Reaching the Underserved Multi-Tenant Market Through Energy Efficiency Financing

Blog Post | August 01, 2013 - 9:44 am
By Stephanie Sienkowski, ACEEE Intern

Over the past several years, financing for energy efficiency investments has been widely viewed as a promising solution to reducing upfront cost barriers to investment in energy efficiency. However, several markets, including multi-tenant commercial office and multi-family, remain stubbornly hard to reach.

Commercial buildings currently represent about 18% of the total primary energy consumption in the United States. 60% of office buildings were built before 1980 and many are in need of upgrades due to aging building equipment and systems. So, there is a great deal of potential to install energy-efficient, cost-effective systems in office buildings that would reduce monthly utility bills.

Often buildings that could benefit the most from energy efficiency upgrades face the steepest barriers to adoption. Evidence suggests that Class B and C commercial office buildings, which typically are older buildings with fewer amenities (particularly those not professionally managed) can sometimes be at a significant disadvantage when it comes to accessing upfront capital for energy efficiency retrofits compared to Class A buildings.

Today, the vast majority of energy efficiency improvements in multi-tenant spaces is covered through traditional finance mechanisms and self-finance. Driving demand for efficiency improvements is in some cases more important than creating attractive financing mechanisms. However, there are also owners with credit constraints (likely Class B and C, particularly non-professionally managed subsectors) that may be swayed by more attractive financing opportunities.

Various energy-efficiency specific financing mechanisms have been created to help these property owners gain access to funding. The chart below outlines existing financing mechanisms and the barriers addressed. On-bill financing and repayment allows tenants to pay for energy efficiency upgrades through a charge on the utility bill. Energy service companies and energy service agreements provide a turnkey approach to project development, simplifying the retrofit process for owners. Many of these mechanisms still lack substantial market experience, but they increase access to energy efficiency finance and are a great base for building financing mechanisms of the future.

Energy Efficiency-Specific Lending Mechanisms

ACEEE’s report, Financing for Multi-Tenant Building Efficiency: Why This Market is Underserved and What Can Be Done to Reach It , explores the barriers to and opportunities of using financing measures for energy efficiency in multi-tenant, commercial office spaces. The report provides an in-depth look at the barriers and potential solutions to energy efficiency investment in commercial-leased space markets in the United States, particularly the commercial office market. It provides an overview of the commercial office market in the United States and explores how different owner-manager-tenant structures and relationships impact split incentives. The report also discusses the extent to which financing mechanisms can address specific barriers to energy efficiency investment, making retrofit investments feasible for a larger population.