Despite the long-term cost effectiveness of most energy-saving interventions, these measures often carry high up-front costs -- sometimes called "first costs" -- that present a barrier to their widespread adoption, particularly among low- and moderate-income families and developers and owners/managers of affordable housing, who often operate on a very narrow cost margin. Specialized financing products that account for the longer-term benefits associated with energy-efficiency upgrades help to spread these first costs over a longer time period, making upgrades more affordable to borrowers who may have limited up-front capital. The availability of these products may mean the difference between making or not making the type of comprehensive changes that significantly reduce home energy consumption. As an additional benefit, some of the products described in this section help to address an obstacle known as the "split incentives" problem. The split incentives problem describes a scenario in which the party responsible for covering the costs associated with energy-efficiency improvements does not directly benefit from those improvements -- for example, owners of rental properties with individually-metered units would have responsibility for | Portland Place, Minneapolis MN -- Photo courtesy of LHB, Inc. |
For example, energy efficient mortgages (EEMs) build on traditional home mortgages by factoring into underwriting standards the cost of energy-saving improvements and the anticipated cost savings associated with those upgrades. Property Assessed Clean Energy (PACE) financing and on-bill financing models add an assessment for implementation of energy-efficiency measures to existing municipal or utility bills, lengthening amortization schedules to increase affordability, streamlining repayment and keeping the responsibility for paying for upgrades with the property, rather than the household. Many communities also offer low-cost loans or grants to reach low- and moderate-income families and the developers and property owners that serve them. The widespread adoption of any of these financing tools depends in large part on the availability of reliable data on pre- and post-retrofit energy usage, which enables property owners and investors to have a high level of confidence in projected performance following implementation of various energy-saving measures. In the absence of a representative dataset, lenders and other financial institutions may view financing tools that support energy-efficiency upgrades as too risky. Learn more about benchmarking energy use. | In 2010, the National Housing Conference hosted the Partners in Innovation preservation forums, a series of three regional forums focused on strengthening and supporting affordable rental housing preservation efforts through innovative partnerships, policy development, and legislative reform. The regional forums took place in Boston, MA; Portland, OR; and Denver, CO in 2010. View the following presentation on tools to finance energy efficiency from the Partners in Innovation: Preserving Affordable Rental Housing Through Energy Conservation in Boston on April 14, 2010.
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Learn more about low-cost financing for energy efficiency Go back to learn about other policies that improve residential energy efficiency |
Split incentives and the assisted housing stock As in many market-rate properties, tenants in Low Income Housing Tax Credit-financed units often pay their energy bills directly to the utility, based on actual monthly usage. When property owners calculate the eligible rent for these units, they must factor in a standard "utility allowance" that accounts for this payment to ensure that gross rent does not exceed 30 percent of the targeted household income level. Until recently, property owners had a limited set of methods for establishing these utility allowances, and most relied on estimates generated by the local public housing authority for Section 8-subsidized units. These "comparable" units tend to be older than Tax Credit units, resulting in inflated utility allowances -- particularly in highly efficient buildings, reducing the resulting rental funds available to the building owner to support building operations. A new option, made effective in final regulations published January 2009 (with additional guidance issued in May 2009), allows property owners to work with a licensed engineer or energy rater to determine utility allowances. This Energy Consumption Model accounts for building-specific factors such as unit size, design and materials, mechanical systems, and appliances, and should result in more accurate utility allowance calculations in newer developments and at properties where the owners have implemented energy-efficiency retrofits and other energy-saving measures. Lower utility allowances mean that property owners may collect additional rental income to pay for the energy-efficiency upgrades or cover other operating and maintenance costs. View a discussion on the HousingPolicy.org Forum that addresses this issue in greater detail. |
Click on the links below to learn more about tools for financing energy efficiency: Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements |
EEMs enable homeowners who lack the upfront funds for upgrades to borrow these additional costs, providing lower-cost financing payable over the term of the mortgage. Moreover, interest charged on EEMs qualifies for the mortgage interest deduction, enabling borrowers with sufficient income to receive an additional tax subsidy. Existing EEM instruments offer several mechanisms through which borrowers can qualify for financing that rolls in the cost of energy-efficient improvements, including:
