Navigating the Labyrinth

Lisa Denby knows about the price of energy. The president of the board at 305 East 24th Street, a 388-unit co-op in Manhattan, Denby has had to deal with annual energy bills for the cooperative’s common areas that at one time topped $800,000. “This is what every board is trying to address – reducing their fixed costs, like energy,” she says. The point was driven home a few years ago when Hurricane Sandy ravaged the property, cutting off the electricity and forcing the board to appreciate the importance of backup power.

“I’ve dealt with a lot of boards over the years, and they all want to do things that will save them money and be good for the building,” says A.J. Rexhepi, an account executive at Century Management, the co-op’s managing agent. “When they see the scope and cost of these projects, they sometimes back off. It takes a certain board to focus on a project like this.” In this case, he says, the real-life storm became a metaphorical “perfect storm” for implementing change at 305 East 24th Street.  It took about four years, but the co-op is in the process of a major overhaul that will provide power in emergencies and save energy costs overall. And it won’t deplete the reserves or cause a rise in maintenance fees.

How did they do it? The board’s innovative solution holds lessons for other properties.

Wanted: Energy Efficiency

Shortly before Hurricane Sandy hit in October 2012, the 20-story co-op’s board had switched to a dual-fuel boiler that burned No. 2 oil and natural gas. But Sandy’s impact – flooding, power loss, and other damage – convinced the board that more was needed. After research by Tony Fanelli and Rick Buckholz, two board members at the time, cogeneration became a very attractive solution.

Cogeneration works like this: a generator powered by natural gas creates electricity to power a portion (or all) of the building’s needs. As a byproduct of that process, it creates heat that is captured and used for the building’s heating and hot-water needs. If the electricity goes out in an emergency, the gas-powered generators continue to operate and provide backup power.

Going to cogen would solve three problems at the co-op in a single stroke: provide energy-efficient power, reduce overall costs, and offer backup in an emergency. But cogen is expensive. Where could this property – already suffering from costly energy bills – get the money needed without raising maintenance, imposing an assessment, or dipping too deeply into the reserves? To find the answer, Fanelli and Buckholz started to look into potential incentives offered by the New York State Energy Research and Development Authority (NYSERDA), which led them to an incentive program run by the New York City Energy Efficiency Corporation (NYCEEC).

NYCEEC to the Rescue

The city’s energy program offers incentives to install cogeneration systems, but in most cases the loan for an energy-efficient project is structured so that payments are based on what the building anticipates it will save in energy costs, says Jay Merves, NYCEEC’s director of business development. The corporation monitors construction, and after a project is finished, it also monitors the actual energy savings to see how it compares with what was projected.

NYCEEC has worked with 71 buildings since its inception in 2010. Buildings that are a good fit for financing are those with strong financials, an informed and willing-to-work board, and a project with enough potential for energy savings to make it economically feasible, Merves says. Terms of loans range from about 5 to 10 years, with interest rates from 6 to 8 percent.

For the East 24th Street co-op, the total project cost was $4.5 million. NYSERDA’s incentives amounted to $1.34 million and the NYCEEC loan was $2.95 million. The latter loan will be repaid over 9 ½ years. The co-op is projected to realize about $440,000 in annual energy savings. (The agency did not release the exact interest rate.) The board fronted about $835,000 from its reserves to NYCEEC, a move that enabled the co-op to stave off loan payments for the year it would take to complete the project. Once the job is finished, NYCEEC will return $600,000, meaning the co-op will be out less than $250,000. The loan was closed in December 2015, and work began soon after. The board hopes that the installation will be done by early spring. Loan payments begin in June 2017.

Dealing with Fannie Mae

The co-op’s original mortgage, which had been sold to Fannie Mae, had covenants that precluded borrowing money to do work that changes the basic components of the building, says Denby. While that is a traditional clause in a loan, it still needed to be ironed out before the project could proceed.“We were able to explain how the project greens the building, and how it creates stronger economics for the building and how the additional debt is covered by those stronger economics,” says Merves. “Fannie is very interested in buildings being greener, not only because of the financial impact but also to help the city meet all of its environmental goals.”

At 305 East 24th Street, the peak need of the building is 500 kilowatts of power. But the co-op installed three 250-kilowatt cogen units, bringing their total capacity to 750 kilowatts, says Peter Westerhoff, owner of AES-NJ Cogen, who was hired by the board as an owner’s agent to oversee the project.

As part of an HVAC overhaul, the building is also replacing the chillers that provide air-conditioning during the summer months. “They were about five to ten years past the end of their lives,” says Westerhoff. “Maintenance was costing them between $40,000 and $60,000 a year.”

A final component of the overhaul will be the installation of electrical submetering, which means residents will now pay for the electricity they use – and they pay the lower “bulk rate” for multifamily residences. Additionally, the co-op joined the N+1 program, which is designed to provide incentives for buildings to install cogeneration systems that produce slightly more than their thermal needs. What that means, says NYSERDA spokeswoman Sue Gold, is that the properties have the ability to occasionally generate more electric power than would be needed under normal circumstances. Consequently, the building can continue to function even in the case of a power outage.

A Wider Audience

Merves says the East 24th Street deal is not just good for that one co-op. Working out the details of the loan might help pave the way for other buildings that also have Fannie Mae-owned mortgages. For example, NYCEEC drafted a consent form for 305 East 24th Street that is part of the complicated loan process. It now can easily be replicated for other buildings. Secondly, in a typical mortgage there is often a covenant that states that the property owner cannot borrow above a certain amount of money without the permission of both the bank and the mortgage holder, which are sometimes two different entities. “It’s not a guarantee that we will get permission, of course,” says Merves. “But we now have a process in place.”

While 305 East 24th Street came to NYCEEC with many of its “ducks in a row,” says company spokeswoman Jessica Luk, buildings that are not quite as organized should not be scared away from the process. “We can help people, even if the ducks are all over the place,” Luk says. “That can include helping make connections to NYSERDA for incentives, and it can include engineering resources.”

Merves is optimistic that more co-ops will follow 305’s lead. “We’ve worked with Fannie Mae a few years ago, but it was a little more ad hoc,” he says. “This time, it was in the spirit of ‘Let’s put something together that will work in the future.’ ”