The year 2016 saw an unprecedented boom in multifamily green financing programs. While the GSEs have been committed to sustainability initiatives for many years, this year was different. HUD, Fannie Mae and Freddie Mac all updated existing programs and/or introduced new programs that were significantly more attractive for everyone than previous iterations. The result? From zero to 60 in a matter of months. As of late 2016, over $3.2 billion in green loans were funded by Freddie and Fannie, an unprecedented amount.
What exactly made these green finance programs so attractive?
For one, flexibility. There are a lot of ways to get to the pot of gold. (And yes there is a pot of gold, I'll get to that next). Both Freddie's and Fannie's programs allow borrowers to take credit for already being green (projects that possess a green certification), or for committing to be green (pursue a green certification, or reduce energy and/or water consumption). Those reduction measures are identified through an energy audit, which provides a roadmap to achieve goals that are most cost effective.
And now for the pot of gold part. Reducing energy consumption alone makes good financial sense, but several features of these programs have really been the tipping point in garnering much broader interest:
- 10-40 basis point reduction – lending rate discounts are available in return for meeting sustainability and/or energy efficiency targets, which can represent a substantial impact to the IRR.
- No caps – green lending programs are not subject to the annual FHFA lending cap, making them very attractive to agency seller/services that can now do substantially more deals than before.
- Audits are paid for – depending on the program, the cost of the energy audit will be in part or in full covered by the agencies.
If you go chasing that pot of gold, keep in mind that these programs are nuanced and evolving, so you'll want to work with an experienced energy / sustainability consultant that understands these programs. For this reason, Freddie Mac's Green Advantage program requires you to choose from their list of approved consultants. You'll also want to work with a firm with the qualifications to match the strategy you chose – Pursue energy efficiency? Or a green certification? Which green certification (there are many other than LEED)?
More Green in 2017?
All indications are that these programs will continue to pick up steam next year. As interest rates start to rise, more multifamily investors and developers may look to these platforms as a way to keep some green. And while no specifics have been revealed by the GSEs yet, representatives from both Freddie and Fannie have expressed their organization's continued commitment to supporting green financing. So, here's to more green (and gold) in '17.
The year 2016 saw an unprecedented boom in multifamily green financing programs. While the GSEs have been committed to sustainability initiatives for many years, this year was different. HUD,
What exactly made these green finance programs so attractive?
For one, flexibility. There are a lot of ways to get to the pot of gold. (And yes there is a pot of gold, I'll get to that next). Both Freddie's and Fannie's programs allow borrowers to take credit for already being green (projects that possess a green certification), or for committing to be green (pursue a green certification, or reduce energy and/or water consumption). Those reduction measures are identified through an energy audit, which provides a roadmap to achieve goals that are most cost effective.
And now for the pot of gold part. Reducing energy consumption alone makes good financial sense, but several features of these programs have really been the tipping point in garnering much broader interest:
- 10-40 basis point reduction – lending rate discounts are available in return for meeting sustainability and/or energy efficiency targets, which can represent a substantial impact to the IRR.
- No caps – green lending programs are not subject to the annual FHFA lending cap, making them very attractive to agency seller/services that can now do substantially more deals than before.
- Audits are paid for – depending on the program, the cost of the energy audit will be in part or in full covered by the agencies.
If you go chasing that pot of gold, keep in mind that these programs are nuanced and evolving, so you'll want to work with an experienced energy / sustainability consultant that understands these programs. For this reason,
More Green in 2017?
All indications are that these programs will continue to pick up steam next year. As interest rates start to rise, more multifamily investors and developers may look to these platforms as a way to keep some green. And while no specifics have been revealed by the GSEs yet, representatives from both Freddie and Fannie have expressed their organization's continued commitment to supporting green financing. So, here's to more green (and gold) in '17.
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Tony Liou
Tony Liou is the founder and President of Partner Energy, a division of Partner Engineering and Science that offers helps its clients improve their properties’ energy, water, and carbon efficiency, as well as property resilience and sustainability. Tony frequently shares his insights and discusses best practices at speaking engagements and through industry publications. He has presented at conferences including MBA CREF, NAREIM Meetings, CREFC Annual Conference, Environmental Banker Association (EBA) Annual Meeting, and IMN ESG Forums.
