Commercial Lenders: The future of going green

Commercial Lenders: The future of going green

Fannie Mae, Freddie Mac and the Federal Housing Administration want to make it easier for owners of multifamily properties to make green improvements. The Government Sponsored Enterprises, or GSE, are providing property owners with economic incentives to make water- and energy-saving renovations.

Interest in GSE green lending programs has increased dramatically since their inception some years ago. Fannie Mae’s green company’s alone increased by more than 1,000% in 2016.

Over 60% of PGIM Real Estate Finance’s total agency origination’s have been through green programs so far this year, up from just a handful of deals in 2016.

Going green is no longer a hip trend but rather a mainstream imperative. Beyond being socially important, going green is lucrative for business. Studies show that green properties are more valuable and benefit year-over-year from cost savings. This reinforced credit quality is a positive for lenders, property owners and residents alike.

With commercial lenders now, most multifamily commercial properties stand to benefit from going green, there is currently an attractive opportunity for multifamily owners to use the GSE green lending programs to finance energy and water improvements at older multifamily properties that haven’t already undergone green updates.

A Variety of Financial Benefits

Green lending programs are rapidly growing in popularity because they benefit multifamily property owners and residents. The residents would benefit from having lower utility bills. In return, property owners enjoy higher rates for occupancy, more resident retention and potentially higher rent than non-green properties. These owners can also benefit economically from lower loan coupons and higher loan proceeds.

The size of a GSE loan is often constrained by a property’s ability to support debt service payments. To support higher loan proceeds, the property’s cash flow would have to increase or the associated loan’s interest rate must decrease.

Under the GSE green programs, commercial lenders can underwrite higher property net cash flow by factoring in a portion of the anticipated energy or water cost savings. In addition, while pricing would vary, owners of older multifamily properties can qualify for a 5 to 35 basis point reduction in interest rate by going green.

In exchange for a commitment to make water efficiency improvements, the sponsor secured $619,000 of additional proceeds—an almost eight percent increase—and a 0.22% reduction for interest rate, which translates into cumulative debt service savings of $135,000 over the course of 10 years.

Multiple Programs, Similar Goals

Each of the GSEs offers green lending programs. While program requirements differ, one commonality is that they all strive to help multifamily property owners lower utility costs, improve housing affordability and quality for residents and decrease the property’s environmental footprint.

Fannie Mae and Freddie Mac each have multiple programs targeting owners of existing multifamily housing stock who are ready to make green betterments. By committing to reduce water and energy usage, borrowers may increase their loan proceeds through a lower loan coupon and partial underwritten credit for projected cost savings.

Projects that qualify under the FHA’s Green Program achieve a mortgage insurance premium of 25 points, which would be up to 45 points lower than a project that does not qualify. For a $10 million loan with a 35-year term. This means that the borrower would be savings up to $875,000.

To qualify for any of these programs, properties must undergo an analysis that highlights how borrowers can save energy or water by making property improvements. The GSEs will fully or partially reimburse borrowers for the cost of this analysis once a loan is closed and delivered.

While these programs are targeted toward existing properties, the GSEs also offer limited pricing discounts for new construction and properties that already meet certain green standards and have obtained approved green building certifications.

The Future Is Green

Going green is here to stay, and that’s a good thing for the environment, multifamily property borrowers, commercial lenders and residents. The GSEs’ green lending programs offer attractive financial incentives—for multifamily property owners who haven’t already done so.

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