The On-Bill Financing (OBF) programs that have taken root are an incredible boost to building owners – especially in the time of COVID.
OBF allows owners to increase their alpha – their above-market-returns – and look like superstars. These programs allow building owners to pass the costs of energy efficiency retrofits on to their tenants, the group that typically benefits most immediately from such a project, often at zero or very low interest rates. When we’re working with our customers who own and operate buildings, we find there are six aspects of OBF that really make it sing.
And when our customers understand the benefits of OBF projects they typically ask us two things: “This sounds too good to be true – is it?” (Answer: No, this is for real.) and “I own three other buildings. Could you please take a look at those?” (Answer: Absolutely.)
[1] OBF allows tenant recovery through the utility bills
In PG&E, the retrofit loan payments are situated in the Other Programs and Service charges line item.
When we approach customers and explain that we’re working with a program that allows them to perform efficiency upgrades and pass the costs to those who pay the bills – usually the tenants – we literally see the (LED) lightbulb turn on in their head. Building operators have often been waiting for years to retrofit their energy systems, but because tenants pay the energy bills, the incentives had been split and the retrofits never made economic sense.
On-Bill Financing fixes this – it places the cost of the retrofit project on the utility bill, paid by the tenants. We’ve also noticed retrofit projects with controls work have become especially popular, as building operators seek to better control buildings that have much different and varying levels of occupancy than they have had in the past.
[2] OBF projects are asset-value positive from Day 1
The motor has served its building well, and it’s time for it to retire.
The magic of OBF is this: every dollar saved in NOI is equal to $10 to 20 in asset value. Because cap rates in office buildings range from 5% to 10%, any increase in net income is multiplied by the inverse of that rate (20x in the case of a 5% cap rate) to get the corresponding increase in asset value. It’s why building operators pay so much attention to costs and why an energy efficiency retrofit with a reputable firm can pay long-term dividends.
Even in buildings where utility costs are passed to tenants, the lower utility bills that result from an OBF project once the loan is paid off – either at building sale or at the end of the loan term – can be accounted for in increased rental rates and therefore higher NOI and higher asset value.
[3] These projects don’t hit your capital budget
In the COVID-19 era, everyone’s capital budgets are suddenly constrained in a way they were not six months ago. This makes capital project planning fraught at best. Enter OBF, which takes projects out of your capital budget and makes them part of the utility bill. This leaves capital budgets available for the other reconfigurations that buildings are doing to address tenant concerns around COVID. We regularly see buildings with opportunities to reduce energy use 20 to 30%, with no upfront payments and no increase in their utility bills, even after accounting for the payback of the OBF loan.
[4] Tenants are happy because the bill stays the same but they get an upgraded space
LED upgrades, needed here, have integrative paybacks that span from lower utility bills to more productive environments.
Tenants are the group that benefit most immediately from an OBF-financed retrofit. Tenants love nothing more than an updated workspace. Efficiency retrofits give them better lighting and more controlled heating and cooling in their offices. In addition, OBF programs are structured to make loan payments bill neutral, so tenants will not see an increase in their utility bills. And after the loan is paid off – usually in 5 to 7 years – tenants will enjoy lower utility bills.
[5] OBF projects (often) transfer to new owners
One of the main questions we hear from building owners is “will my OBF loan transfer if I sell the building.” The answer is “usually yes.” This depends on the program structure. For example, in all of the California OBF programs, the loan is transferable at building sale, at the option of the seller and buyer. If the seller or buyer chooses not to transfer the loan, it can be prepaid and closed out at any time. Even after accounting for the cost of paying off an OBF loan, we find the economics of the increased NOI far outweigh the cost of paying off the loan, making asset owners happy to either close out the loan or transfer it.
[6] Utilities usually subsidize interest rates for OBF programs
Often, utilities subsidize the interest rate for their OBF programs to make them more attractive. Where market interest rates for efficiency projects are 8 to 10% or even higher, utility programs are often 0%, or sometimes just a few percentage points. This subsidy is much lower than most building owners’ cost of capital and provides a nice source of risk-free leverage for building owners to use to increase returns on their own assets.
If you have questions about how this might work in your building, let us know.
