This primer serves as an introduction to critical issues in energy finance for commercial buildings such as hospitality, retail, and the commercial real estate sector. It provides case studies, market data, and other resources to help leaders in the sector take advantage of innovative financing strategies. The primer is part of the Better Buildings Financing Navigator, an online tool that helps public and private sector organizations find financing solutions for energy efficiency and renewable energy projects.

*Healthcare, higher education and industrial, which are sometimes included the commercial sector, each have individual financing primers due to their unique characteristics.

There are a few unique characteristics of the commercial sector that affect how a company may choose to approach financing for energy projects:

• Building size: The makeup of the commercial sector ranges from large office, hospitality, and retail complexes to smaller (less than 50,000 square feet) office and retail properties. According to CBECS, properties under 50,000 square feet account for nearly 50% of total commercial floorspace, and properties under 5,000 square feet make up 50% of the total number of commercial buildings. Smaller properties may face additional hurdles to financing energy efficiency or renewable energy projects due to the lower overall dollar cost of the project, higher transaction costs and potential reluctance from financiers.

• Portfolio size: There is also diversity in the makeup of commercial building owners. Large commercial organizations may own hundreds of properties across the country, while other building owners may just have one or two properties. Certain financing solutions can be scalable for owners looking at portfolio-wide initiatives, though variance in location, policies and incentives, and building type may create challenges.

• Leased space: In leased commercial properties, the owner/tenant relationship may encounter split incentives to energy efficiency: this is the disconnect that occurs when the costs and benefits of reducing energy usage fall to different parties. This may create a scenario in which neither the building owner nor the building tenants are motivated to pursue energy efficiency efforts. A building owner may not be inclined to implement a retrofit project outside of common area space if the resulting savings accrue to tenants. Conversely, tenants may be unwilling to pay for upgrades when they do not own their property or when savings accrue to the building owner. Certain financing solutions are available to help overcome the split incentive issue, and the emergence of green leasing is enabling owners and tenants to mutually benefit from energy and sustainability upgrades in leased space.

• Competing priorities: Companies often have many potential areas where they can re-invest their capital at high rates of return, such as scaling the core business, expanding to new markets, or making outside investments. Energy efficiency may also be viewed as “back of the house” even though it can be critical to maintaining competitiveness, occupancy, and useful life. Therefore, energy projects may need to meet this higher “hurdle rate” to be competitive when compared with these other potential uses of capital. Companies can overcome this barrier by seeking external financing with little or no upfront cost or creating internal energy funds or capital expenditure programs that target high-return projects.

• Incentives: Companies may be eligible for utility and/or regional tax credits, rebates, and other savings opportunities that can help to lower the overall cost for energy efficiency and renewable energy. For more information on available opportunities, visit the Database of State Incentives for Renewable Energy and DOE’s Tax Credits, Rebates, & Savings Database.

Loans and leases are financing options that owners of commercial properties may use to cover the upfront costs of energy efficiency and renewable energy projects. Cost savings are not guaranteed and operation and maintenance of equipment must be arranged by the owner. Most forms of leases and loans are secured, meaning that the debt is backed by some form of collateral (generally the energy equipment or the facility) in the event of a default, which often requires lender (first mortgage) approval and can further complicate transactions.

For certain organizations (e.g. small businesses and non-profits), loans may be available with more flexible or favorable terms such as below-market interest rates or greater tolerance for poor creditworthiness. These programs are typically established by public organizations, foundations, or other private entities for the purpose of serving a specific social need such as greenhouse gas mitigation or community development. They vary widely in program design and target market but typically fall into the following categories: state and local loan programs, community development financial institutions (CDFIs), grants and program-related investments (PRIs), and U.S. Small Business Administration (SBA) loan programs.

In addition to traditional financing options, companies can use a variety of specialized financing options to implement energy retrofits as well.

Commercial PACE is a financing structure in which building owners borrow money for energy efficiency, renewable energy, resilience improvements, or other projects and make repayments via an assessment on their property tax bill. The financing arrangement then remains with the property even if it is sold, facilitating long-term investments in building performance. There may be some off-balance sheet benefit to PACE, making the option appealing for owners who would prefer to not take on additional debt. Additionally, PACE can align incentives for landlords and tenants, as both the tax assessment and cost-savings from the project can be shared with tenants under some lease structures. Lender consent may present an issue as PACE loans are typically senior to other liens on the property, and the complexity of PACE deals may be less attractive for some owners. PACE enabling legislation has currently passed in 36 states plus D.C.

