Smart Rehab for MF Properties at No Cost Ravi Malhotra / Matt Naughton Ravi@icastusa.org / MattN@icastusa.org 720-261-1086 / 505-977-6431

ICAST Services Planning Design Construction Management Reporting Assessment of portfolio or property Planning Architect & engineer coordination Design General Contractor Optimizing Building Performance Property Rehab Construction Management Measurement & verification, and certification requirements Reporting Grants, rebates, government incentives, off-balance sheet financing, conventional debt, etc. Financing ResourceSmart November 11, 2018

Multifamily Properties ICAST November 11, 2018

Unlocking Potential Savings “$46 billion invested in MF residential buildings ………… will provide NPV of $80 billion in energy savings.” – McKinsey and Company So let’s dig in – First of all - there is Money to be made by investing in efficiency. According to McKinsey, there’s a lot of money waiting to be saved. Keep this in mind for later in the presentation… What kind of projects are we talking about - How can we do this – start with Low Hanging Fruit, equipment replacement at end of useful life, upgrades for code compliance, utility driven incentives, LIHTC requirements… And finally – through innovative energy financing programs – either at the time of purchase, refinancing, or possibly even mid-stream (STAND ALONE) in a development’s lifecycle

Affordability of Rental Housing A = R + U + H + T Affordability = Rent + Utilities + Health + Transportation ICAST November 11, 2018

Why Go Green? Reduce operating costs Increase value of property Energy, Water, O&M cost savings Increase value of property Increase comfort, health and safety Increase NOI Lower turn-over rates Higher occupancy rates Higher rents Create local jobs Environmental benefits from reduced waste Reduced GHG, Hg, SOx, NOx,… Why Go Green? Whole is Greater than Sum of Parts ICAST November 11, 2018

Use it or Lose it Pay utility company OR Pay for green renovation Current Annual Utility Cost $100,000 Typical Waste/Inefficiencies 25% Annual Waste / Cost of doing nothing $25,000   Inflation Rate for Energy 5% Life of Green upgrades (in years) 10 Money you will pay to your Utility Company $314,447 NPV: $ available for Green upgrades Now $265,000 ICAST November 11, 2018

Cost of Doing Nothing $100,000 $25,000 $9,000 $6,000 $40,000 5% Current annual utility cost $100,000 25% utility savings due to Smart Rehab $25,000 Reductions in O&M costs from green rehab $9,000 Increase in profits due to higher occupancy & lower turnover due to smart rehab $6,000 Total Savings/Year i.e. Increase in NOI $40,000 Cost of Capital 5% Increase in value of property $800,000 Lifetime of Smart Rehab (in years) 15 Total Savings from Smart Rehab $600,000

Trends in MF Green Financing Strategies Unlock the Savings

Basics of Energy Financing Financing allows someone else to pay for Capital expenses Boilers Lighting insulation Solar, etc. Requires repayment from future sources over agreed upon terms Future savings Requires evaluation of Risks, Liability and Security Complex risk management Energy Financing is basically the same thing, you’re looking to pay for work that will save energy and those energy savings will be the source of repayment. Unfortunately - underwriting energy projects is very complex and not standardized.

Complexities of Energy Financing How to accurately forecast savings? Is there data for similar projects proving it will work? What % of savings will be underwritten? What % savings benefits building owner? Is there a need for Guaranteed savings? Unique O&M responsibilities to ensure savings persist over time? Qualifications & Responsibilities of owners, financer, and contractor? What if utility rates change over time?

Funding Sources Off-Balance Sheet Incentives Owner Reserves 11/11/2018 Funding Sources Owner Reserves Debt: Banks, CDFIs, Credit Unions, State HFA, Private Investors Banks/Credit Unions – Require 1st position Prefer large multi $mm project size Agencies (HUD/FHA/State HFAs) and CDFIs – Green rehab loans; Consider all sizes of projects; Typically below-market rate Incentives MACRS Tax Credits/Deductions – ITC, PTC, 179-D, LIHTC Grants Utility Rebates Off-Balance Sheet Energy Performance Contracts (EPC) Power Purchase Agreement (PPA) for Renewables Property Assessed Clean Energy (PACE) On-Bill Financing (Utilities)

Incentive Programs FHA – MIP Reduction + 85% LTV Freddie /Fannie Green Loan Program Solar – 30% ITC + MACRS Grants e.g .WAP , LiHEAP, HOME, CDBG, HTF Utility rebates 179-D federal tax credit,45-L tax deduction LIHTC

Pay-out-of-savings Model

EPC / PFS / PACE Energy Performance Contracts (EPC) ALL – PHAs / USDA-RD / Market Rate Properties Pay-For-Success (PFS) HUD PRAC and Property Based Section 8 Property Assessed Clean Energy (PACE) Only for Solar projects in NM

Summary Smart Rehab is: Financially viable, irrespective of size or location Incentives, Rebates and Grants available as Leverage Having cash reserves is not necessary Eliminates waste to garner savings Non Green Rehab can be funded from Savings Comprehensive, hassle-free, and cost-effective service providers available ICAST November 11, 2018

Questions? Ravi Malhotra / Matt Naughton Ravi@icastusa.org / MattN@icastusa.org 720-261-1086 / 505-977-6431 www.icastusa.org