By Drew H. McCreery
Partner Engineering and Science, Inc.
The Federal Housing Finance Agency (FHFA) has announced reduced multifamily lending caps by over four percent in 2018 versus 2017. Green Finance programs, however, are one of the cap-excluded categories.
Fannie Mae and Freddie Mac have continually updated their Green Financing incentives and guidelines to make these programs more streamlined and enticing to new borrowers.
As a result, they have recently been some of the most robust lending programs in the commercial real estate industry.
Agency lenders and borrowers will continue to find no shortage of multifamily opportunities, in addition to taking advantage of the many established benefits to green financing.
These include: preferred pricing, higher underwritten net operating income (NOI) and value (such as tenant and owner paid utility bill savings), additional loan proceeds, and energy study cost reimbursement (up to $3,500 for Freddie Mac and Cost of High Performance Building Module for Fannie Mae).
With the help of a knowledgeable, experienced environmental consultant, borrowers and lending agencies can take advantage of affordable housing incentives if they meet new green program guidelines.
Improvements financed through the program must result in more water or energy efficiency savings (borrower can pick either) than previously required.
Fannie Mae has increased savings thresholds from 20 to 25 percent.
In addition, they require specific forms mandated by Fannie Mae (4099h) to be submitted to the client along with a green report, and introduced some changes to the high-performance building report, including decreased site visit sampling and additional water flow rate bag testing.
Freddie Mac, on the other hand, now requires even greater efficiency numbers, from 15 percent owner-paid savings to 25 percent whole property savings, introduced a new Form 1106 that must be submitted to clients along with a Green report, and implemented some changes to the green assessment report, including increased site visit sampling and no minimum spend or vintage requirement.
For both programs, there is no minimum spend requirement per unit, and partial implementation is possible, but 100 percent of selected energy and water efficiency measure (EWEM) costs must be escrowed and improvements completed within 12 months.
The process for utility bill review and report formulation remains the same. It involves obtaining client questionnaires and utility data, which are then paired with comprehensive site visits and internal analysis, generation of an ENERGY STAR score and an energy and efficiency model.
Energy efficiency experts can navigate the intricacies of these requirements to achieve the highest efficiencies.
They can then strategize to help multifamily lenders and borrowers take advantage of the green lending programs, save water and energy, and improve the NOI of their buildings.
Benchmarking is required for both Fannie Mae and Freddie Mac to report energy performance metrics through the ENERGY STAR portfolio manager.
This includes an entire calendar year of utility consumption data for the whole property (both owner and tenant paid), including gas, electric, purchased fuels and water/sewer.
This recurs annually for the life of the loan for Fannie Mae, and for four years annually for Freddie Mac loans. A good consultant can do this on behalf of clients if utility data is provided to ensure compliance and reducing paperwork hassle.
How these changes could impact multi-family deals for borrowers and developers depends on the existing conditions.
Other factors include geography and the vintage of the property, but the biggest impact is the current condition of the existing site.
What is the flow rate of water for fixtures and toilets? What efficiency measures (if any) have already been implemented? What building requirements were applicable in the year the structure was built?
Based on average existing conditions from historical data, EWEMs such as kitchen and bathroom aerators, showerheads, and toilets, it is possible to get over 25 percent energy savings from minimal installation cost per fixture that adheres to per unit Green Financing guidelines.
But it does probably require commitment to multiple installations and more EWEMs than current underwritten green loans. Additional measures that can be implemented include dishwasher and clothes washer replacements and on-site irrigation improvements, as well as whole property lighting improvements.
Fannie Mae has also introduced a new program called Healthy Housing Rewards for affordable housing new construction.
It provides basis point interest rate reduction on properties with health-promoting design (15 bps) or enhanced resident services (30 bps). Health promoting design includes playgrounds, fitness equipment, tobacco-free environments, green spaces, and more.
Enhanced resident services include health and wellness programs, day care, food access, youth and education programming and job training.
While all property owners and investors can greatly benefit from benchmarking and efficiency building upgrades, this is a requirement for Fannie/Freddie multi-family loans.
As regulations and compliance expand, it is more crucial than ever to engage with a certified, experienced energy and sustainability consultant to ensure a successful transaction and to maximize long-term asset value.