Provide Low-Cost Financing
Why is it important to provide financing?
Green building techniques have been shown to reduce operating and maintenance costs for new and existing buildings, generating significant cost savings over the life-cycle of a home. The payback period -- i.e., the length of time over which energy-efficiency retrofits or construction techniques pay for themselves through utility cost savings -- varies widely and depends on a variety of factors, including the initial condition of the building (for existing homes), the cost of purchasing and installing specific upgrades, and energy price levels after the upgrades have been completed. In general, however, the typical payback period for general energy-efficiency improvements has been estimated at three to ten years, while comprehensive "whole house" improvements have been estimated to pay for themselves over a five to twelve-year period.
| 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. |
What tools are available to finance energy efficiency?
Up until the recent economic downturn, homeowners looking to finance energy-efficiency improvements may have taken out a second mortgage or a home equity line of credit -- products that may be much more difficult to access in the wake of the recent mortgage foreclosure crisis. Personal unsecured loans and credit cards have served as another financing option to cover the cost of energy-efficiency improvements; however, today especially many families cannot qualify for or afford these loans, which often carry relatively high interest rates and strict lending criteria. The tools described in this section, which in many cases have been modeled on traditional lending instruments or payment processes, provide options for financing investments in energy efficiency under favorable terms. (Click here for more information on federal funding sources for energy efficiency.)
| 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.
|
Where is this most applicable?
As with traditional financing products, the tools discussed in this section may be useful to families in new and existing homes in communities across the country. The geographic diversity of the organizations pioneering many of these programs illustrates their broad applicability.
| Learn more about low-cost financing for energy efficiency Go back to learn about other policies that improve residential energy efficiency |
Successful energy-efficiency financing tools rely on a concept known as "life-cycle costing." Traditional financing methods consider only the up-front costs of new development, such as building design and construction, without factoring in the reduced energy consumption and projected savings associated with high-efficiency buildings. In contrast, a life-cycle costing approach takes a longer-term view, accounting for prospective operating and maintenance costs over the life of the building in addition to the initial first costs of the upgrades.
| 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 |
Goal: Improve Residential Energy Efficiency
Policy: Provide Low-Cost Financing
Make Available Energy Efficient Mortgages
Policy: Provide Low-Cost Financing
Make Available Energy Efficient Mortgages
Energy efficient mortgages (EEMs) allow homebuyers or owners who are refinancing or taking out a new purchase mortgage to add the cost of energy-efficiency improvements to the loan, often stretching debt-to-income ratios so that borrowers may qualify for a larger loan. Similar programs are available for new construction, allowing greater latitude for borrowers who demonstrate that their homes exceed model code requirements. (A variation on this theme is to provide a second mortgage to finance the improvements, while leaving the first mortgage intact.)
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:
| Solutions in Action |
| 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. |
Potential barriers to adoption of energy efficient mortgages
While energy efficient mortgages are not new, they have not yet broken into the broader market in a meaningful way. A recent evaluation of HUD's Green Building efforts by the Government Accountability Office revealed several barriers that may prevent more widespread use of the FHA products -- barriers that may apply to EEMs in general.
- Added time -- For programs that require inspections by a rater before and/or after the improvements have been carried out, the additional time associated with these inspections has been identified as a potential obstacle to their widespread use. However, the recent slowdown in home sales could serve to mitigate this concern, with real estate agents more likely to accept delays that help to close sales in a slumping market.
- Availability of qualified raters and contractors -- Lenders may require that audits be carried out by a Home Energy Rating System (HERS) accredited rater or that work be conducted by a certified contractor. (Learn more about supporting an energy-efficiency workforce.)
- Lack of awareness -- A critique of HUD's energy efficient mortgage programs issued by the Federation of American Scientists identifies lender and borrower lack of awareness as "the most prominent obstacle to [the] market success" of EEMs. The Energy Star mortgage builds on familiarity with the Energy Star brand to promote the lending product; the resurgence in popularity of FHA-insured mortgages may also help to improve take-up of FHA EEMs.
| 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 |
Goal: Improve Residential Energy Efficiency
Policy: Provide Low-Cost Financing
Offer Special Assessment Programs
Policy: Provide Low-Cost Financing
Offer Special Assessment Programs
The tools discussed in this section -- Property-Assessed Clean Energy (PACE) programs and on-bill financing -- add an assessment for the cost of energy-efficiency measures to existing utility bills or other municipal bills. The cost of the improvements is repaid incrementally, on a monthly or annual basis, to the municipality or utility company.
