RAPID CITY, S.D.—Loans for green buildings certainly help the environment—but do they always help the credit union?
One expert contends that lenders, amid the growing interest in green, sometimes overlook the math when it comes to making a good loan on a new green building or enhancements to an existing office.
Phil Love, president/CEO of Midwest Business Solutions, says it is critical that the lender first closely examine energy savings claims to make sure they are accurate, and then match up those dollars against the cost of the green improvements.
“Green buildings, alternative energy . . . those are things that look really good right now,” said Love. “But loans for green buildings need to be looked at for what makes sense. Will the borrower receive an adequate return on the money they invest—savings over time that makes economic sense to put the green changes in.”
Love is aware of a Colorado business that used big refrigeration units that burned energy. The owner asked for a $500,000 loan for a photovoltaic solar system, estimating annual energy savings of 75%.
“But due to higher demand charges during peak hours, which the business owner did not account for, the actual savings was closer to 5%,” Love said.
Love explained that the owner, when taking out the loan, did not understand that on hot days the businesses’ electrical usage would spike, moving the company into a higher charge per kilowatt hour, which impacted the entire billing period. Love said the plan shown to the lender indicated payback for the investment within five to eight years, but in reality it would take 40.
Love cautioned those kinds of miscalculations can lead to defaults or even impact the viability of the business. That is why it is essential the credit union do its homework, he said.
When borrowers approach the credit union for a loan for energy improvements, Love said a “T-bar analysis” should be performed.
“The analysis accounts for all cash outflows for the costs of the green system and any ongoing maintenance, and then examines all inflows, such as higher rental income, utility rebates, tax credits and lower utility and water cost.
Love said this allows the lender to determine a break-even timeframe for the green loan and a rate of return utilizing a discount interest rate. If the borrower plans to eventually sell the property, the net projected sale price should be considered, as well, said Love.
Love added that studies by the Institute for Building Efficiency revealed that green buildings have higher asset values than their conventional counterparts—with 6%-35% higher resale values, 2%-17% higher rental rates and 30% lower operating costs.
To further protect the loan, Love advised that lenders have any utility rebates assigned to them, as opposed to the business, to help pay down the debt.
“Whenever you work with a borrower on a green opportunity, the credit union has to carefully look at the numbers,” said Love. “It is easy for the borrower to get excited about green and say, ‘Lend me $500,000 because I will save X.’ What it really takes from the lender is close inspection to make sure the loan makes sense.”