Financial Engineering

Financial engineering and analysis is the combination of the engineering and design (what’s going to be changed in the building, such as new windows or an upgraded HVAC system) translated into an energy model to show how the design affects the building’s energy use and reduces utility costs. These are brought together in a financial model to provide an objective “dollars and cents” evaluation of the proposed retrofit, its payback, impact on your operating expenses, and feasibility. At its most basic level, the financial analysis of an energy efficiency project is:

“The accurate cost-benefit analysis of a proposed investment”

We develop the financial model in consultation with a client’s accountant, real estate professionals, and bank or mortgage holder to ensure a complete and thorough evaluation of the proposed investment, while the project-specific financials are verified by the C-PACE program.

Increase Building Value
Typically, any improvement to a building raises the value of the property by the amount of the investment made. If the money is well spent, then the increase in the building’s value can exceed the cost of the improvement.

An energy efficiency retrofit using C-PACE financing improves the value of the building:
  1. It can lower the operating expenses of the building by 20-40%.
  2. This increases the Net Operating Income and consequently the Capitalization Rate, a key metric for any future investor.
  3. The value of the retrofit in new energy infrastructure increases the value of the building.
  4. The lien is assessed over a long period — of up to 20 years — against the building, and passes to the new owner in the event the building is sold.
  5. This reduces the impact of your balance sheet, improving your Loan to Value (LTV) ratio.
  6. An energy infrastructure retrofit improves the comfort of your tenants, which reduces tenant attrition.
  7. A high energy efficiency rating increases market attractiveness along with lower utility bills.

The bottom line is that any investment to lower operating costs that can be amortized over 20 years without impacting your balance sheet improves your investment.

Rebates and Incentives
Rebates and incentives are valuable contributions to any project. Building Energy Performance investigates and secures all the rebates and incentives available from the city, county, state, and local utility. These can be substantial and can sometimes influence the design of the project to take advantage of particular incentives designed to drive both behavior and purchasing decisions.

Tax Considerations
Tax credits are equally important, but these have to be considered as part of your overall tax planning and should be modeled in consultation with your accountant. It often the case that projects present the “potential benefit of tax credits” without due regard for the ability of the individual building owner or business to take full advantage of the credit. It is also the case that tax credits need to be modeled against the projected savings and lowered operating expenses, otherwise the impact of tax reduction will be overstated.

Off Balance Sheet Finance
The most important aspect of C-PACE financing is that it is an off-balance sheet transaction. Of course, the investment in the project still needs to be paid for but this is done by turning the loan into a county assessment against the building rather than the building owner or the company’s balance sheet. The assessment payment collected by the county adds to the operating costs of the building, but the added costs will be more than offset by the resulting reduction in utility bills. Our financial model is designed to show the net improvement in operating expenses, and the use of C-PACE means that the debt is not added to the balance sheet of the company or building owner. This preserves the debt to income ratio, which is particularly useful when a business can no longer borrow to fund capital expenditures or if a building owner’s balance sheet is fully leveraged.