Special assessment tools help to overcome barriers to energy-efficiency in several ways. First, by extending the payment period for energy-efficiency measures over a decade or more and requiring little or no upfront payment, these programs avoid "first costs" obstacles and can work for families that have limited discretionary income. PACE and on-bill financing programs also tend to have favorable terms, and are often designed so that monthly energy savings equal or exceed monthly program costs, allowing homeowners to break-even or even realize a net benefit on their bills.
These programs also help to overcome the split incentives barrier. Families that take out a traditional personal loan to complete energy-efficiency upgrades retain responsibility for payments even if they move to a new home; this arrangement leads to weakened incentives for energy-efficiency improvements among families that do not plan to remain in the property long enough to benefit from the utility cost savings. PACE and on-bill financing, by contrast, attach the obligation to repay the costs of energy-efficient improvements to the property, rather than to the household. Under this approach, the household pays for the energy-efficient improvements only as long as it remains in the home, largely addressing this particular split incentives issue. (NOTE: A report on PACE programs prepared by the Energy Efficiency Institute recommends requiring movers to repay in full the cost of any measures that have a shorter life span or may move with the resident, such as compact fluorescent light bulbs or window unit air conditioners.)
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 |
On-bill financing programs allow borrowers to pay for energy-efficient improvements through monthly or annual installments on an existing utility bill. Depending on program guidelines, energy-efficiency measures may be selected from a list of approved upgrades, or as the result of recommendations following an energy audit.
| 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:
| Solutions in Action |
| 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$mart financing -- where estimated savings fall short of the improvement costs, residents may "buy down" the balance by paying for the difference on their own. [3] In the event that the initial homeowner moves, the payment obligation transfers to the new owner. The program was initially offered as a four-county pilot, and opened to all Midwest Energy customers in the summer of 2008. As of June 2010, some 400 customers had enrolled in the program. Click here to leave these site and learn more. |
(DOE) and Housing and Urban Development (HUD) has been convened to explore, among other things, the possibility of extending DOE's loan guarantee authority to include the residential sector, a step that could help to encourage institutional participation in an on-bill and minimize the risk that any defaults would result in higher charges for other customers. [2]
| Potential barriers to participation in an on-bill financing program Two utilities in New Hampshire, New Hampshire Electric Cooperative and Public Service New Hampshire, implemented an early on-bill financing program, now named Smart$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 $26 million in this revolving loan fund designated for two residential financing programs: 1) the Home Performance with ENERGY STAR Loan Program, launched in November 2010, and 2) the on-bill financing program. The legislation requires that the on-bill recovery program is operational by summer 2012. For updates on the development of this innovative program, click here. |
| Click on the links below to learn more about special assessment programs: Work with utilities to offer on-bill financing, allowing customers to pay for energy improvements and realize energy savings on one statement Offer Property Assessed Clean Energy (PACE) financing programs that tie payment for energy-efficient improvements to the property |
| You are currently reading: Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage Other pages in this section: Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements |
[1] Paying for Energy Upgrades Through Utility Bills. [PDF] By Matthew Brown. State Energy Efficiency Policies: Options and Lessons Learned - A Series of Briefs. Washington, DC: Alliance to Save Energy.
[2] Secretaries Donovan and Chu Announce Partnership to Help Working Families Weatherize Their Homes. February 27, 2009. Press Release. Washington, DC: U.S. Department of Housing and Urban Development.
[3] CEP Conversations: Michael Volker of Midwest Energy, and their award-winning How$mart energy efficiency program. 2008. Blog Entry. Climate and Energy Project Blog.
Goal: Improve Residential Energy Efficiency
Policy: Provide Low-Cost Financing
Property Assessed Clean Energy (PACE) Financing
Policy: Provide Low-Cost Financing
Property Assessed Clean Energy (PACE) Financing
PACE programs use the proceeds from municipal bond issues or other public sources to provide up-front capital for energy-efficiency improvements in privately-owned buildings. This process resembles the commonly-used practice of establishing a "special assessment district" to fund streetlights or other municipal projects; however, PACE programs target homeowners and cover the initial costs of the private contractors who complete the work. [1]
| 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. |
Legal and other issues associated with PACE
Consistent with most states' policy of granting senior tax liens when used to further a valid public purpose, PACE loans confer upon the funding agency a senior position -- not just on the energy-efficient improvements, but on the entire building undergoing upgrades. [5] As a result, pre-existing lenders lose their priority position -- a feature that may cause concern among first mortgage lenders. (See blue box on Federal challenges to PACE programs)
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. |
Click here to access a webinar hosted by the Department of Energy on December 15, 2009, that provides additional guidance on legal and other issues related to implementation of PACE programs, including precedents for defining energy-efficiency improvements as a valid "public purpose," impact on local governments' general funds, and methods for establishing the seniority of PACE loans. (Scroll down to "Past Webcast Presentations" and look for a webcast titled Legal Issues Regarding PACE Financing Programs to access presentation slides, audio, and a full transcript.)
| Recommendations for PACE Financing Programs Adapted from Policy Framework for PACE Financing Programs [PDF]
|
| 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.
|
| 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 |
[1] Although PACE financing could conceivably be used in multifamily properties, to date we are not aware of any communities where this has been implemented. Please click on the "Contact Us" link at the bottom of this page to submit examples.
