Green Lending: The Feel-Good, Cost-Saving Financing Option

Before an owner-operator decides to join the rapidly growing sea of voices backing green loans, it’s important to understand the costs and rewards.

Kim Cozza, BerkadiaIt’s clear industries across the board are taking strides to become increasingly eco-friendly, and Fannie Mae and Freddie Mac have followed suit. The two GSEs are incentivizing multifamily property owners to reduce their water and energy usage through post-closing property improvements by offering lower interest rate costs—and it has proved to be an extremely attractive option. Freddie Mac launched its Green Advantage program in August 2016 and provided $3 billion in green loans in the first quarter of 2017 alone. Fannie Mae, which began offering green lending programs back in 2012, saw a surge in volume last year when it began providing deeper interest rate savings ranging from 13 to 39 basis points. At the end of this year’s first quarter, Fannie Mae had already financed $5 billion in green loans—surpassing its entire green production in 2016. But before an owner-operator decides to join the rapidly growing sea of voices backing green loans, it’s important to understand the costs and rewards.

Going Green Requires the Green

For owner-operators seeking to qualify for a green loan, they must first be willing to re-invest capital back into their asset. Although one of the largest hurdles in any real estate transaction is timing, both GSEs and third-party vendors have worked tirelessly over the last year to ensure the timeline to close is essentially the same as in a traditional deal. Program approval requires the owner to commit to reducing water and energy usage by requiring they escrow the funds needed to do so. Fannie requires a 20 percent consumption savings but no minimum spending requirement, while Freddie requires water and energy usage savings of 15 percent with a minimum spending requirement of $350 per unit. Pre-approved, third-party engineering companies perform an ASHRAE II Level Energy Audit, which identifies all the potential energy upgrades and shows the savings-to-investments ratio (SIR), so an owner can determine which green improvements (e.g., replacing kitchen and bathroom water aerators and showerheads, installing low-flow toilets and replacing dishwashers with energy-efficient brands) they are willing to make in order to qualify for the appropriate GSE green program. The agencies will even refund the costs of these reports.

Seeing the Green Yields

While a lower interest rate may be incentive enough to seek a green loan from Fannie or Freddie, the economic benefit of these loans exceeds well beyond the lower interest rate (which typically far outweighs the initial investment cost for improvements). An investment in green improvements has proven to reduce the property owner’s operating and maintenance cost—in fact, according to the U.S. Green Building Council, owners of green buildings have reported an average of 19.2 percent return on investment for existing building green projects and a 9.9 percent average return for new green projects. For example, on a 400-unit multifamily property constructed in 1986, with project costs of $44,000 that were funded from the Fannie Mae loan, green improvements resulted in water optimization and savings of $152,000 per year and are expected to reduce annual usage by 30 percent. With regular monitoring and benchmarking of utility costs and green savings progress is required by each GSE, owners are more aware of volatility, potentially protecting properties against future fluctuations post-closing. The environmentally friendly improvements can also lead to increased occupancy and potentially higher rents. As a 2016 Freddie Mac survey reports, 78 percent of renters would rather rent an environmentally friendly home. Coupling lower interest rates, potentially more loan dollars, reduced operating/maintenance costs, and higher occupancy and/or rents will reward the owner with a higher property value.

When assessing next steps, if an owner-operator can reduce operating expenses or interest rates with the net benefit being greater than the cost of the certifications or the investment into the property—and it’s clear the environmentally conscious resident simply isn’t a fad—perhaps it’s time to consider green financing.