Lower interest rates and larger loans are fueling energy conservation inside multifamily housing operations across the country, bolstering the bottom line of owners and the wallets of residents.
Fannie Mae, Freddie Mac, HUD and the Federal Housing Authority (FHA) offer multiple loan discounts that recognize apartment properties that use less energy. Apartment buildings with energy-saving features typically have lower utility bills that can make them more profitable and less risky for lenders. GSEs (government sponsored enterprises) recognize the potential savings in their underwriting calculations, discounted interest rates and loan to value ratios in the products they offer.
Fannie Mae was the first to launch its Green MBS product in 2012, a loan category that has widened greatly in the last year as HUD, Fannie Mae and Freddie Mac bolstered or launched fiscal incentives for conservation in 2016. Fannie and Freddie funded well over $3.5 billion in green loans last year, a number expected to be exceeded in 2017 as the trek toward sustainability continues in an energized apartment market. These loans support properties that will save 20 percent or more on their annual energy or water consumption by upgrading to energy- or water-efficient equipment, as well as properties that have been awarded a third-party green building certification, such as ENERGY STAR or LEED.
Apartment communities that are LEED certified tend to be new construction or extensive rehabs since insulation is a big contributor to meeting its high-efficiency standards. Fannie Mae’s Green Rewards program is a huge part of making these new construction loans possible.
Green financing also helps owners obtain low-cost loans to make existing properties more energy-efficient. Fannie covers up to 50 percent of the projected value of the energy-saving improvements planned by the borrowers and lends up to 5 percent more than a typical loan. This allows owners of older affordable housing properties to get green financing without going through a full gut rehab that’s required of older buildings to meet standards like LEED.
Fannie Mae, Freddie Mac and HUD provide over half of the multifamily housing loans across the country, giving the GSEs significant influence over the lending market as green lending competes with conventional loan products.
GSE programs continue to place green financing discounts in reach of just about any borrower seeking funds for a multifamily property, with simple, low-barrier requirements in the way of conservation. Fannie and Freddie allow basis point reductions on loans for multifamily properties that meet one of three criteria:
- Having a standing green certification
- Committing to pursue green certification
- Committing to reduce energy and/or water consumption
Those opting to simply reduce consumption and not pursue certification are verified by an energy audit. Such an audit sets a roadmap for achieving certain cost-effective goals for effectiveness.
With the constant market fluctuation of utility supply and cost, the heightened focus on socially responsible conservation and tightening rents already occurring in many metros, reducing energy consumption is becoming a standard of good business. Green financing supercharges operational savings by offering reimbursements, lower interest rates and additional loan proceeds at a lower upfront cost.
What incentives do GSEs offer?
10-40 basis point reduction. Lending rate discounts are available in return for meeting sustainability and/or energy efficiency targets, which can provide a substantial impact to the Internal Rate of Return.
No caps. Green lending programs are not subject to the annual Federal Housing Finance Agency lending cap, making them attractive to agency sellers and servicers who can now do a lot more deals.
Audits are covered. Depending on the program, the cost of the energy audit is covered in part, or in full, by the agencies.