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Energy Efficiency Financing ‘Ready for Commercial Real Estate Market’

Energy efficiency financing is on track to become a mainstream class of financial assets that enjoys predictability, large volumes and high standardization, according to a whitepaper from Building Energy Performance Assessment News.

The report, Energy Efficiency Retrofit Financing Options for the Commercial Real Estate Market, says such financing has shown itself to be suitable for the commercial real estate market, which faces stringent financial underwriting criteria surrounding returns on investments. Stakeholders in the market have learned that building energy performance can impact property value, and now view less energy efficient buildings as a competitive disadvantage similar to a damaged roof, the report says.

But the paper suggests that low-hanging fruit – the low-cost improvements with two to three-year payback periods and lower risk – have already been implemented. Meanwhile, tools have emerged to manage deeper, more capital intensive investments with longer periods of return

The report reviews traditional retrofit financing options such as bank debt, internal financing and lease agreements, as well as the non-traditional options of energy service companies (ESCO) and energy service agreements (ESA), and the growing number of companies that offer these services.

It identifies five criteria of an ideal financing mechanism for commercial real estate stakeholders to accelerate energy efficiency improvements and monetize energy savings opportunities:

1. ) Funding of the project without any capital expense;
2.) Funding that does not add debt to the property;
3.) Funding that covers 100% of the project cost;
4.) Funding structure that will be tax deductible to the maximum extent possible;
5.)  Funding that will be at relatively low cost and payable over an extended period of time.

The report also discusses a few important factors that have developed which contribute to the health of energy efficiency financing as a financial asset – a transparent set of performance standards, insurance policies to guarantee the energy savings, and longer-term funding options, i.e., more than ten years.

The paper cites ASTM E 2797-11, the Building Energy Performance Assessment Standard, published in February 2011, as an example of one technically sound, consistent and transparent standard for energy use data collection, compilation and analysis.

It also recommends fourteen steps to take in order to obtain financing under the most attractive terms and implement a successful energy efficiency retrofit project.

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