If you believe the headlines, there’s a real possibility that an economic recovery may be fueled by green initiatives. For apartments, the promise is that each dollar invested in green will pay off for owners and residents via lower utility bills.
Unfortunately, reality hasn’t lived up to the hype. Comprehensive energy and climate change legislation has faltered in Congress and is unlikely to receive serious consideration in the remainder of the 2010 legislative cycle. While the climate bills that have been proposed present some problems for the multifamily sector, several early versions included promising new incentive programs and grant opportunities for multifamily renovations and retrofits.
Passage of a residential retrofit program seemed inevitable at the start of 2010, and it garnered wide-ranging praise following mention during President Obama’s State of the Union address. The leading real estate stimulus proposals, “Home Star” and “Building Star,” were introduced in 2010 but have been repeatedly delayed or derailed in Congress.
Home Star, nicknamed “cash for caulkers,” was modeled after last year’s popular “cash for clunkers” auto rebate program. The idea? Provide rebates to property owners who complete energy-efficient retrofits. Home Star targeted the single-family market, although multifamily buildings up to four units could qualify. A version of Home Star passed the House in May but has since lost footing in Congress.
Meanwhile, the $6 billion Building Star proposal created incentives for commercial and multifamily buildings, providing direct rebates for the purchase and installation of high-efficiency insulation, window, heating and cooling, and lighting products. The program would also help fund energy audits, operations and maintenance training, and energy performance testing; plus establish a loan program to help initiate Building Star-qualified retrofits. The Building Star program also failed to receive Congressional support in either the House or Senate.
Industry support for both initiatives waned because of a push to limit rebates to projects that follow federal Davis-Bacon laws, which would require employers to pay a minimum wage to all workers, unionized or not. The costs associated with Davis-Bacon could seriously undermine the value of the incentive program: A government report found its requirements harmed the distribution of stimulus funds under last year’s American Recovery and Reinvestment Act and contributed to the anemic pace of $5 billion in Weatherization Assistance Program grants. Budget issues also were a concern, and the bills foundered in Congress because of their expense.
Keeping up the PACE
In the absence of meaningful incentives, apartment firms have explored innovative financing mechanisms to accomplish their efficiency goals. Here, too, the federal government plays an important role in offering new financial tools, and emerging programs can face debilitating barriers without early collaboration.
Consider the Property Assessed Clean Energy (PACE) loan initiative, which was severely handicapped by various federal stakeholders. PACE programs use the proceeds of municipal bonds to extend loans to property owners for energy-efficient retrofits in existing buildings. These loans are repaid through an assessment on the borrower’s property tax bill. Although fairly new, PACE initiatives have been authorized by 22 states and have earned White House support. Further, the U.S. Department of Energy allotted $150 million of federal stimulus dollars to fund PACE programs nationwide.
Despite this support, the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac’s regulator, expressed “significant safety and soundness concerns” over PACE programs in July. FHFA objects to the fact that most PACE loans acquire senior liens over existing mortgage debt; it contends that the risk to primary mortgage holders is unacceptable, should a property owner default on their loan.
In effect, the FHFA objections prohibit Fannie and Freddie from backing mortgages that are subject to PACE financing. Moreover, the FHFA directed the GSEs to take protective action in jurisdictions with PACE programs, including adjusting loan-to-value ratios and requiring additional covenants for all borrowers. Most jurisdictions have therefore suspended their PACE programs.
FHFA has faced an enormous backlash against this stance; diverse parties are trying to quash their guidance through legislation and lawsuits. And the FDIC and other agencies have issued alerts to banks warning of the risks posed by PACE loans.
Ultimately, the prospects for new federal energy-efficiency incentives are slim for this year. While Congress may revisit some proposals this fall, there is a small window to move legislation before the November elections. In the short term, apartment firms will likely find better incentives using state and local efficiency programs.
Paula Cino is the director of energy/environmental policy at the National Multi Housing Council in Washington, D.C.