[2] PACE Bond Financing for Energy Projects Gaining Favor, Adopted in New York. 2010. By David Abromowitz and Yuanshu Deng. Boston, MA: Goulston & Storrs.
[3] Policy Framework for PACE Financing Programs. [PDF] 2009. Washington, DC: White House.
[4] Financing Program Support for ARRA Recipients: PACE Legal Issues. [PDF] 2009. Webinar presentation prepared for the U.S. Department of Energy.
[5] PACE Bond Financing for Energy Projects Gaining Favor, Adopted in New York. 2010. By David Abromowitz and Yuanshu Deng. Boston, MA: Goulston & Storrs.
Goal: Improve Residential Energy Efficiency
Policy: Provide Low-Cost Financing
Provide Interest Rate Buy-Down Programs and Other Low Cost Loans
Policy: Provide Low-Cost Financing
Provide Interest Rate Buy-Down Programs and Other Low Cost Loans
Some states offer loan programs that provide financial assistance on favorable terms to help cover the up-front costs associated with energy-efficient construction or retrofits. Loans for achieving greater energy efficiency may be marketed to owners of existing homes and multifamily properties for making energy improvements and upgrades or to builders and developers of new homes, depending on local objectives, and may or may not be targeted on low-income families. Qualifying activities vary from state to state, with some areas limiting eligibility to specific measures or technologies while others offer more general requirements related to energy performance. In other cases, borrowers undergo a home energy audit, which identifies recommended upgrades.
As with other incentives programs, the capital for an interest rate buy-down or other lending program can come from a variety of sources, including federal weatherization and energy efficiency programs, revenue collected from public benefit funds, and, less commonly, state and local bond issues and appropriations. In some cases, lending programs can be designed as revolving loans, so that repayment helps to capitalize the next round of loans. Unlike a rebate or tax credit, the money must be repaid; however, borrowers typically benefit from low-cost financing achieved through below-market fixed interest rates, interest rate buy-downs, or other arrangements that states offer in conjunction with private lenders.
Click on the links below to learn more about lending tools:
Interest rate buy-down programs
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. |
Notably, New York's Energy Smart Loan Fund, which offers
interest rate reductions for a term of up to ten years, has a
zero percent default rate.
interest rate reductions for a term of up to ten years, has a
zero percent default rate.
- Current credit environment -- Interest rate buy-down programs do not, on their own, make it easier for borrowers to obtain financing. In the current market, households with limited income or blemished credit could have difficulty qualifying for a loan, leaving them unable to take advantage of this program.
back to top
Low-interest loans
Many states offer low-interest loan programs that support energy-efficiency upgrades in privately-owned single-family or multifamily buildings. These programs are often administered by private nonprofit organizations acting on behalf of a state agency. Program administrators assume responsibility for originating the loans, rather than buying down interest rates on products offered by participating lenders.
For example, the nonprofit Center for Energy and Environment administers two rental rehabilitation programs in Minnesota in cooperation with the state's Department of Commerce and Housing Finance Agency. The Rental Energy Loan Fund, offered with the Department of Commerce, provides short-term (5-year) low-interest loans up to $10,000 to the owners of rental properties to help pay for renovations that increase the energy efficiency of their buildings. Eligible activities include replacement or repair of heating systems and water heaters, installation of insulation or storm windows and doors, and high efficiency lighting. The Rental Rehabilitation Loan Program, offered with the Housing Finance Agency, provides loans of up to $25,000 for single-family and duplex structures and the lesser of $10,000 per unit or $100,000 per structure over a longer-term (15-year) basis for energy-saving and other basic improvements.
| 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. |
back to top
| 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 |
[1] State-Sponsored Energy Efficiency Grant, Loan and Tax Credit Programs. [PDF] 2007. Energy Efficiency Mortgage Program State Working Group Report. Washington, DC: Energy Programs Consortium.
[2] Financial Interventions to Increase Access to Commercial Credit in Developing Economies. [PDF] 2004. Washington, DC: TCG International LLC.