Efficiency-as-a-service is a financing solution that requires no upfront capital and typically comes with a performance guarantee. These options offer third-party ownership of energy equipment and are typically considered off-balance sheet for the customer, which may be appealing to owners who would prefer to not take on additional debt. For owners looking to retrofit multiple facilities, efficiency-as-a-service agreements can sometimes be scaled to bundle smaller project opportunities into a single package.

Energy Savings Performance Contracts (ESPC), also referred to as EPCs, are another commonly used solution to implement energy upgrades in commercial properties. Under an ESPC, an energy service company (ESCO) coordinates installation and maintenance of efficiency improvements in a facility (or bundle of facilities for portfolio-wide initiatives) and is paid from the associated energy savings. The ESCO typically provides a savings guarantee, and the improvements may be installed with little or no upfront cost (if the ESPC is financed). ESPCs are typically better suited for larger projects ($500k+, and often $5 million+). ESPCs can be self-financed if the building owner has enough cash on hand, or the owner may seek financing from a third-party lender to cover some or all of the upfront cost. The majority of financed ESPCs are backed by an on-balance sheet financing mechanism such as a loan or capital lease in which the building owner owns the equipment throughout the financing term.

On-bill financing (OBF) and repayment (OBR) are financing options in which a utility or private lender supplies capital to a customer to fund energy efficiency, renewable energy, or other generation projects and is repaid through regular payments on an existing utility bill. The benefits of OBF/OBR include low-to-zero interest rates, simple contract structure, and balance-sheet flexibility. However, OBF and OBR are only available in regions where utilities support on-bill programs for commercial entities and there has been limited uptake of the financing option in the commercial sector thus far.

Power Purchase Agreements (PPA) have been used to install renewable energy (typically solar) on commercial sites. A PPA is an arrangement in which a third-party developer installs, owns, and operates an energy system on a customer’s property. The customer then purchases the system's electric output for a predetermined period. A PPA allows the customer to receive stable and often low-cost electricity with no upfront cost while also enabling the owner of the system to take advantage of tax credits. To be eligible for an onsite PPA, a project must be located in a state or jurisdiction where third-party ownership of energy generation equipment is allowed. For more information on where PPAs are available, see this map from DSIRE. Offsite/virtual PPAs, where the customer does not take physical delivery of the renewable power generated because the physical generation assets are not located onsite, are an alternative to onsite PPAs and are common among larger corporations looking to procure renewable energy.

In addition to external financing solutions, companies may use internal funding options to pay for efficiency upgrades without accessing external capital. This is often the most simple and direct method for funding projects, and it allows the company to capture the full financial benefits of energy projects rather than paying a portion to a financing provider. Some companies have established internal funds to help structure their own investments in sustainability projects. These include revolving funds, CapEx funds, and other types of dedicated capital pools set aside for a specific purpose. These funds can have benefits including building a clear business case for sustainability, streamlining the budgeting process, and demonstrating a company’s long-term commitment to sustainability. Additional information on green revolving funds can be found in the Green Revolving Funds toolkit.

If you are a commercial sector leader ready to take the next steps on financing for energy projects, consider doing the following:

• Engage the facilities team(s) or the individual responsible for monitoring energy use to assess the project opportunities in your building(s) that are feasible to implement. Understanding the size and scope of the potential projects will help determine the appropriate financing mechanisms .

• Understand what internal capital (if any) can be accessed to fund potential projects and consider whether it could be structured into an internal fund or capital expenditure program.

• Assess which preferences for financing are important (on or off balance sheet, performance risk, etc.) to narrow down the list of external financing options.

• Determine if there are available subsidies, incentives, or city/state/utility programs that could be leveraged to support financing efforts or lower the overall cost. For more information on available opportunities, visit the Database of State Incentives for Renewable Energy and DOE’s Tax Credits, Rebates, & Savings Database.

• Consider using the Better Buildings Financing Navigator to explore the range of third-party financing options available and connect directly with Financial Allies who may be able to finance your project.

Additional resources

• Energy Efficiency Finance For Commercial Buildings: Insights From Lenders

• Financing Small Commercial Building Energy Performance Upgrades: Challenges and Opportunities

• Retail Industry Leaders Association Financial Management