Retrofit proponents unable to contribute at least $6.25 million in equity capital will have to look to third-party interveners in order to tap into the Canada Infrastructure Bank’s $2-billion fund for energy efficiency and greenhouse gas (GHG) reduction measures in commercial buildings. Speaking last week during a webinar sponsored by the Building Owners and Managers Association (BOMA) of Canada, Frederic Bettez, managing director, investments, at the Canada Infrastructure Bank (CIB), outlined a scheme to enfranchise a squad of delivery agents that can help launch projects more quickly and widely than could the lending institution working on its own.

“The aggregator model basically gives the CIB a broader network of sales people, gives us a broader network of experts and it accelerates the deployment of capital in the market,” he advised. “But we can make direct investments to corporations or large owners that have larger projects; we have that flexibility also. We are trying to cater to the market with as much flexibility as we can toward achieving the common objective of the GHG reductions.”

CIB is now accepting businesses cases for both potential avenues of investment. As first announced in the fall of 2020, the $2-billion initiative is one component of a $10-billion strategy to stimulate green economic growth and help to meet Canada’s commitment to reduce GHG emissions to 30 per cent below 2005 levels by 2030. Bettez characterizes it as an effort to “turbo charge” the five targeted streams — which also include clean power, rollout of broadband to underserved regions, agriculture-related infrastructure and zero-emission buses — and also to drill down from the CIB’s typical focus on large projects to capture the environmental and economic potential of the vast existing building inventory.

To do so, CIB will stick to its large-loan template, disbursing low-cost financing in chunks of $25, $50 or $100 million dollars to borrowers presenting plans for reducing GHG emissions by 30 per cent across a portfolio of buildings. Meanwhile, energy management specialists caution that will be a challenging target to meet.

Energy efficiency upgrades, switching to low-carbon or carbon-free heating sources and adopting on-site renewable generation and energy storage are all tapped as plausible measures, but that will come with differing degrees of difficulty and economic viability depending on electricity costs, the carbon intensity of the provincial electricity grid and a building’s baseline starting point.

“Fuel switching seems to be the direct route, but it will be tough to find a business case to do it unless the price of natural gas goes up a lot,” says Rob Detta Colli, energy and sustainability manager with Crossbridge Condominium Services.

Competitive, flexible financing promised

Borrowers, who could be portfolio owners or third parties planning to offer retrofit services to a number of smaller players, will have to bring at least 20 per cent equity capital to the deal and a credible strategy for delivering GHG reductions. The latter requirement includes compliance with Investor Ready Energy Efficiency (IREE) certification and enrollment in ENERGY STAR portfolio manager.

Loans will be offered at 3 per cent interest — tied to delivering a 30 per cent GHG reduction portfolio-wide and no less than a 25 per cent reduction per individual building — but borrowers have the opportunity to secure rates as low as 1 per cent for achieving greater reductions. Capital must be fully invested within five years of the credit agreement, and there is a 25-year repayment period.

“We wanted to allow the market to move the financing off-balance sheet, if necessary, or at least lower level of security so that we would not prevent the building owner from borrowing funds to make acquisitions or other investments within the buildings,” Bettez told webinar attendees. “It is not just about the interest rate. We don’t take security on the buildings; we don’t supersede the mortgages. We’ll go second lien; we’ll go corporate. We can go longer-term rather than renew every five years; we can go six to 20 years. We can also play with the early years where, if you have a longer mobilization or deployment period, the interest will be deferred for a little while.”

That’s all welcome for large commercial real estate portfolios. Also speaking at the BOMA Canada webinar, Tsering Yangki, head of real estate finance and development with Dream Unlimited Corp., identified access to capital as one of the barriers the sector faces in implementing energy-saving and sustainability measures.

“Typically, for any kind of financing, it is based on your rents. You’re really trapped just based on your cash flow in the ability to be able to get the mortgages, and it is quite challenging,” she observed. “This structure, it is quite innovative in terms of being off-balance sheet. I think these are pretty good opportunities for landlords and owners to have the flexibility of being able to get sources of capital when it’s not sitting on the balance sheet.”

Aggregators tapped to reach smaller players and diverse market segments

Energy services companies (ESCOs), engineering firms and contractors are considered prime candidates to serve as the aggregators tasked with reaching the greater number of smaller owners. CIB additionally aims to sign on some municipalities to offer retrofits through a property assessed clean energy (PACE) program approach, in which loans are registered with the property itself and repaid over a number of years via a designated premium on the property tax bill. Or local utilities might offer the same sort of option through a mechanism known as on-bill financing.

“We’re also talking to third parties like investors in the infrastructure and energy world or property management firms that want to create their own new investment vehicle,” Bettez reported. “The common thread (among prospective aggregators) is the CIB backstops. The difference is every one of those aggregators can choose which market it wants to address — be it a geography in particular; a size or a type of building; or a portfolio of measures that they feel more comfortable with.”

He suggested that could be an aggregator targeting a hundred $300,000-retrofits in low-rise multifamily stock or three $10-million projects in industrial facilities. “We like that because by making two investments, we attract two different markets, and that’s the goal of the aggregator. That’s the way that we want to spread our tentacles through Canada across different segments of the market,” he said.

There is also an envisioned role for aggregators to take on packages of retrofit work across public sector portfolios, such a municipal, provincial, healthcare and university holdings. Through the envisioned deal structure, the CIB would provide 40 to 60 per cent of the financing for project bundles valued at $50 million or higher, with the potential for up to 70 per cent financing “to enable deeper retrofits and fuel switching”. Public sector facilities managers would not have to contribute upfront capital or commit to minimum guaranteed payments, but would pay out 100 per cent of realized energy savings to the aggregator/ESCO for the term of the agreement.

“CIB has decided to attack public and the private sector buildings in two different ways in order to bring efficiencies to the forefront,” Bettez said. “We have a team dedicated to addressing the public sector needs and we do encourage them to contact us.”

Positioning retrofit as an investment asset class

All borrowers will have to pass rigorous technical and financial due diligence and post-construction quality auditing, which is also devised to bolster an ancillary goal to position retrofit as an investment asset class. “You’ll see in the initiative that we’re trying to move the market to some sort of standardization on reporting, certification and, on our side, also, on documentation,” Bettez affirmed.

For institutional investors, property funds and asset managers, that might align with other performance benchmarking and reporting imperatives. Yangki underscored the need for metrics to inform investors’ and lenders’ decision-making.

“There is cost, but what is the value creation and (the return on) unlocking the potential of that?” she mused. “What is the value of the opportunity cost that you’re losing out on?”

Paybacks are expected from energy and operational savings, enhanced asset value and the related capacity to draw and retain tenants. Direct borrowers or aggregators’ clients will also be free to leverage grants and incentives to further offset their costs.

“There are municipal, provincial and federal programs that allow for incentives to kick in on the energy side, on the GHG side or air quality or the health and safety side, which can be compatible to what we’re doing here,” Bettez reiterated. “We are very interested in working with these other incentive programs and making sure that we can.”

Some of the future envisioned green job growth may come from portfolio owners’ need for expert guidance. “You really do need to make sure that you have a good consultant to be able to analyze and assess what is your risk profile, and what are the returns that you’re looking for based on whether or not this is a long-term hold,” Yangki maintained.

Smaller players — which will typically include condominium corporations — will have to wait to see if aggregators emerge and what they’ll offer. Detta Colli suggests they’ll likely be focused on buildings with “really inefficient boilers” since that will present the most straightforward opportunity to achieve required GHG reductions through offsetting energy used for heating, domestic hot water and warming up outdoor air intake.

Barbara Carss is editor-in-chief of Canadian Property Management.