New Pilot Program is a Winn-Win for Owners Looking to Retrofit
Back in July, WinnCompanies announced the launch of the Open Market ESCO, a pilot program that will finance energy-efficient retrofits for low-income housing and allow apartment owners to pay for the upgrades through reduced energy costs. The $9 million pilot program, a collaboration with the Local Initiatives Support Corporation (LISC), was established in part with a $5.25 million grant from HUD’s Energy Innovation Fund.
To qualify for the program, low-income housing communities must have the potential to save at least 20 percent on their energy costs through eligible retrofits. Owners will not take on new debt or incur significant upfront costs that would typically be associated with such retrofits. Instead, the costs are covered by monthly energy savings, with a portion of savings being shared with the owners.
The Open Market ESCO program has begun operations in three states -- Massachusetts, Connecticut, and New York City. As of presstime, Winn had already completed audits of more than 4,000 potential units. As Vice President of Energy and Sustainability at WinnDevelopment, Darien Crimmin has played a big role in the implementation and early success of the program. The five-year company veteran sat down with Operations Insights recently to talk about this effort.
What follows is our chat:
NATIONAL APARTMENT ASSOCIATION: Mr. Crimmin, could you please describe this program in basic terms for our readers?
DARIEN CRIMMIN: Sure. We’ve created an energy financing program that allows us to access a loan fund to pay for energy upgrades in affordable multifamily properties and capture the energy savings to repay that loan. It’s not a loan to the building owner, but a loan to the ESCO. The ESCO will actually come in and build or retrofit or upgrade in cooperation with the building owner. But it’s a slightly different model than the typical ESCO where the building owner is really on the hook for getting the financing. We bring the financing to the building owner and basically keep it off the balance sheet of that property. That services agreement allows us to navigate around some of the regulatory hurdles specific to affordable housing, such as restrictions on secondary mortgages or distributions that are typically in the way for energy retrofit financing.
NAA: What was the general thinking behind the creation of such a program?
DC: There has been a need and a desire for the past decade for HUD to really focus on greening their portfolio, which is basically the entire affordable housing stock in the country. One of the ways to do that is to make sure that capital is available. There needs to be money out there that is accessible for building owners, but the availability of third-party energy retrofit financing is relatively rare. It’s kind of hit or miss in affordable housing. HUD recognized this and created their Energy Innovation Program. Our program is piloting one model that enables private capital to come into these developments and pay for the retrofits using future energy savings. It’s pretty risk-free for the building owner.
NAA: What has been the biggest challenge so far in implementing the program?
DC: There have been a number of challenges. First of all, we are selling these services outside of the core, Winn-owned properties that we are most familiar with. We’re offering this program to third-party owners whose buildings we manage and also to owners we don’t have any affiliation or connection with at all. So, part of the challenge is finding the sweet spot and selling to owners who are very busy but also want to invest in green measures and are interested in the concept. Because most of the savings are required to repay the ESCO loan, it’s a challenge to find the right economic incentive for building owners. A lot of building owners assume they’ll get 50 percent of the savings. Well, 50 percent of the savings is a lot! With the low price of electricity and natural gas affecting the economics of efficiency projects, the savings are tight and the margins aren’t THAT great. As we’re piloting this program, we want to demonstrate that this model works. We’re trying to identify the best physical buildings to retrofit, and at the same time, we need the best owners. We need innovative third-party partners willing to try something new.
NAA: For you personally, what has been the most rewarding part of this whole odyssey?
DC: Being on the cutting edge of how we investi in energy efficiency and how we approach the whole marketplace for efficiency. Part of our program is focusing on which contractors are out there providing different services. We’re building a qualified contractor network: vendors that we have either used before or are vetting right now, that we can reach out to and trust to do the actual work - construction, energy auditing, the design-engineering, commissioning, or whatever it might be. There is so much variability in the quality and the price of contractors within the green retrofit space. It’s astounding actually. From a cost/benefit and payback perspective, the upfront costs really matter. If you don’t bid out the project aggressively and end up getting overcharged 10 percent, that 10 percent really matters when you compare it to the savings you are expecting. The extra savings don’t go up 10 percent if you get overcharged 10 percent. The savings are fixed no matter what, so it really matters if you can bring down the upfront costs by more transparency, more competition, and more rigorous vetting of those contractors. That’s one of our strategies and one of the most exciting parts of this program – to continue to build our vendor network and strengthen the energy retrofit industry.
NAA: So, what has been the biggest benefit for residents so far?
DC: One of the ways residents have benefited directly from our program is where we have installed insulation. We know that it is going to save energy, but we also know it’s going to make the apartments more comfortable in the winter and cooler in the summer.
NAA: If we were to chat a year from now and you look back on the previous 12 months, how will the program have been a success?
DC: In addition to completing many specific milestones – and the program has over 50 milestones that we have targeted – we’re learning so much about how to underwrite energy-efficient savings and how to build transparent models to help shape future energy policy. From the perspective of HUD, state agencies and public utilities programs, we are helping to provide real case studies from the front lines of energy retrofits, which will inform public policy and help create the right incentives and mechanisms to make sure energy efficiency and renewable energy continues to be adopted.
By Teddy Durgin
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