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Currently operating as a pilot program in several states, the Energy Star Mortgage provides financing on favorable terms for homeowners wishing to make upgrades to enhance the energy efficiency of existing homes and homebuyers purchasing a new, Energy Star-qualified home. The Energy Star product wraps the cost of energy-efficiency investments into the loan; participating lenders further customize loan terms, including determining eligible expenses and choosing which incentives to offer in order to lower the borrower's financing costs. Incentives may include discounted interest rates or loan fees, closing cost assistance (for new mortgages), and -- as in many other EEMs -- an extension of the allowable debt-to-income ratio, among others. Owners of existing homes must receive a pre-improvement audit through a Home Performance with Energy Star or Weatherization program in order to participate in the program, and targeted energy-efficiency improvements must be made under one of these two programs with the intent of achieving a 20 percent savings in energy costs. Click here to leave this site and learn more about Energy Star Mortgages. |
Location-Efficient Mortgages As the name suggests, lenders that offer location-efficient mortgages (LEMs) factor in a home's location when determining the mortgage amount for which a household qualifies. The rationale behind a LEM, a product distinct from but conceptually related to an EEM, is that families living in walkable, urban communities or in close proximity to public transit rely less on personal vehicles, thereby reducing their transportation costs and increasing discretionary income. To account for these cost savings, LEMs' flexible underwriting standards allow families to qualify for larger loans than they might otherwise be granted. LEM lenders add the predicted savings, calculated using land-use and other data, to families' income and permit a more-generous qualifying ratio. In addition, location-efficient mortgages typically require a relatively low downpayment, making it easier for families to get into homes they may not otherwise be able to afford. Allowing families to qualify for larger mortgages than they would ordinarily be eligible for may appear to be anachronistic, given the recent mortgage foreclosure crisis. However, recent analysis of foreclosure rates and location efficiency by the Center for Neighborhood Technology, as reported by the Natural Resources Defense Council, suggests a significant relationship between the two. Researchers looked at performance data for 40,000 mortgages in Chicago, Jacksonville, and San Francisco and found that the likelihood of mortgage foreclosure increased with neighborhood vehicle ownership levels (a proxy for location efficiency), controlling for household income, debt-to-income ratio at mortgage origination, and other key factors. By adjusting underwriting standards to account for neighborhood-level differences, lenders can offer products that reflect risk levels on a more fine-grained basis. Click here to access the report [PDF]. Location-efficient mortgages have not yet achieved significant market share; however, Fannie Mae currently offers LEMs up to $300,700 in four metropolitan areas -- click here to learn more. While experience with LEMs is limited, in theory, one would expect that the widespread adoption of LEMs could have different effects in strong and weak markets. In weak markets, the higher borrowing power associated with LEMs could stimulate reinvestment in location-efficient areas, leading to revitalization and housing stock improvements. In strong housing environments, where the ability of the private market to develop new or renovated housing is often constrained by the regulatory environment and shortages of available land, it is possible that widespread use of LEMs will simply drive up the price of housing in location-efficient areas, without improving housing quality or overall affordability, by increasing all families' borrowing power equally. |
You are currently reading: Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance Other pages in this section: Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements |
Click on the links below to learn more about special assessment programs:![]() Work with utilities to offer on-bill financing, allowing customers to pay for energy improvements and realize energy savings on one statement Offer Property Assessed Clean Energy (PACE) financing programs that tie payment for energy-efficient improvements to the property |
You are currently reading: Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage Other pages in this section: Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements |
Like PACE programs, the contractors or whoever will complete the energy-efficiency upgrades receive upfront payment from the program sponsor, although repayment occurs through utility bills, rather than payments to the local government. Because of this arrangement, the cost of the improvements and the post-improvement savings cancel each other out on the same statement -- a potential benefit as compared with property assessment financing, which requires homeowners to pay a special assessment on a tax or other municipal bill but accrue savings on a separate utility bill. Public benefit funds may be used to capitalize on-bill financing programs or to establish a loss reserve fund to cover late or default payments; however, while utilities or public entities integrate the billing for these programs, they do not typically serve as a lender or a guarantor of program costs -- a role outside of most utilities' purview. Instead, loan portfolios can be managed by an array of institutions or through public-private partnerships, some of which may also provide upfront funds. Failure to pay the assessed fee may trigger the same penalties as failure to pay standard energy usage charges. [1] While administered by utilities, states and localities can facilitate adoption of on-bill financing through several channels, as described in a policy brief from the Alliance to Save Energy:
