Powering Upgrades: Innovative Financing for Smart Buildings

Smart building projects promise energy savings and higher property values, but steep upfront costs remain a hurdle despite utility rebates and government incentives covering up to 30% of capital expenditure. Rising material and labor costs strain budgets further, risking missed rebates or regulatory non-compliance. To overcome this, building owners and operators are turning to creative financing that makes upgrades affordable and cash-flow positive. Five innovative models include:

1. PACE Financing: Funds upgrades via property tax assessments
2. ESCO Models: Providers finance and manage upgrades
3. As-a-Service Models: Subscriptions for smart systems like lighting, HVAC, or networks, offset by operational expense savings
4. ESG-Aligned Funding: Low-rate loans/bonds tied to sustainability goals
5. On-Bill Financing (OBF): Utility-funded upgrades, repaid via standard billing cycles

Let’s explore each model, providing a common use case for each.

PACE Financing

Enabled by state laws in over 30 states to promote sustainability and reduce emissions, Property Assessed Clean Energy (PACE) uses private capital to make many smart building upgrades more affordable. PACE financing funds energy efficiency, renewable energy, or resiliency upgrades through a voluntary property tax assessment. Owners can borrow up to 100% of project costs, repaid over 10-30 years via tax bills, with no personal debt. The lien also transfers with any property sale, boosting the resale value.

Use Case Example: A California strip mall owner upgrades an outdated HVAC system and installs solar panels, saving 25% on energy costs. PACE funds the entire project, with tax assessments offset by savings over 20 years, which is perfect for owners seeking no-upfront CapEx costs.

ESCO Models

Energy Service Company (ESCO) models enable energy-efficient upgrades by having specialized firms like Johnson Controls, Siemens, or Schneider Electric design, finance, install, and maintain systems, aiming to cut costs and emissions. Owners pay little to nothing upfront, with costs recouped through guaranteed or shared energy savings over 5-20 years. ESCOs support investments in smart technologies like building management systems (BMS).

Use Case Example: An office building owner installs IoT-enabled BMS, saving 20% on energy ($50,000/year). An ESCO funds and manages the $250,000 project, taking 50% of the savings ($25,000/year) for 10 years. Thus, this option is ideal for building owners who seek risk-free, turnkey solutions.

As-a-Service Models

These consumption models provide subscription-based smart building upgrades, where solution vendors or Managed Service Providers (MSPs) install and maintain systems like smart lighting and HVAC systems, aiming to boost efficiency and cut costs. Owners pay monthly fees that are offset by 20-60% energy savings, shifting CapEx to OpEx, and lowering in-house maintenance costs with no upfront investment.

Use Case Example: A retail chain with 20 stores adopts a lean IT model to reduce staff and tech overhead. They contract an MSP to deploy smart LED lighting as-a-Service with IoT sensors, saving 50% on monthly energy costs. The MSP’s fees, offset by 80% of savings over 5 years, deliver cash-flow-positive, maintenance-free operations which are ideal for retailers seeking to streamline IT operations and scale upgrades across multiple sites.

ESG-Aligned Funding

ESG-Aligned Funding, including green loans and sustainability-linked bonds, provides low-rate capital (0.5-1% below market) for smart building upgrades meeting environmental, social, and governance (ESG) goals, like emissions reductions or LEED certification. Lenders, such as Wells Fargo or Bank of America, alongside green banks, tie rates to KPIs defined in loan agreements or frameworks, like GRESB.

Use Case Example: Owners of an aging office tower seek LEED certification, installing smart thermostats to cut emissions by 30%. A low-rate green loan, earmarked for projects with environmental benefits, covers 100% of costs.

On-Bill Financing (OBF)

On-Bill Financing (OBF) enables energy-efficient upgrades through utility or third-party loans, repaid via monthly utility bills, aiming to reduce energy costs and emissions. Utilities and lenders benefit from interest and grid efficiency. Owners pay no or low upfront costs, with repayments offset by 20-30% savings. Available in states such as California and New York, OBF promotes smart technology investments like energy meters.

Use Case Example: A warehouse owner in a geographic location where OBF is available installs smart meters and a more efficient HVAC, saving 25% on energy. An OBF loan through the warehouse owner’s utility company covers 100% of costs, with repayments added to utility bills.

You Could Start Upgrading Today

Creative financing for smart building projects makes many upgrades more affordable, delivering energy savings, increasing property values, and compliance with mandates and regulations. These solutions eliminate upfront costs, streamline operations, and future-proof assets against rising energy prices.