Kyle J Wacyra, PE
100% Project Financing for Deep Energy Retrofits
Capital Efficiency recommends leveraging 100% project financing to pay for all hard and soft costs of our energy efficiency projects with financing that is...
Off-balance sheet, non-recourse
Non-accelerating, fully amortized
Transfers with the sale of the property
Passes thru to tenants in a triple net (NNN) lease
Energy efficiency projects have faced roadblocks of resistance in the past... we'll explain why the days for those once very valid reasons are over.
Roadblock #1: Short-term holding periods.
Challenge: Building Owners may not plan to hold onto their property for several years, so the convention was that projects with paybacks longer than the planned length of ownership were ruled out. Makes sense; why continue to pay for something you no longer own?
(more later on why the concept of paybacks are outdated anyway).
Break Through: 100% Project Financing can be transferred with the sale of the property.
Value Proposition: Upgrade your building to increase the value of your property and sell for a higher sales price. The new Owner will resume the payments for your upgrades.
Roadblock #2: Triple Net (NNN) Leases.
Challenge: Building Owners have no interest in paying for projects that save energy (money) when the tenants are the ones paying the bills, as they do under NNN leases.
Break Through: 100% Project Financing can be passed through to the tenants.
Value Proposition: Upgrade your building (for which your tenants will pay for) to reduce your tenants' energy costs and increase tenant retainment. They'll be thrilled with their reduced operating expenses and happy to market a green progressive office space.
Bonus Value Proposition: Consider entering into a modified gross lease with your tenants. Take over the payment of the energy bills, locking in fixed utility payments from your tenants at their current usage/price, then pocket the difference between the collected payment and the new reduced energy bills.
Roadblock #3: Capital Expenditures (CapEx).
Challenge: Building Owners may not have the money to invest, and/or the projects are ruled out based on conventional financial metrics of simple payback, Internal Rate of Return (IRR), and Net Present Value (NPV). These metrics are used to evaluate and compare two investments by ultimately posing the question, "What is the better use of my money? Doing this energy efficiency project or investing in the S&P 500?", for example.
Break Through: 100% Project Financing covers all hard and soft costs of the project and when provided the upfront financial capital, it becomes a cash flow deal. As long as you save more than you owe, i.e. the Savings-to-Investment Ratio (SIR) is greater than one, then the deal makes sense.
Value Proposition: Go out and spend your CapEx funds on something you really want, like acquiring another property instead of buying to repair or replace HVAC equipment. When provided the financing for your energy efficiency project, you no longer need to make the choice between two investments and justify them using simple payback, IRR, or NPV.
Additional Benefits as it relates to Business Owners:
Off-balance sheet (OBS) financing. The financing is not taken on as debt to your company, keeping your debt-to-equity (D/E) and leverage ratios low.
Non-recourse financing. Only the profits of the energy savings can be used to repay the financing, and no other assets can be seized upon default.
Non-accelerating and fully amortized. Cash flows are predictable, with fixed payments throughout the entire financing term. tal28-34 Weeks7-8.5 Months< 1 Year