Multifamily Affordable Housing Decarbonization Toolkit

Complementary Finance Strategies to Advance Innovation

Although the IRA presents promising opportunities to invigorate the retrofit market, it is important to note that funding availability will vary across states. Furthermore, closing the gap between incentives and overall project costs will likely require additional financing. Despite persistent concerns about project economics, workshop participants expressed optimism that strategic coordination of policies, incentive programs, and financing could help address this challenge. A notable example is the deployment of the EPA’s Greenhouse Gas Reduction Fund to green banks nationwide, offering a flexible and concessionary funding source. While additional financing tools will be necessary, this infusion of funds is expected to empower owners to advance with decarbonization and electrification projects.

Challenges and Recommendations

Flexible Funding

Even after leveraging available subsidies and incentives, most holistic retrofit projects still face a significant budget gap and require additional funding and suitable financing to cover remaining project costs. Asset-based construction loans present a particular challenge to developers of affordable multifamily housing, due to the need for up-front collateral and a guarantor. Smaller developers and nonprofit organizations, which typically operate with lower financial reserves, face added difficulty in meeting these requirements. Without substantial up-front capital, they may struggle to secure necessary loans or may be forced to seek out additional financial backing, which could delay project timelines or increase costs. Traditional lenders also often require extensive documentation and a proven track record, making it more difficult for smaller, community-based developers to access funds. Furthermore, discrepancies between incentive disbursement and project timelines can create liquidity challenges during the project for many owners, especially in predevelopment stages. Developing financing practices and products to address these challenges will be critical to scale decarbonization in affordable housing. Potential solutions identified include:

Coordinated Program and Funding Deployment: To facilitate effective capital distribution, lenders and program administrators can adopt a more proactive and collaborative approach in aligning available incentives with traditional financing options. Integrating clear and consistent guidance on relevant grants, rebates, and tax credits during the financing process will help owners maximize available incentives and can help financiers better understand project financing stacks to then best accommodate financing timelines and terms. For smaller developers that are oftentimes more resource-constrained and reliant on bootstrapped financing stacks, streamlined up-front coordination will facilitate the assembly of financing stacks and move projects forward more quickly. The Greenhouse Gas Reduction Fund, for example, will allocate billions of dollars in concessional finance to catalyze investment in net-zero buildings through a national network of community lenders. Proactive coordination with fund awardees, sub-awardees, and project financiers will be crucial in ensuring these funds are used to their fullest extent in alignment with other market incentives.
Expanded Lending Activity and Liquidity for Projects: Syndicating Commercial Property Assessed Clean Energy Program (C-PACE) loan portfolios to community development financial institutions and securitizing these portfolios to replenish capital at a lower cost can help borrowers unlock lower interest rates on C-PACE loans. This will also allow lenders to steadily increase lending activity on C-PACE loans at lower interest rates, garnering greater market adoption.
Credit Enhancement Mechanisms: Partnerships between financial institutions and state and local governments aimed at establishing loan loss reserves or credit enhancement mechanisms can help reduce potential financial uncertainty. This approach benefits both borrowers and lenders because the risk is partially redistributed to state and local governments if a borrower defaults.
Revolving Loan Funds: Revolving loan funds offer a pathway for affordable housing owners to finance essential decarbonization upgrades. As loans are repaid, the funds are recycled to finance other projects, creating a continuous cycle of capital for necessary improvements. Beyond just providing funding, these funds act as a catalyst for local economic growth and can serve as a derisking mechanism, therefore attracting additional private capital.
Bridge Financing: For some decarbonization programs, incentives are not provided to the owner up front, but rather at certain benchmarked points during or after construction. However, low- or zero-interest rate bridge loans can be used as a short-term financing solution at the start of construction when funding is needed. The loan would become a traditional loan or be paid back as project incentives are received. Bridge loans can be made available to the building owner or to contractors, through which certain incentives would flow, to jump-start the retrofit process.
- Program-Related Investments can provide flexible bridge financing while unlocking low-cost, below-market interest rates. Although this up-front capital is usually deployed by philanthropic foundations, program-related investments with low- or no-interest terms can aid in improving an owner’s debt-to-income ratio.
Philanthropic Engagement and Support: While traditional financing from private or community lenders is often crucial for project upgrades, philanthropic support can act as a short-term catalyst to initiate projects and bridge financing gaps until the market becomes self-sustaining. Enhanced public-private partnerships and deeper collaboration between state agencies, financiers, and philanthropic organizations will be an important pathway forward. Philanthropic funding is a historically unconventional method of affordable housing financing, although it can offer funders meaningful ways to improve living conditions for low-income residents while reducing emissions. Philanthropy can work with state programs directly or can also engage mission-driven organizations to identify projects with funding gaps where support would be most impactful. In addition to direct project assistance, philanthropic funding could also be beneficial in supporting CBOs and tenant-represented organizations by providing them with the resources needed to build technical expertise. This would enhance these organizations’ ability to engage further in decarbonization efforts, allowing the expertise of local community-driven groups to be leveraged in providing technical assistance, supporting tenant engagement, and delivering projects.
Financing Innovation: Innovative technologies and methods continue to push toward affordability of building decarbonization, but there is still a need to validate and establish a range of these innovations in the market to drive down costs. While emerging technologies are demonstrating their ability to address various pain points — such as exterior insulated façade panels solving for tenant-in-place retrofits, or prefabrication methods solving for time and workforce constraints — costs remain a challenge. While this is due to multiple factors, there are clear opportunities for financiers, insurers, and investors to take a more active role in facilitating access to these products and driving broader market adoption.
- Embedded Finance Solutions: There is potential for embedded finance to play a larger role in making decarbonization technologies more accessible at the point of purchase. By integrating financing options directly into the sales process, contractors can more easily adopt such technologies without the burden of high up-front costs. For example, Sealed, a new climate tech company, incorporates embedded finance into technical interventions, enabling homeowners to pay for energy efficiency upgrades through energy savings rather than up-front payments. This model is made possible through partnerships with financial institutions like the NY Green Bank, which provides revolving credit facilities to fund Sealed’s projects. Homeowners are offered upgrades such as insulation, air sealing, and low-carbon HVAC systems, and the cost is amortized and bundled into their energy bills, allowing them to pay overtime as they save on energy costs. This makes it easier for homeowners to adopt necessary upgrades without needing large up-front capital. As an aggregator, Sealed also pays rebates to contractors and households immediately upon installation, further reducing up-front costs for owners.