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Midwest Energy is a customer-owned energy cooperative based in rural Kansas. Available to Midwest Energy's 88,000 electric and/or gas customers, the How$mart program enables consumers to pay for investments in energy-efficiency, including insulation, sealing, and heating and cooling systems, through a charge on their utility bill. Both homeowners and renters (with landlord permission) may participate in the program. Participants receive a free home energy audit, which is used to determine the most cost-effective improvements. The program covers the upfront cost of the improvements; however estimated savings must be greater than the monthly surcharge. (Not all improvements identified in the audit yield sufficient savings to be eligible for How$mart financing -- where estimated savings fall short of the improvement costs, residents may "buy down" the balance by paying for the difference on their own. [3] In the event that the initial homeowner moves, the payment obligation transfers to the new owner. The program was initially offered as a four-county pilot, and opened to all Midwest Energy customers in the summer of 2008. As of June 2010, some 400 customers had enrolled in the program. Click here to leave these site and learn more. |
Potential barriers to participation in an on-bill financing program Two utilities in New Hampshire, New Hampshire Electric Cooperative and Public Service New Hampshire, implemented an early on-bill financing program, now named Smart$tart. (The program originally applied to residential customers, but is now available to commercial customers only.) As reported in a policy brief from the Alliance to Save Energy, a survey conducted 18 months after inception identified several potential barriers to participation, including:
| Photo credit: Mark Ballogg, Ballogg Photography, Inc.; courtesy of Landon Bone Baker |
Solutions in Action |
NYSERDA's On-Bill Financing Program The Power New York Act signed into law in August 2011 includes a provision authorizing the use of on-bill recovery for residents to finance home energy retrofits. The on-bill financing option is an addition to the Green Jobs Green New York (GJGNY) program created in 2009, and will be administered by the New York State Energy Research and Development Authority (NYSERDA). The legislation requires that all combination gas and electric corporations with annual revenues greater than $200 million in billing and collection must enact an on-bill financing option. The primary funding for the on-bill financing program will be provided by a revolving loan fund created by the original GJGNY legislation. This fund was created using a portion of New York's Regional Greenhouse Gas Initiative (RGGI) funds (RGGI is the 10-state cap-and-trade agreement established in 2008). There is $26 million in this revolving loan fund designated for two residential financing programs: 1) the Home Performance with ENERGY STAR Loan Program, launched in November 2010, and 2) the on-bill financing program. The legislation requires that the on-bill recovery program is operational by summer 2012. For updates on the development of this innovative program, click here. |
Click on the links below to learn more about special assessment programs: Work with utilities to offer on-bill financing, allowing customers to pay for energy improvements and realize energy savings on one statement Offer Property Assessed Clean Energy (PACE) financing programs that tie payment for energy-efficient improvements to the property |
You are currently reading: Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage Other pages in this section: Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements |
Those who choose to participate re-pay the advance over time (typically 15 to 20 years), generally through an annual assessment on their property tax bill. As a result of the extended term, minimal or nonexistent up-front costs, relatively low interest rates, and anticipated savings on utility bills, PACE programs allow property owners to avoid increased bills, even while repaying the cost of improvements. [2] The use of an established, reliable payback mechanism such as a property tax assessment streamlines the process for the owner and the municipality alike. [3] As of July 2010, some 22 states had adopted enabling legislation to allow local PACE programs and at least four communities had issued their first PACE bond (Berkeley, CA; Palm Desert, CA; Boulder County, CO; and Babylon NY). [4] According to a White House memo, "if only 15 percent of residential property owners nationwide took advantage of clean energy community financing, the resulting emissions reductions would contribute 4 percent of the savings needed for the US to reach 1990 emissions levels by 2020." | Solutions in Action |
In March 2010, Racine, Wisconsin launched the Midwest's first active PACE program, developed in partnership with the Center on Wisconsin Strategy (COWS) and the Delta Institute. The Racine Energy Efficiency Program (REEP) was capitalized with $500,000 from the City of Racine's Energy Efficiency and Conservation Block Grant allocation, and will cover the upfront cost of energy-efficiency improvements to single-family homes and duplexes built between 1946 and 1975 that have total energy- and water-consumption costs of at least $1,700/year. Participating homeowners may have payments directly debited from a bank account, or may remit monthly payments using coupon books from the city. REEP targeted an initial group of 10 homes at launch, with plans to support up to 100 projects. Click here to leave this site and learn more. |
