How Did They Do That?

6 min read

Energy Efficiency: Planning as a Partnership

Sandeep Sood didn’t have to wait to replace the rusted, inefficient boiler at Jeffery Parkway – thanks to teamwork between developers, financers and energy experts.

“We were able to invest early in the process rather than later. That allowed us to make really significant changes upfront,” says Sood, project manager for Nautilus Investments at the Preservation Through Energy Efficiency Roadshow, held September 29 in Chicago.

Before Nautilus bought the seven-story building, the developer arranged for a complete energy assessment and financing to pay for energy improvements. These have already saved enough money to more than pay for themselves and have added hundreds of thousands of dollars to the likely value of the building.

Starting from half-empty
Nearly half of the 55 apartments at Jeffery Parkway were vacant and few residents were paying rent when Nautilus bought the building in October 2009, soon after the darkest days of the Global Financial Crisis.

It was a good time to buy property – Nautilus paid just $1.25 million for Jeffery Parkway. That works out to just $23,000 per apartment, an outrageously low price, even considering that half of the apartments were empty.

Sood had years of experience as a commercial real estate attorney – but Jeffery Parkway was his first project as a real estate developer.

CIC Financing provided both acquisition financing and an additional $85,000 second mortgage to provide capital for the retrofits.

“With CIC, we were able to line up some energy funds prior to closing the loan,” says Sood. “I was able to plan the retrofit process upfront, which was really great from a developer’s standpoint to help stabilize the building.”

High return on energy investments
The experts from Elevate identified four improvements that would cut the heating bill by nearly a quarter, from an estimated 41,000 therms of gas a year to a projected 31,000 therms. At a cost of about $1 per therm, that would work out to $10,000 in annual savings. At that rate, the energy improvements would pay for themselves in about eight years.

The improvements included air-sealing the basement exterior walls, along with windows, doors and plumbing chases throughout the building. The work would cost $3,000, but would save a projected $1,500 a year. So the work paid for itself in just two years – a very fast payback.

Nautilus also spent $13,800 to air-seal and insulate the roof to an insulation value of R-49. That would save another projected $3,500 a year in energy.

Another $10,000 bought a new water heater for the building, saving a projected $1,500 a year, paying for itself in 6.7 years.

Finally, a new steam boiler with controls and an automated fresh combustion air louver cost $55,000, and was anticipated to save $3,500. That made the new boiler the most expensive piece of the energy retrofit, with the longest projected time to pay for itself: 15.7 years.

Without the package of financing to pay for energy efficiency, Nautilus probably would have invested in a new boiler eventually. “We might have waited another winter or two,” says Sood.

However, the old boiler turned out to be in much worse shape than it appeared at first. It was 30 years old, and though it had been a good piece of equipment, three decades of hard use and little maintenance had worn it out. Pipes under the boiler had begun to leak water. Replacing the water let oxygen into the boiler, so that it rusted inside. Nautilus had estimated the cost of heating Jeffery Parkway at $41,000 a year, before the renovation. The real cost turned out to be more than $50,000. If Nautilus had to delay replacing the boiler – one of the most expensive pieces of the renovation, that unexpected cost would have been a weight on the building’s operations. The inefficient old boiler also might have made the apartments at Jeffery Parkway more difficult to rent.

“The new boiler has made the building so much more comfortable,” says Sood.

The benefits of fixing up Jeffery Parkway also turned out to be even better than anticipated. Once it was properly air-sealed, the seven-story brick building, built in 1928, turned out to be naturally efficient with solid construction. Heat lost from the lower apartments is captured by the apartments above. “It’s a great, old building,” says Sood. The property is one of the first buildings in the country to get the federal Energy Star certification for apartment properties.

Jeffery Parkway now costs less than $20,000 a year to heat. That’s much better than Elevate’s projection that the building would cost $31,000 a year to heat – which seemed very good at the time.

All together, the energy retrofits save Jeffery Parkway more than $30,000 a year. That adds up to a tremendous return on investment – the energy retrofits will pay for themselves in less than three years.

The retrofits also added a tremendous amount of value to the property. Comparable, stabilized apartment properties in the area now sell at capitalization rates of about 8%. (Cap rates represent the income from a property as a percentage of the sale price.) With that in mind, more than $30,000 a year in savings probably add more than $400,000 to the value of the property. A recent appraisal put the property’s value at $3.25 million – that’s $2 million more than Nautilus paid for it in 2009.

Rents start at $675 a month for a studio apartment. The rents are not restricted by any formal affordable housing program – but are still low enough to be affordable for low-income residents. The community also includes a few one-bedrooms renting for $850 a month and two-bedroom apartments renting for $950.

Nautilus continues to invest in Chicago’s workforce housing and plans to continue to improve the apartments at Jeffery Parkway.

“There’s even a swimming pool in the basement that we’re still trying to figure out how to get up and running,” says Sood.

New Money forEnergy Improvements in Illinois

People who own affordable housing properties have a new way to pay for energy improvements, thanks to a new program in Illinois.

Utilities regulated by the Illinois Commerce Commission now offer an energy retrofit loan repaid through the property’s utility bill. Illinois is one of the first states to allow “On-Bill” financing for apartment properties.

Affordable housing communities built with Low-Income Housing Tax Credits often cannot take out a new conventional loan secured by the property to pay for energy improvement, because of the existing financing.

“Oftentimes a first mortgage does not allow subordinate financings,” says Jim Wheaton, energy fund manager for the Community Investment Corp., based in Chicago.

That means that even if an energy improvement is likely to pay for itself immediately, the property will be unable to take out a new loan secured by the property to pay for it.

So far, CIC has closed six On-Bill loans to multifamily properties to pay for energy improvements. The loans average about $45,000 with terms of up to 10 years and a fixed interest rate of 5.99%. The energy improvements typically provide utility saving of 25% to 30%.