Grinding the GEERS: Analysis
Even if you haven’t been following the issue closely, you might have heard something about the City of Guelph’s potential GEERS programme. GEERS stands for Guelph Energy Efficiency Retrofit Strategy and is a city-created loan programme that provides money to qualifying residents for home retrofits — possibly including insulation, HVAC, triple-glazed windows, rooftop solar, etc. — that will help reduce home energy, metered water, and/or distributed electricity consumption. Using Local Improvement Charges (LIC), the loaned money will be repaid by the home owner on their property taxes over 20 years.
On the surface, GEERS seems like a good idea. After all, if the city can help owners retrofit homes in a way that will have a positive effect on energy/water consumption (and, in return, greenhouse gas emissions), Guelph can play a positive role in combatting climate change and everyone wins. Digging deeper into the actual proposed programme, though, there are a number of hard questions that need to be answered and red flags that need to be examined before city council proceeds with this ambitious plan. Though there are many aspects to GEERS that we must analyse, I am only going to focus on a few of the matters that I find most pressing. My career experience as a real estate broker and mortgage broker has informed much of what I am addressing.
Full Cost Recovery Needed
The staff report proposes that a full GEERS programme, as well as a potential 20-home pilot project, show full cost recovery with no requirement for funding from tax-supported budgets. In other words, those home owners participating in GEERS will be responsible for all implementation and administration costs. I fully support this goal and would not vote to implement GEERS if it was any other way.
It’s important for staff to identify what “full cost” means, though. I believe it must take into account everything related to GEERS, from the obvious costs such as interest on borrowed money to fund the retrofits for home owners and new staff hired to oversee the programme, to the less obvious costs such as long- and short-term employee benefits for new hires, prorated employment time costs for existing management providing oversight to GEERS, legal costs to establish the LIC, and all advertising/marketing costs.
Plan for Cost Changes in Future
The report indicates that full cost recovery for GEERS can be achieved by adding an administration premium of 0.3% to the city’s cost to borrow money. For example, if Guelph borrows 20-year money at 3.5%, the LIC for home owners should be 3.8%.
I believe the city should anticipate costs being higher than projected since this is a new programme implementation. I am not confident that 0.3% is sufficient to recover costs and propose that the premium be doubled to 0.5% or 0.6%, positioning the LIC rate close to 4%. It is prudent for the GEERS programme to have a foundation of financial independence and stability until the city has a firm understanding of what full cost recovery entails. Furthermore, I would insist on wording in the GEERS contract with home owners the provides for future interest cost increases and/or decreases should the financial burden of implementation be higher and/or lower than anticipated.
In other words, the city should charge a higher LIC percentage on GEERS to be financially conservative. If it runs under budget, have contract provisions that returns the extra interest back to the home owner. If it runs over budget, ensure the city can easily increase the LIC interest rate charged to break even.
But Even Then, Will Anyone Use It?
Even with a well-crafted programme, I have trouble envisioning why anyone would actually use GEERS to fund their home energy retrofits. The reason why is that it comes down to eligibility for programme participation.
Without getting into too much detail, the only home owners who would be able to participate are ones that either have no mortgage on their home or ones that have what is called a “conventional mortgage” (i.e. do not owe so much on their home that they require federal mortgage insurance on it). Since the mortgage insurance company (or companies) would not support an additional burden of annual LIC payments, the only home owners that could qualify for GEERS are also the ones that have the best options for funding the home retrofits themselves, through either a home equity line of credit (HELOC) or through refinancing their existing mortgage.
If GEERS is available, though, why would home owners want to finance retrofits themselves through a larger mortgage/HELOC on their homes? Flexibility and lower borrowing costs is the answer. For example, if implemented today, the LIC rate for GEERS would be in the 3.8-4.1% range. As a mortgage broker, I can usually arrange a mortgage refinance for a client at a lower rate (currently around 2.8% for a 5-year term). The necessity of long-term borrowing for 20 years under the GEERS programme, plus city administration costs, almost certainly means higher interest rate charges than if the home owner finances through more traditional means.
There’s also more flexibility through mortgage financing. For example, if retrofits cost $15,000 and a home owner wants to borrow $5,000 extra money for a vacation as well, a refinance could be done for $20,000 at the low rate of 2.8%. Under GEERS, the home owner would be limited to borrowing to cover the actual retrofit costs only.
In short, if home owners wanted to retrofit their homes, nearly anyone who could qualify for GEERS could already fund the renovations themselves through mortgage refinancing at lower interest rate costs. Consequently, who would actually take advantage of GEERS if the city implemented it?
But What If I Can’t Refinance?
Some GEERS proponents may take the position that not all home owners would qualify for refinancing their home or borrowing through a HELOC, and that GEERS makes it easier to qualify. I counter that this is a dangerous way of thinking.
The primary reason Canada largely avoided the 2006-2008 mortgage crisis experienced by our neighbours to the south is our strongly regulated and conservative banking system. Our Canadian lenders have very stringent parameters when determining who can and cannot qualify for a mortgage/HELOC that protects the overall financial health of the home owners themselves. Lending guidelines may seem overly conservative at times (especially to mortgage brokers like me who try our best to help meet our clients’ needs) but they are valuable limits to keep home owners financially protected.
If a home owner could not qualify for a refinance/HELOC to fund retrofits through a traditional lender — perhaps due to high overall debt levels, lack of sufficient income, poor credit, etc. — the city should in no way qualify that home owner under GEERS. If a bank doesn’t think the resident has the financial strength to borrow additional money, the city should take a similar conservative stance.
This leads back to the question: who, exactly, would take advantage of GEERS when more flexible and less expensive options are available?
Are Home Owners Well Served Under GEERS?
To answer this questions, I’m going to put on my real estate broker hat. I believe that at worse GEERS could be potentially harmful to home owners/sellers and buyers; at best, it won’t provide any advantages over traditional mortgage financing of retrofits.
An earlier staff report indicates that:
In the event that the property changes ownership, the LIC will be transferred to the new owner at the time of sale, when the property tax roll is updated.
In reality, this will rarely ever happen when selling a home because buyers will always require the home owner to pay out the remaining GEERS LIC balance before closing the sales. For example, if a home is worth $400K and has a $15K LIC on it, a buyer is going to either offer $400K and tell the seller to pay off the $15K LIC before closing or is going to only offer $385K and be willing to assume the LIC. This is the normal practice for owner-financed items such as furnaces, air conditioners, water softeners, etc. There is simply no benefit for the buyer to assume the LIC when purchasing and there is a danger that home owners may not anticipate paying the remaining LIC in full when selling.
Furthermore, some buyers may be unable to assume the LIC even if they wanted to if they only have 5-20% down payment and thus need a mortgage that will come with federal mortgage insurance. Unless the seller is willing to pay the LIC in full before closing, the presence of the LIC will exclude the home for any high-ratio buyers.
It’s clear to me from a real estate and mortgage perspective that GEERS likely does not serve home owners, and potential home owners, better than traditional retrofit funding methods and in some instances may cause potential financial harm.
Is There Any Benefit to GEERS Then?
I believe there are a few potential benefits. First, the mere existence of GEERS will raise awareness of home energy retrofits, even if very few people use the programme — and awareness of climate change and what home owners can do to fight it is a good thing. Also, if a rooftop solar programme was implemented well through lower-cost bulk purchases of photovoltaic panels, GEERS participants could perhaps see a savings vs. individual purchases through mortgage refinancing … even at the higher 4% LIC rate. Finally, there may be some current or future provincial or federal grant funding that could help reduce the cost to implement GEERS, but I am not aware of anything like that currently.
From everything I outlined above, though, I currently can see more potential drawbacks than benefits to the GEERS programme.
Will You Support GEERS in a Council Vote?
To answer that question, I’ll need more information from staff about the programme implementation. I am hopeful that after receiving this May report, staff will continue their work and come back to council in fall 2016 with an updated report with even more information, data, and analysis.
I believe that the goals of GEERS are noble and strong, but that home owners can perform energy retrofits on their homes without the municipal government getting involved. We need to ask ourselves if Guelph should become a mortgage lender by creating the GEERS programme. I believe that while Guelph could take a role in this, whether it should is another matter.
I currently believe that Guelph should not, but I remain open to learning more about the GEERS concept.