Policy Assistance for Engaging Small Lenders

by Matt McNerney, ACEEE

On December 2, 2014, the American Council for an Energy-Efficient Economy (ACEEE) and Energi Insurance, with support from the MacArthur Foundation, hosted the second Small Lenders’ Energy Efficiency Community (SLEEC) gathering in Washington, D.C. Coinciding with a recent uptick in activity for multifamily efficiency, the meeting brought together around 20 key stakeholders, the majority of whom are direct lenders to multifamily energy efficiency projects, to discuss barriers and opportunities to approach financing for this market.

This past September both the Fannie Mae Multifamily Energy and Water Market Research Survey and the Energy Star Score for Multifamily Housing were released. Together these mark huge strides for multifamily energy efficiency, as both seek to catalyze market activity. ACEEE and Energi hope to build on this momentum by bringing together the small lender community through SLEEC and by learning from their perspectives in approaching multifamily homes. Although it shares many similarities with other property types, multifamily housing is a unique market.

Variability in the marketplace prohibits blanket approaches to financing. One attendee suggested that the difference between subsidized and unsubsidized properties alone is enough to fill the agendas of two meetings, as the two necessitate such fundamentally different financing models and attract dissimilar lenders. Beyond inconsistencies in property types, there is a perceived disconnect between qualified lenders attracted to multifamily energy efficiency projects and interested creditworthy property owners. Yet, as mentioned, there are similarities between financing energy efficiency in multifamily and other properties, especially in barriers to financing. In fact, several key takeaway points from the first SLEEC gathering in October 2013 were echoed in the December 2014 convening, including a need to overcome regulatory hurdles and a lack of standardization throughout the process.

In addressing these barriers and others, mission- and nonmission-driven lenders alike see the proliferation of one-stop shop models, such as Energy Savers in Chicago, as critical in moving the multifamily energy efficiency financing market toward maturity. Successful one-stop shop models present lenders with the opportunity to approach multifamily projects with greater assurances. Lenders can expect a reliable return on their investment through flexible but standardized models. They are flexible in that they are able to adjust to a wide range of ownership structures and property liens, yet there is uniformity throughout the process—from energy audits and third-party reporting, to data collection, measurement and verification (M&V), and rates. Standardization, where possible, is especially important in scaling the multifamily market, as it will increase the viability of lending opportunities, which will likely attract more lenders and investors to the space.

What makes Chicago’s Energy Savers such a successful one-stop shop is the partnership between the Community Investment Corporation (CIC) and Elevate Energy. CIC, a community development financial institution, handles the financing side of the process by securing funding and underwriting, while Elevate Energy, a nonprofit, manages the projects by assisting with energy audits, lining up utility incentives, hiring contractors, and conducting M&V. The formation of more successful partnerships such as this one is fundamental in moving one-stop shops to a national scale.

Along with one-stop shops, lenders are calling for alternative access to the multifamily market. We often hear in this space that the money is available but the demand for financing is lacking. Often, however, demand is present but the project is not deemed creditworthy or viable by traditional lending standards. Organizations providing alternative underwriting and credit enhancements are able to provide access to a wider range of multifamily projects. Although less-traditional underwriting and credit may lead to higher default rates, they are proving alternative models work. This is another aspect of the multifamily energy efficiency space where successful partnerships between alternative underwriters and more traditional lenders would be a welcome step in expanding the market.