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by Tom Konrad CFA
Many people still think of green technologies as costly. But cost
is never the main barrier to efficiency measures, which often can
boast internal financial returns far higher than even risky junk
bonds. The barriers against energy efficiency and legion,
but cheif among them are the small size of the investments and
split incentives, where the person making the investment is not
the same person who reaps the rewards.
A Colorado based NGO, the International Center for Appropriate
and Sustainable Technology (ICAST), recently launched
a charity-finance hybrid to overcome this problem of split
The hybrid includes a charity and crowdfunding platform, Project Sunlight, as well as a new community
development financial institution, the Triple
Bottom-Line (TBL) Fund. By combining donations and
social-impact investments, ICAST hopes to increase the pool of
low-interest money available to fund these retrofits.
The idea of making affordable housing energy efficient is an
alluring one. After all, more efficient apartments not only save
tenants money, but also can improve their health, safety and
comfort. At the same time, landlords benefit from higher property values, lower turnover,
higher occupancy and tenants’ better ability to pay rent. And, of
course, everyone benefits from reduced greenhouse gas emissions.
Ravi Malhotra (left) and ICAST staff discuss energy
efficiency options with the owner of an affordable housing
Many energy-efficiency upgrades also pay for themselves in energy
savings over the long run: ICAST’s retrofits generally pay off in
seven or eight years, with some improvements, such as lighting,
paying back in as little as two years.
But it’s hard to find many low-income rental building owners
willing to pay the upfront costs. Many low-income apartments
suffer from a classic split-incentive problem: the landlord pays
for the building upgrades, but the tenants receive most of the
It takes low-interest loans to entice landlords, and ICAST’s
ability to do these projects is limited by the supply of
investment funds available at low interest rates. It’s Economics
101, says Ravi Malhotra, executive director of ICAST: “The number
of owners we can sign up at 4% is much smaller than the number of
owners we can sign up at 2%.”
For ICAST, the magic number interest rate is around 3%. “We can
find as many projects as we have capacity to do as long as we can
offer owners funds below 4%,” Malhotra adds.
The catch is that ICAST needs both a loan loss reserve and money
to fund its operations. Together, these cost about 2.5% per year.
A quick check of the math shows that won’t work: if ICAST gets
money at 3% and loans it out at “below 4%”, there wouldn’t be
enough room to both run ICAST and fund the reserve.
In other commercial settings, a host of government programs and
utility incentives exist to bridge the gap, but the unique nature
of commercial property for residential use leaves most low-income
housing to fall through the cracks.
Only a handful of US utilities offer rebates for low-income
housing, Malhotra says. Some government programs have historically
supported weatherization upgrades for affordable housing, at
least, but these funds – which have only served about 5% of market
demand over the last 30 yeaars – are decreasing.
The solution, according to Malhotra, is to sell loans that are
essentially subsidized by charity instead of by government.
Donations to Project Sunlight will pay for a loan loss reserve and
ICAST’s operating expenses. This will enable accredited investors
backing the TBL Fund to earn an annual return of 3% over five
Although 3% interest is a fairly low rate, Malhotra thinks many
investors will be interested because of the outsized social
impact, so long as the money is safe.
And there’s some evidence investors would consider these loans to
be safe. Over the last eight years – including during the 2008
housing crisis – ICAST has completed more than $10m worth of
commercial multifamily housing upgrades without any defaults.
Current “green” loans have default rates of less than 0.5%,
according to the TBL website.
Additional safety comes from the 5% loan loss reserve, in
addition to a 20% loan loss reserve provided by the state of
Colorado for projects in that state. The underwriting process
includes screening applicants against risky borrowers, as well as
due diligence aimed at preventing upgrades that do not provide
Even before its official launch, the TBL Fund is already catching
the attention of some impact investors. By the end of 2014, it had
garnered $500,000 in loan funding from investors, and Project
Sunlight had received $44,000 in charitable donations.
It remains to be seen if other investors will step up – and if
Project Sunlight will receive enough donations to match the demand
for investment in the TBL Fund. Malhotra thinks ICAST will need
10% of its funds to come in the form of donations to be able to
offer the 3% return rate for the rest.
One idea would be to ask investors if they would be willing to
donate 10% of their investment to the charity. No individual has
yet both invested and made a donation but, Malhotra says, “All we
can do is ask.”
Tom Konrad is a freelance writer and portfolio manager
specializing in clean energy and income investments.
An earlier version of this article
published on The Guardian, and is republished with
permission. Further reprints require permission from The