Underwriting Barriers

Underwriting policies are effective levers that are oftentimes underutilized or not adequately used to shape project scopes. Today, most financing entities will not underwrite operational savings when there is no guarantee of cost savings. As a result, owners must cover project funding gaps out of pocket. Recommendations to address this issue include:

Cost Data Research: Some state energy offices, including NYSERDA, have started to build a performance database for energy efficiency projects. By streamlining and analyzing this data, energy offices and other central organizations can provide a variety of resources to lenders, including case studies and utility cost-savings estimation tools. These standardized data points can inform lender underwriting processes, ensuring more favorable lending terms for borrowers. For example, if electric systems have longer life spans, financing entities could adjust underwriting standards to permit owners to set aside fewer reserves, freeing up cash flow at the property and portfolio levels. As a result, more owners would be willing to pursue decarbonization projects due to the cost benefits, thereby driving market growth.
Underwrite Cost Savings and Added Value: If building owners can underwrite a portion of projected cost savings specific to decarbonization improvements, they would be able to keep the savings in project budgets, allowing projects to be more ambitious with larger capital improvements. Utility savings are the most straightforward cost savings, though they are still not optimized in the underwriting process due to perceived uncertainty in projected savings. The Future Housing Initiative is furthering the underwriting field for high-performance buildings, having recently published new standards for low-carbon underwriting based on real performance data from 30 new construction, low-carbon multifamily properties in the Northeast. High quality data is critical not only for utility savings, but for capturing the many other benefits of decarbonization, including NEBs such as avoided emissions noncompliance fines, improved tenant health and comfort, and decreased maintenance costs. Underwriting should aim to capture the full value of decarbonization, whether determined by projected benefits from building assessments or by post occupancy assessments that advance the market for future projects.
Improve Debt Service Coverage: The up-front cost of decarbonization upgrades may prompt building owners to raise rents. However, if owners can demonstrate the long-term operational savings of whole building retrofits, there could be more opportunities to negotiate and reduce debt servicing costs. Financial strategies, such as extended amortization schedules, lower interest rates, or tax abatements that reflect the long-term value of high-performing buildings could help owners achieve a higher debt service coverage ratio. In turn, this incentivizes projects and increases the likelihood of owners meeting debt obligations.
Performance Data Collection and Application: Jurisdictions, insurance firms, and financiers can collect and analyze performance data to inform plans, terms, and products tailored to high-performance buildings that accurately capture the value of decarbonization. For example, climate risk scorecards that encompass weather-related risks, tenant relocation during power outages, and temperature fluctuations for any given property can help standardize data collection to inform underwriting processes or performance-based insurance models. California’s Climate Smart Insurance Products Database lists over 400 green insurance policies that provide incentives such as discounts for energy efficiency certifications and climate-resilient construction. These insurance products offer reduced premiums for properties that meet specific energy performance benchmarks or incorporate climate resilience measures, thereby further encouraging integrated whole-building retrofits.
Inclusive Utility Investments: Inclusive utility investments offer a compelling way for owners to make energy improvements to their building without facing up-front financial strain. Also commonly known as tariffed on-bill financing, inclusive utility investments can be used to cover the initial costs of energy efficiency or clean energy upgrades. Up-front investment costs are recouped through fixed charges on a customer’s utility bill. This approach eliminates the need for individual credit evaluations because the tariff is tied directly to the building or unit’s meter.
Recognize Carbon as a Pollutant: Today, many originators require that borrowers demonstrate plans to remediate pollutants prior to closing a loan. Yet, despite carbon’s well-documented negative effects on both human health and the environment, it is not classified as “pollutant” in the same way radon, asbestos, and lead are. Introducing protocols to recognize carbon as a pollutant and factoring it into Phase I Environmental Assessments or in state-mandated assessments, such as New York’s Integrated Physical Needs Assessment, would be a significant first step. This would signify a powerful incentive for the adoption of low-carbon upgrades, making carbon reduction a standard due diligence practice.