A memo available on PACENOW, a website created to advocate for PACE programs, addresses this and other issues. Among other points raised in the memo, the authors note that in the event of a foreclosure most states require repayment only of back taxes owed, followed by repayment of the mortgage. Limiting liability to any amount in arrears, provides protection to mortgage lenders. In general, then, only a very small percentage of the overall home value would get paid ahead of the mortgage balance. The authors also point out that adoption of PACE programs generally leads to increases in home values, and savings on utility bills help to strengthen borrowers' ability to repay any loans, reducing the likelihood of default. As some practitioners have noted, municipalities may be reluctant to implement PACE programs using certain federal funding sources, including ARRA, for fear of triggering prevailing wage (Davis Bacon Act) requirements that specify a minimum compensation level for workers carrying out contracts. These requirements do not apply to individual homeowners participating in PACE programs -- click here to view guidance from the Department of Energy on prevailing wage requirements for individual homeowners [PDF]. | Federal challenges to PACE programs Statements issued by the Federal Housing Finance Agency and Fannie Mae and Freddie Mac may pose significant challenges to local communities wishing to adopt PACE programs. Click here for updates and to view a Forum discussion on this topic. |
Recommendations for PACE Financing Programs Adapted from Policy Framework for PACE Financing Programs [PDF]
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In 2010, the National Housing Conference hosted the Partners in Innovation preservation forums, a series of three regional forums focused on strengthening and supporting affordable rental housing preservation efforts through innovative partnerships, policy development, and legislative reform. The regional forums took place in Boston, MA; Portland, OR; and Denver, CO in 2010. View the following presentations from the Partners in Innovation: Preserving Affordable Rental Housing Through Energy Conservation in Boston on April 14, 2010.
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Click on the links below to learn more about special assessment programs: Offer Property Assessed Clean Energy (PACE) financing programs that tie payment for energy-efficient improvements to the property ![]() Work with utilities to offer on-bill financing, allowing customers to pay for energy improvements and realize energy savings on one statement |
You are currently reading: Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage Other pages in this section: Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements |
Interest rate buy-down programs make it more affordable for borrowers to finance energy-efficient improvements through public subsidies that reduce interest rates on loans issued by participating lenders. Several states have implemented energy-efficiency interest rate buy-down programs, including New York, Louisiana, and Alaska, offering repayment periods ranging from one to 15 years and interest rate reductions from 25 to 650 basis points (100 basis points = a one percentage point reduction, i.e,. from 6 to 5 percent). [1] Some of the considerations relevant to designing a program of this nature include:
Potential barriers to adoption of interest rate buy-down programs
| Solutions in Action |
Photo credit: Todd France Photography, courtesy of Common Ground The New York Energy Smart Loan Fund program, one of many programs administered by the state's Energy Research and Development Authority (NYSERDA), provides an interest rate reduction on loans from participating lenders used to finance energy-efficiency measures and renewable technologies. In most parts of the state, borrowers can receive a reduction of 4 percent (400 basis points) below the normal market interest rate over a 10-year loan period. Partnering banks receive a lump sum payment in the amount of the subsidy when the loan closes, with project funding coming through a public benefit fund administered by NYSERDA. Owners of existing single-family homes may receive loans of up to $20,000 ($30,000 for Con Ed customers); owners of existing multifamily buildings are eligible to receive $2.5 million ($5,000 per unit) plus an additional $2.5 million for projects with advanced meters that help reduce peak-load energy use. Developers of new multifamily construction are also eligible to participate in the program and may receive loans up to $1 million plus an additional $500,000 for Green Building Improvements when the building achieves LEED certification. All improvements financed by the program must be included on the program's Eligible Measures List and, with the exception of appliance installation, must be completed by a pre-approved contractor. |
Solutions in Action |
In May 2009, the New Jersey Housing and Mortgage Finance Agency (HMFA) announced an array of initiatives to be supported with $73.6 million allocated to the state for energy-efficiency programs through the American Recovery and Reinvestment Act. Among other initiatives, the announcement noted an $8 million low-interest loan program for energy-efficiency improvements in single-family and multifamily homes. Households earning up to 250 percent of the area median income may apply, as well as the owners of multifamily properties that meet HMFA's affordability requirements. The agency plans to feed loan repayments back into the program in order to finance energy-efficiency improvements for additional borrowers. |
You are currently reading: Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements Other pages in this section: Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage |