Most smaller commercial buildings can't afford energy retrofits on their own. But what if they banded together?
Single- and multi-family residences are pretty well covered on the energy retrofit market. Plenty of groups have lined up to help them: utilities offering rebates, local governments pledging tax breaks. Remember Barack Obama’s federal “cash for caulkers” program? All of these incentives exist to help homeowners swallow the up-front cost of new insulation, or smarter thermostats, against the promise of lower utility bills down the line.
At the other end of the built environment exist the Pentagons and the Empire State Buildings of the world, the really big commercial towers and sprawling office complexes. They’ve got things pretty well covered, too.
“Those larger single-owner entities are pretty much a slam dunk,” says Chad Riley, the director of finance and strategy for a Denver-based nonprofit called Living City Block. “You can figure that out relatively quickly and easily.”
If you have tons of square footage under a single owner, maybe an older building with lots of inefficiencies to exploit, it’s pretty easy to pencil out the math, to see how a building can recoup in energy savings what it costs to invest in a deep retrofit.
But then there is a gaping hole in the middle of the retrofit market. An estimated 95 percent of commercial building owners in the U.S. own small to mid-size properties, buildings of no more than 50,000-100,000 square feet, perhaps with a shop on the ground floor and a handful of offices or rental apartments above. These buildings take up 45 percent of all the commercial square footage in the country, and they consume an equally large share of America’s annual commercial energy use.
There's never been a great financial model to entice these properties to become more energy-efficient. Why is that? Riley laughs: "Because it’s hard as hell." He's partly laughing at himself, because Living City Block has been trying to solve this problem, and he’s aware that the task sounds almost sadistic.
Living City Block’s basic concept is simple. Small buildings rarely have the resources to do a serious retrofit. For most of them, the idea is cost-prohibitive. But what if you combined a small building with 10 more like it? If all of those building owners got together to order high-efficiency water heaters in bulk, or to collectively replace one-thousand windows, could they achieve the kind of economies of scale that the Empire State Building gets?
This sounds feasible, and Riley is sure the idea will work. But he's talking about creating a kind of building owners’ association that has never been modeled before, one in which neighbors who otherwise have very little in common might make common decisions about pooling their trash pick-up, paying their utility bills, and renovating their properties.
If you've ever thrown in your lot with a condo association, you can begin to imagine the logistical and legal challenges of scaling up something like this to the neighborhood level and then convincing banks to finance the joint projects of all of these random people.
“The legal framework, the governance structures and the financing are the biggest three [challenges],” Riley says. “Everything else is just stuff.”
Living City Block is testing this idea on two blocks of the Lower Downtown neighborhood of Denver, with a second site in Brooklyn. The Denver location includes 17 buildings, 16 of them historic, spanning 800,000 square feet of space and 40 different building owners. These two blocks contain low-income housing, high market-rate rental housing, condos, commercial offices that are both owned and rented, florists, clothing stores, and restaurants. In the first phase of the project, Living City Block will focus on eight adjacent buildings with four owners. The goal is to get a 50 percent improvement in energy efficiency in the first two years.
Living City Block will act as a kind of aggregator of all of these buildings, and the owners won’t themselves have to pay for any of the retrofits. They’ll instead turn over their utilities to Living City Block, which will acquire the financing, pay for and coordinate all the work. If a building owner, for instance, generally pays about $100 a month to the electric company, he may now be locked in to paying $90 instead to Living City Block. After all the windows are replaced and the new water-heaters installed, maybe the real utility bill falls to $50 a month. Living City Block will use that $40-a-month difference to pay down the loan.
Sounds like a pretty sweet deal for the building owners; they’re guaranteed cheaper utilities, and they don’t have to foot the up-front retrofit to make that possible. But, of course, they must give up something in exchange – some control over their properties.
Jon Buerge, the vice president for asset management with a company that owns two of the Denver buildings, effuses about the potential for making a meaningful impact on how energy is consumed.
“That said, this is something that we’re treading carefully on,” he adds, “because any time you’re giving up any control over something, it’s important to us that we’re at least making sure we’re protected, that our rights are protected.”
Exactly how long will the contracts last? And what happens if a property owner wants to sell a building before then? Can he buy out of the group commitment? Can he still make changes to his own building apart from the Living City Block improvements? And how can Living City Block accommodate all of these concerns without scaring off the banks that are supposed to finance everything?
The whole idea requires arranging a dozen moving pieces between the building owners and their utility providers, between the buildings and Living City Block, between Living City Block and the banks, between this small slice of the city and the Denver government. Riley hopes to start work on the test buildings this fall, but some of these details still need to be worked out before then. Ultimately, he envisions the whole project expanding beyond energy efficiency to tackle waste management and stormwater runoff and urban agriculture.
Living City Block is aiming, according to its mission statement, for nothing short of a “replicable, exportable, scalable and economically viable framework for the resource efficient regeneration of existing cities, one block at a time.” Whew.
“There’s been equal skeptics to enthusiasts,” Riley says. “People who get the idea, get the concept, who are jazzed about this kind of stuff, they’re all in, and it’s a very visceral reaction. For people who are skeptics, they’re skeptical for the right reasons. This is a very, very complicated, very, very difficult project and framework we’re trying to do here.”
If it works, it would be a new business model for a great deal of people, albeit one built on the much older idea of communities investing together in goals individuals can’t accomplish alone. A holistic approach to the built environment encompasses all of these things: energy consumption, energy production, transportation, waste, water and even public assets like sidewalks.
“The reality of the world is that there are very few clusters where a single person, or a single company owns and controls all the pieces, so in order to make a real impact on the world of real estate, it’s got to be something that’s collaborative,” Buerge says. “There’s going to be pullback by property owners, because any time someone gives up control over anything, there’s pullback. So if there’s a real-world example of for-profit developers going down this path, and being successful with it, that can make a huge impact on other for-profit developers.”