Earlier this year, San Francisco’s Existing Commercial Buildings Energy Performance Ordinance went into full effect. Buildings with a gross area of 10,000 square feet and up are now required to benchmark their energy consumption annually and perform energy efficiency audits once every five years. With thousands more audits slated to happen over the next two years, what kind of energy savings might we expect to see from this simple reporting requirement? And what tools are available to help property owners make identified efficiency improvements?
First, some background: In the last decade, San Francisco has adopted ambitious legislation, policy initiatives and programs to support green and energy efficient buildings. A number of these goals responded to the city’s 2004 Climate Action Plan, which called for major reductions to city greenhouse gas emissions — and revealed that nearly 50 percent of San Francisco’s greenhouse gas emissions came from buildings’ use of energy. In 2008, the Green Building Ordinance required that new commercial and residential developments — as well as large renovations to existing buildings — meet credible, third-party-verified green building standards. In 2011, recognizing that new buildings and major renovations only account for 1 to 2 percent of total square footage in San Francisco buildings each year, the San Francisco Board of Supervisors adopted an energy performance ordinance for existing buildings. Energy audits required by the ordinance assess the energy consumption of a property and identify a spectrum of energy efficiency upgrades a property owner can make to improve overall building efficiency, reduce energy use and lower utility costs.
So far, the first 195 building audits performed to comply with the ordinance have identified 32 megawatt-hours of potential annual energy savings, with a value of $6 million. Two thousand more audits will be due over the next two years, with full implementation covering 152 million square feet of floor area space. These audits are likely to identify millions more in potential energy savings: According to the National Renewable Energy Laboratory, identifiable energy savings in the office portfolio ranges from 28 to 44 percent. An EPA study that followed 35,000 buildings that benchmarked energy performance found an average savings of 7 percent over four years. It’s reason for optimism that the old adage is true: We manage what we measure.
One of the biggest challenges in translating energy performance information into comprehensive efficiency retrofits is cost. So, in coordination with the energy performance ordinance, the city created GreenFinanceSF, San Francisco’s own PACE program, to deliver accessible, low-cost capital for clean energy projects. PACE, which stands for “Property Assessed Clean Energy,” is a municipal financing program that allows a property owner to borrow money for energy efficiency, renewable energy and water conservation improvements and pay it back over time through a special property tax assessment. As of 2013, PACE operates in more than 25 states and 413 municipalities and has provided more than $37 million in financing to commercial property owners nationwide.
The basic idea behind PACE is not new. Public financing of improvements and services, such as infrastructure for master planned developments, was first introduced by the California legislature with the Community Facilities Act of 1982, more commonly known as the Mello-Roos Act. In a Mello-Roos district, participating property owners pay special additional property taxes to recover the cost of financing public improvements like water, drainage and parks. In 2007, modeled after Mello-Roos districts, the City of Berkeley established an Energy Efficiency Financing District enabling the city to raise money through the issuance of bonds to fund clean energy projects that would be repaid over a set number of years as a special tax on participating owners’ property tax bills. Like Berkeley’s model, GreenFinanceSF, which first launched in 2010, was originally designed to provide up to 100 percent financing for both residential and commercial property owners. However, in mid-2010, the Federal Housing Finance Agency effectively banned Fannie Mae and Freddie Mac from buying or holding mortgages from residential properties with PACE assessments. (Recently, California governor Jerry Brown sent a letter to FHFA proposing to establish a $10 million residential PACE reserve fund.) Following these rulings, GreenFinanceSF and the national PACE movement began to focus solely on commercial properties.
Here’s how GreenFinanceSF works today: A property owner of a commercial building in San Francisco requests an energy audit from a qualified business, which identifies ways the owner can improve the energy efficiency of his or her building. Then, the property owner applies to participate in GreenFinanceSF, which can offer qualified property owners 100 percent financing for the project and related costs, such as engineering and permits. Just like a Mello-Roos district, funding for qualified PACE projects comes from the issuance of bonds purchased by private investors. GreenFinanceSF uses an open market PACE model, which allows property owners to negotiate specific terms with qualified lenders willing to provide the capital for their project. The repayment obligation is attached to the property and repaid as a property tax assessment for up to 20 years.
GreenFinanceSF has many benefits over traditional methods of financing building improvements. Credit underwriting is based on property value instead of the personal credit of the applicant, which can make financing more broadly accessible. Since repayments for the project are tied to the property and not the owner, the obligation automatically transfers at sale to the new owner. PACE repayments can also be transferred to tenants because they are structured like other property taxes and assessments. Furthermore, the relatively low interest rates and longer terms typically generate positive cash flow within the first year. Last fall, GreenFinanceSF closed $1.4 million in financing for a comprehensive energy efficiency and solar energy project for Prologis Inc. The Pier 1 efficiency project is projected to cut building energy use by 32 percent and save the owners $98,000 a year in utility costs.
GreenFinanceSF has worked closely with San Francisco Energy Watch to build relationships with local contractors, as well as energy performance ordinance auditors to begin an audit-to-action plan, aimed at making it clearer and easier for property owners to act on their audits. GreenFinanceSF is also working to educate business and building owners about the cost savings available through energy retrofits. Looking forward, GreenFinanceSF is working with financial institutions to establish a financing platform for smaller projects (under $500,000); this effort overlaps with new authorizations that allow GreenFinanceSF to provide financing for seismic upgrades (in the $100,000 range, so also considered small) required by the mandatory Soft-Story Retrofit Ordinance, which SPUR strongly supported. The resiliency of our city is highly dependent on improving existing city infrastructure, and the suite of services, information, incentives and financing offered through SF Environment’s commercial building programs should help accelerate that process.