Large commercial buildings use a great deal of energy and often offer attractive payback periods for energy efficiency investments. The clearest incentives in the large commercial building sector are usually for investment in buildings where the owner pays the energy bills or the tenant has a lease term that is longer than the payback period on the project. If the owner of the facility is different from the party paying the energy bills (e.g., a tenant), the incentives to do efficiency projects are split between the tenant who pays the energy bills (thus benefitting from the efficiency improvements) and the owner (who pays for the efficiency but receives no direct financial benefit).
In cases where the property owner is also the property occupant, the financial benefits of clean energy investments are clear. They include lower operating costs and increased cash flow, improved services and potentially higher occupancy rates, higher property values, and a contribution to overall building upgrade and system replacement needs. Financing helps property owners pay for the large upfront investment costs of clean energy projects. This section of the guide provides background and options that are clearly applicable to buildings where the owner and occupant are one and the same, or the property owner pays the energy bill; some of the options presented below may also be applicable to tenant-occupied facilities where the tenants pay the energy bill.
For the purposes of this webpage the large commercial building sector is defined as including commercial buildings such as offices, malls, hotels, and retail stores, along with nonprofit facilities (private nonprofit hospitals, schools, higher education, YMCAs, museums, etc.). Some programs also include industrial projects under their large commercial definition.
Rationale for Promoting Clean Energy Finance in the Large Commercial Building Sector
The large commercial building sector offers a good target for government-supported clean energy financing programs. Project economics are typically quite strong, with simple payback periods in the 3- to 5-year range, compared with paybacks of 7 to 12+ years in the residential sector. Energy savings and carbon emission reductions are commensurately higher than in the residential sector as well. State and local government-supported energy efficiency and renewable energy finance programs can achieve a range of public objectives: create jobs, promote investment that improves local properties and economies, and reduce greenhouse gas emissions.
Financing Gaps and Barriers
Commercial real estate is generally facing restricted access to credit due to the recent financial crisis that is still unfolding in the sector. Real estate values are down. Buildings are often owned by special purpose entities whose balance sheets may not sustain additional borrowing. Some owners face restrictive covenants from first mortgage holders. Thus, financing gaps exist in the commercial buildings market that warrant public policy intervention. Energy efficiency/renewable energy financing programs can help fill those gaps and demonstrate sustainable, scalable new financing structures.