What is the Value of a Green Loan in Multifamily?
With the Federal Reserve’s recent interest rate drop, there is much discussion around whether the rate decrease is sufficient. Fortunately, there are Green Loans from Fannie Mae and Freddie Mac that can assist owners to achieve the rate decrease needed to benefit in financing or refinancing a property.
Green Loans are a type of loan product where owners can invest in green designations or efficiency upgrades in exchange for discounted closing costs and reduced interest rates beyond what may be available to a property in a conventional loan product. The basis for these reduced rates is that a property that has a green focus will be more resilient and profitable, making it a lower risk investment for the lender.
In addition to the benefits of the financing package when considering a green loan:
If an owner is looking at a green loan for an existing site with no green certification (such as green globes or LEED), then the borrower can increase their loan amount to fund a certain percentage of the retrofit costs. This means that your loan itself can be expanded to include part of the work required to achieve the loan.
On a retrofit project, the percentage of energy/water savings is a goal not a requirement. If the scope of work completed does not require efficiency savings there is no penalty. For example, if the loan requires a 25% reduction on energy and it is projected that a lighting retrofit will achieve the savings, however the actual energy savings is only 20% there is no penalty or requirement to do additional projects.
There can be operational benefits for property to further improve the NOI of the property. Think about it, if you are reducing your energy consumption, your costs go down. When you combine those cost savings of energy and water with the improved terms of the new loan, the benefit to the property can exceed the NOI target for the property. Our Chief Sustainability Officer has seen one green loan create $30 million in value for a sole property over the term of the loan.
You can use Incentive programs to fund your retrofits. It is perfectly permissible to use alternative funding sources such as rebates, free equipment, and other incentive programs to fund your project. To deepen this benefit, in some green loan products, the owner can take both the additional funding for the project and the alternative funding to complete the same scope of work. This means that in some cases even if the owner has no capital budgeted for the improvement, the improvement can still occur.
There are some nuances with Green Loans that owners should note and be prepared for:
Grean Loans often require annual energy and water reporting through EnergyStar Portfolio Manager. This may require an owner to have both unit and common area data (whole building data). If a property is in a mandated benchmarking or building performance standard market, then the whole building data will be available to comply with the loan requirements. If the property is not located in a jurisdiction that compels the utility providers to supply the data, then modeling of whole building data, based on a sample set of the unit data combined with the common area accounts can be used. It is critical for owners to verify in advance if modeled data will be accepted. Certain loans, like HUD, do not allow for modeling when other types do.
All property improvements need to be completed within a specified time limit set in the loan documents. This means that your site teams and regional teams need to be advised when the scope of work must be complete. Pro-tip; you can work with your lender with this. During the pandemic, permitting processes in certain cities were affected and some projects took longer to complete due to this. Communication is key. Often the lender will work with ownership if there are challenges to completion that are outside of ownership’s control.
Although the proposed efficiency measures will come in a report from an energy auditor assigned to the property by the lender, the operator can discuss and “pick” which energy efficiency measures they would like to pursue.
Looking at Green Loans for your portfolio? GreenT Climate Software can assist you. We offer energy project management, annual compliance reporting, incentive evaluations, and energy modeling to all our customers. Want to learn more? Contact us here.
