Mercy Housing: Arden Aire Apartments

A key innovation of the project was fuel switching gas-powered hot water heating systems with high efficiency electric heat pumps, one of the first examples of doing so in a multifamily structure in the U.S. The project was part of a larger initiative that included fuel switching at five other properties, in addition to other efficiency measures. 

Financing the replacement of gas-powered hot water heating systems with electric heat pumps is particularly challenging due to high upfront installation costs and long payback periods. The project was possible as one of the first examples of applying the Energy Savings Service Company (ESCO) model to a multifamily affordable housing nonprofit property, which requires no upfront costs to the property, allowing lenders to be paid back through savings. The work was also supported by Mercy Housing’s retrofit installation partner, Bright Power, which evaluates opportunities for upgrades and installs measures.

The ACE Model

Mercy Housing signed a 10-year agreement with its ESCO partner, Affordable Community Energy Services Company (ACE). ACE applied a portfolio approach to maximize energy and water savings across 48 properties, using larger projects with more immediate savings potential to cover the costs of smaller measures that have more modest savings with longer paybacks.

Because Mercy Housing could not provide real estate liens as collateral for the financing of the upgrades, ACE put a lien on the installed equipment itself and held ownership of the equipment. ACE is also responsible for operations and maintenance of the equipment throughout the life of the contract, ensuring continuing savings sufficient to cover the total cost of the intervention over the 10-year period.

After significant research and outreach, ACE engaged Reinvestment Fund (RF), a community development financial institution, to finance the projects. To mitigate risk from the project’s inherently limited cashflow, RF established a “price floor” for utility costs that are the basis for how the lender is paid back. The price floor guarantees a minimum payment to the lender, similar to financing structures found in Power Purchase Agreements.

The deal was augmented by California’s higher utility rates and excellent state and utility incentives for energy and water efficiency measures. ACE managed the process of applying for and receiving the incentives and rebates.

ACE bills each of the properties on a quarterly basis after reviewing that quarter’s utility bills to determine actual savings. Mercy Housing receives 20% of the savings, while ACE receives 80%, which covers its costs, O&M expenses and the cost of the loan.