance. We’re able to keep doing this going forward.

CEFF: Does this program cover solar energy as well as energy efficiency?

Markowski: We’re not against solar energy, but in general it doesn’t pencil out. Either the owners don’t want to get into it because it’s too big of a job for them or else it’s not cost-effective.

There have been a couple cases where we’ve looked at solar collectors for a larger loan that we’ve been doing as part of a big rehab project.

CEFF: The angle I’m considering for this article is that what you’re doing could be done nationally. Do you have any comments on this?

Markowski: We’ve set the groundwork. This could be replicated across the country.

You have to have the lender, the capital, the loan-loss reserve, and the technical expertise.

CEFF: What national organizations that work with CDFIs – either organizations that fund them or organizations that collaborate with them – might be able to move solar financing and energy efficiency financing forward for the CDFI market?

Markowski: Bank of America or other high-level banks could work with this market. Bank of America had a program where they committed $50 million across the country.

The basic question you’re getting to is: are you going beyond your normal lending standards? Any kind of enlightened lender could make loans for something energy-efficient – and they do. They will, as long as it conforms to their underwriting standards.

But how far will you go beyond your normal underwriting standards in doing it?

If you’re making a loan and you judge the ability of somebody to repay, one of the things you have to do is to evaluate the reduction in their energy cost – assuming that your energy-conserving measures save money. How aggressive are you going to be with that approach?

But beyond that, the question is: if you’re going beyond your normal underwriting standards, with whose money are you going beyond them?

And so I think that in some way or other, you need a role for philanthropy and government.

We were able to go beyond our normal underwriting standards because we were able to get money from the government to pay for our loan-loss reserves. The loan loss reserves were funneled through local government, but they originated with the federal government through the United States Department of Energy.

So that money was important because it allowed us to be aggressive with lending private money.

Bank of America put out a study and did an evaluation of how they did. We made second-mortgage loans behind first mortgages at a very low interest rate – 3 percent. We ended up having very good performance.

This high-risk lending may not be as high-risk as it seems. I think that was a good use of that pilot program. 

CEFF: How can CDFIs reduce risk while making loans to low-to-moderate-income communities for solar energy and energy efficiency?

Markowski: You have to know your customer and know your product. It’s important to understand what you’re installing, what it’s going to save, and whether the estimate is accurate.

CDFIs know their finances. They might not know anything about energy efficiency or how to separate a smart energy investment from a not-so-smart one. It’s important to have partners who can provide that technical assistance.

Our technical assistance partner is Elevate Energy. This is very important if you’re getting something that is outside the normal construction expertise that one might have.

With Elevate Energy, the way we work with them is that they go to the building and do an overall audit of the building. The most cost-effective and energy-use-reducing retrofits are insulation, caulking, boilers, controls and lighting. The company makes a list of everything the owner could do. They say: this is what you could do, this is how much it would cost, this is how much it would save, and this is the payback period.

We rely on Elevate Energy when we do our underwriting for a loan. We’re installing things that have paybacks of four to six years. Our goal from a financial perspective is that the amount that you save each month pays for the loan that you have to take out to pay for the capital improvement. It should pay for it, with interest, within five to seven years. The ideal is that the loan is fully amortizing and in seven years, it’s completely paid for itself.

And by the way, they’re reducing energy costs 25 to 30 percent. So you’re using that reduction to pay for the loan for the first seven years. And then, after that, you’re set free from an economic perspective and saving money from there on out.

Elevate Energy continues to monitor the building so the savings are actually realized.

CEFF: You were talking earlier about some specific technologies. Are there any issues related to building maintenance that you face when financing solar and energy efficiency in low-to-moderate-income communities? And if so, what are they?

Markowski: The people we’re serving are owners of apartment buildings. They could be as low as a six-flat. The owners have an understanding of the basic mechanics in the buildings.

That notwithstanding, I will tell you there have been some challenges with the controls on some of the more modern pieces of equipment. They don’t look like the old stuff.

In the first couple years of our program, we had to make sure that Elevate Energy was going out and making sure that the owners or their janitors understood how to operate and maintain the equipment.

CEFF: When you’re working with owners of apartment buildings, what financial issues come up? Sometimes marketing to landlords is a different consideration than marketing to people who own their own properties. (Marketing to apartment landlords sometimes splits the incentive so that landlords may not see it as important to install energy efficiency retrofits if they are not paying for the utilities directly.)

Markowski: Most of the apartments we’re dealing with are centrally heated. It’s not a split incentive. The owner has to pay for the utilities. There’s code requirements that require certain temperatures.

What we’ve been told is that landlords who do the retrofits can keep their buildings more comfortable at a more reasonable price – and that becomes a marketing virtue for the building because they’re able to save on the costs.

We got into this not because we wanted to conserve energy and it’s an environmental thing to do. We did this because we wanted to reduce the costs of operating affordable housing.

Energy costs were seen as one of the costs that was most difficult to control.

Our appeal to the owners of the buildings – we don’t appeal to the tenants – is that for a modest investment of $2,500 to $3,000 a unit, you can cut your energy consumption 30 percent. That’s our pitch.

There have been a handful of building owners who had individual utilities for the tenants. In that case, it was the tenants who were paying. One might say: why are the landlords investing? They did it because they feel it helps them market their buildings.

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