Category Archives: Innovations and Solutions

Canada could make huge progress in greenhouse gas reduction by retrofitting buildings for energy efficiency. But how would we pay for it?

By Chris Westendorf

With buildings accounting for approximately one-third of all greenhouse gas (GHG) emissions in Canada, primarily through end-user energy use (such as people using heat to warm their homes or offices), it makes sound ecological and economic sense to implement a more sustainable building stock. While comprehensive sustainability standards in new construction are the way of the future, the overwhelming majority of standing buildings are not built to green  standards and will not be replaced any time soon. Given this slow turnover of building stock, there is potential to make immense progress in GHG reduction by retrofitting existing buildings for energy efficiency.

The big problem is how to pay for it. While resources and expertise in terms of the actualities of the retrofit exist in abundance, financing remains a major barrier. Public-sector incentives do help, but usually cover only a portion of significant upfront costs.

Several innovations in retrofit financing that attempt to address this problem have sprung up in recent years. These innovations, which we’ll call “energy-savings financing,” generally involve a structure whereby future borrowing costs are offset by energy savings. The idea is to enable relevant parties to undertake a retrofit without impacting their cash flow. PACE, a model for individual home retrofits in the United States, is a well-publicized version of energy-savings financing.

Unfortunately, a generic retrofit financing model for all building classes is an overly optimistic and impractical dream. Each class of building presents special concerns that may each require a unique energy-savings financing model. The challenges in creating these models lie both in motivating relevant parties through an appropriate cost-benefit structure, and in demonstrating loan security to financial institutions.

Multi-unit residential buildings (MURBs) are a class of buildings that make up over 30 per cent of Canada’s national housing stock and over 50 per cent of the housing stock in cities like Vancouver. Creating a successful model for financing MURB retrofits that is replicable on a widespread scale and meets private-sector financing criteria could have a massive impact on both energy efficiency and GHG emissions.

A major barrier in financing MURB retrofits is the complications involved in arranging and securing financing when dealing with multiple unit-owners, particularly unit owners who may not have plans to occupy their unit for the long term. Entry points for improvement do, however, exist. One point of entry with enormous potential is retrofit financing through MURB strata corporations.

Strata corporations offer the advantage of presenting a single face for debt administrators to deal with. They are also large and stable enough to be considered credit-worthy. As City of Vancouver sustainability manager David Ramslie puts it: “Stratas are actually excellent to lend to because they always pay the bills. They never move; you always know where to find them.” With the power to collect financing payments through strata fees (offset by energy savings) and to register liens against the property of owners who are late in their payments, strata corporations are a one-stop shop when it comes to dealing with the complications of multiple unit owners. Under this structure, owners who leave are also free of obligation, with new owners continuing payments under strata fees while benefiting from energy savings.

A problem with this model, however, is that mainstream financial institutions typically demand that this type of debt be secured with assets. Providing debt security is also an essential prerequisite for locking in long-term interest rates that provide stability. While attaching liens to each individual strata member’s mortgage to secure financing is a possibility, this model is complicated and much easier to implement at the new construction stage. What’s needed is third-party aggregators, retrofit-financing broker companies that specialize in evaluating a strata’s ability to pay based on future energy savings and that can guarantee and bundle financing and spread risk over several projects.

Several public bodies in Canada are already making inroads by acting as functioning aggregators. The Toronto Atmospheric Fund, for example, has facilitated multiple retrofit loans to strata corporations and provided financing to new-building developers to build beyond code for energy efficiency. Once the building is occupied, these added financing obligations are passed on to the new strata. Vancouver has plans to enact a pilot project facilitating MURB retrofits through stratas in 2011. Further public-sector incubation and finance tool development is an essential step in demonstrating and publicizing the business case behind MURB retrofits to both stratas and financial institutions.

In order to optimize conditions for private-sector entry into this field, all levels of government must collaborate to ensure a constant, stable, and encouraging regulatory environment. Ambiguities in strata acts that create uncertainty for lenders need to be addressed. Section 112 in Ontario’s Condominium Act, for example, allows newly elected strata boards for new condos to terminate agreements that previous boards have entered into if those agreements go beyond one year. Strata acts across the nation need to be integrated and refined for this model to flourish.

In a world where “sustainable” and “subsidized” often go hand in hand, the stability of strata corporations, coupled with the undeniable economic value of energy savings, offers a rare and shining beacon of potential for widespread market reproduction. It is important for our policies and incentives in this respect to function like mother hens; warming, protecting, and incubating a potentially market-worthy egg.

(Reprinted from The Mark