Loan Star

Apropos of my realization that if I bought a new furnace on credit, rather than waiting to save up the cash, I’d have saved a bundle of money over the last 5 years, here’s something I’ve been meaning to write about for months:  a Vancouver developer that came up with a smart financing scheme to build a super-efficient condo complex.

All things being equal, I imagine that most real estate developers don’t care one way or the other if their buildings are energy efficient.  If they can make some money by building green—or at least recoup their costs—they’ll do it.  If they can’t, they’ll cut corners.  I suppose that a few virtuous souls forgo some profits, say, by installing efficiency features that they can’t quite recoup on sale.  But for the most part, the developers are going to follow the profit motive:  if the costs of a super-efficient heating system are higher than home-buyers are willing to pay, the developer is going to skimp.

That’d be fine, if consumers were rational about energy purchases.  But we’re not.  In fact, most people’s decisions about energy efficiency—well, mine at least—are really dopey.  In my case, I was too worried about taking on new debt to realize that utility bill savings would have more than paid for the financing cost of a new furnace.  I could have saved money from day one.  Only myopia prevented me from seeing that.

For a condo-buyer, the problem is similar.  Most prospective buyers are looking for the cheapest possible mortgage—which means that they undervalue long-term savings on utility bills.  So they’re not willing to take on a bigger mortgage for a more efficient heating system—even if it saves them money in the long run.  (Or, really, even in the short run.)

So what makes this Vancouver developer, reSource Rethinking Building, and their Verdant development, so clever is that they figured out how to get around all that.  They used some innovative financing to make energy efficiency profitable for everyone—from day one.

Here’s how it worked. The developer took out a loan (kudos to Vancity Capital for taking this on) to build a hyper-efficient heating system—a ground-source heat pump, which is just about the most climate-friendly way to heat a big building. For collateral, the loan itself was backed by the future energy savings. In effect, this meant that the developer paid next to nothing out of pocket to build the super-efficient heating system.

After the development is finished, the loan will be transferred to the condo association (in Canada, they’re called strata corporations, but it’s the same thing). The loan financing costs will show up as a line item in condo fees—a fixed cost every month, that won’t go up over time. But because the system is so efficient, condo owners will pay less for their heat—combining utility & financing costs—than if the condo had a standard gas furnace.  They pay no more for the condo and pay less per month in condo+utility fees.

I don’t know if this description does a good enough job of describing how diabolically clever all of this is. The developer does the right thing, but doesn’t have to pay anything for it—the financing gets passed down to the future owners. The condo owners pay the financing costs as part of their condo fees—but wind up paying less, overall, to stay toasty in winter. The financers get their cash back, plus interest. More money goes to local engineers and laborers, and less money goest to distant natural gas fields. Greenhouse gases are avoided. Everyone wins.

Anyone want to try this south of the 49th parallel?