Multifamily green financing; A stronger business case leads to a banner year
This past year was a game changer for the multifamily green financing market. Fannie Mae and HUD significantly increased financing discounts for their existing programs, while Freddie Mac entered the market with a splash. By the end of 2016, the agencies had funded several billion dollars in green loans, and momentum has continued to build in 2017.
Why add another layer of complexity to the closing process? Green financing provides interest rate reductions of 15-45 basis points, increased NOI, and other benefits that reduce the cost of ownership. With proper planning, the benefits far outweigh the risks. Let's break it down.
More arrows in your quiver
You have many financing options, including Fannie, Freddie, and HUD. While green financing may not be a good fit for every community, investigating the business case is well worth your time and effort. Look beyond interest rates to quantify the value of ongoing utility & maintenance cost reductions, increased NOI and asset value, and lower resident utility costs.
Choose your own adventure
Fannie, Freddie, and HUD green financing options are available for acquisitions, refinances, and new construction projects. While each program has unique benefits and requirements, they are all structured to achieve one of the following goals:
- Achieving an eligible green building certification (e.g., LEED, ENERGY STAR, etc.)
- Fannie Mae Green Building Certification Pricing Break
- Freddie Mac Green Certified
- HUD MIP discounts
- Reducing property-wide energy OR water consumption
- Fannie Mae Green Rewards
- Freddie Mac Green Up and Green Up Plus
HUD’s MIP discount program is a good fit for new construction projects that are working towards achieving a green building certification. The program provides mortgage insurance premium (MIP) discounts of 45 basis points and a period of 15 months post-construction to demonstrate achievement of an eligible green building certification and an ENERGY STAR score of ≥ 75.
Fannie’s Green Rewards and Freddie’s Green Up Plus programs provide the strongest business case for existing communities that have not achieved green building certifications. Their programs require community-wide energy OR water consumption reductions of 15% (Freddie) and 20% (Fannie) and provide interest rate reductions of 15-39 basis points. It is important to note that Fannie's Green Rewards program is the least restrictive and typically provides the strongest business case.
The sweet spot
According to the National Multifamily Housing Council, approximately 85% of the nation’s multifamily housing stock was constructed before 2000. The vast majority of these communities have not achieved green building certifications and contain low efficiency energy and water-consuming equipment. Therefore, most of the nation’s multifamily housing stock is well positioned for Fannie’s Green Rewards and Freddie’s Green Up Plus programs.
The strong business case
Over the course of the average 7-12 year loan, financing savings can be significant. For example, a 30 basis point interest rate reduction on a $40 million loan will save the borrower $120,000 annually. When layering ongoing utility and maintenance cost reductions, the business case can be quite compelling. Let’s focus on the two most popular green financing programs, Fannie’s Green Rewards and Freddie’s Green Up Plus.
Fannie Mae Green Rewards
- Eligibility: Existing communities with utility reduction opportunities.
- Requirements: Perform an ASHRAE Level II energy/water audit, reduce property-wide energy OR water consumption by 20%, report annual utility performance to Fannie via ENERGY STAR Portfolio Manager.
- Benefits: Up to 39 bps interest rate reductions, ASHRAE Level II energy audit paid for by Fannie, up to 5% additional loan proceeds, increased NOI.
- Estimated capital costs: No minimum investment, $150-$350/unit for 20% water reduction, $300-$700/unit for 20% energy reduction.
Freddie Mac Green Up Plus
- Eligibility: Existing communities constructed before 2000.
- Requirements: 15% reduction in property-wide energy OR water consumption, report annual utility performance to Freddie via ENERGY STAR Portfolio Manager.
- Benefits: Up to 30 bps interest rate reductions, Freddie subsidizes $3,500 of ASHRAE Level II energy/water audit, increased NOI.
- Estimated capital costs: Requires minimum improvement budget of $350/unit that should more than cover a 15% water reduction, up to $600/unit for 15% energy reduction.
Multifamily green financing programs should be evaluated for all acquisitions, refinances, and new construction projects. The strong business case can provide value across all stages of the ownership cycle and even benefit your greatest asset, your residents.
If you would like to evaluate green financing options and the business case for a potential transaction, refinance, or project,