Complementary Finance Strategies to Advance Innovation

To meet the massive market need for multifamily retrofits and decarbonization across the building stock, exploring more innovative technologies could help many projects improve cost and time efficiencies, reduce disruption, and create replicable solutions at scale. In parallel with refining conventional methods where more appropriate, lowering the cost of innovative technologies and facilitating adoption can further support growth in the building decarbonization market. To facilitate the adoption of new technologies, a multifaceted approach is vital, including enhancing data transparency to foster trust, aggregating and coordinating demand to achieve greater economies of scale, and developing insurance mechanisms to mitigate potential risks. These initial opportunities for exploration are listed in more detail below:

Technology Performance Data Transparency: Availability of robust data can better demonstrate the value of these technologies broadly and help secure favorable insurance terms and attract investment. However, the perceived risk associated with new technologies, combined with cost premiums in some cases, presents a barrier to adoption, especially when looking for available funding products. To overcome this, a stronger emphasis on collecting and sharing performance data is essential. It is critical to present funders and insurers with clear evidence of the benefits to the project and community from investing in these innovations. Additionally, continuous monitoring is vital for tracking the long-term performance and ensuring the sustained benefits of new technologies.
Scaled Demand: By aggregating demand when purchasing innovative technologies, property owners can potentially reduce up-front costs and secure more favorable financing. Bulk procurement vehicles can drive cost reductions, as seen in successful models such as bulk purchasing heat pumps in Canada, where manufacturers and general contractors can gain visibility of cash flows through aggregated purchases. More loosely, coordination of innovative projects across owners can reinforce the demand signal, justifying investment in economies of scale by providers. These approaches not only help optimize pricing and bring down production costs but also allow for the demonstration of these technologies across multiple projects, building confidence in their performance. As more projects adopt these technologies, insurers, investors, and financiers can gain greater confidence, helping to establish and expand these solutions in the market.
Insurance Mechanisms for Emerging Technologies: Establishing robust insurance mechanisms is essential to mitigating the perceived risks associated with adopting new technologies. Performance-based insurance policies can help guarantee new technologies deliver on their promises, offering both financiers and building owners a layer of protection. These mechanisms could include coverage for underperformance, extended warranties, and maintenance guarantees, ensuring that expected benefits are realized. This approach provides confidence to stakeholders and supports wider adoption by reducing financial uncertainty.

Regional Financing Tools

In addition to traditional financing products issued by financial institutions, both NYC and MSP offer specialized financing tools to support various property improvement initiations. These products are designed to finance sustainability, health, and safety upgrades for properties that are in the middle of a financing cycle and may not otherwise have access to project financing.

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