How Multifamily Investors Can Qualify for a Green Loan

Let's move your project forward

Multifamily investors can reap some green by going green. Investors can earn financial incentives via federal loan programs for borrowers who make their buildings more energy efficient—and maintain the improvements.

Fannie Mae's Multifamily Green Financing platform offers loans for apartment buildings and cooperatives incorporating improvements that boost energy and water efficiency, while Freddie Mac's Green Advantage program revolves around a so-called "Green Assessment" that estimates potential savings from energy- and water-efficiency projects.

These initiatives can prove helpful to multifamily investors looking to invest, capitalize and maximize returns while preserving affordable rental housing.

“A mission of the Federal Housing Finance Agency (FHFA) is to provide affordable workforce housing," said Andy Shires, managing director at Greystone, which is one of the country's top participants in the green lending sector and a leading multifamily real estate lending, investment, and advisory company. To incentivize more green lending activity across the agencies, funds distributed from Fannie Mae's Green Rewards program or Freddie Mac's Green Up and Green Up Plus programs do not count toward either agency's $35 billion multifamily lending cap.

For the borrower, this can yield savings and overall lower interest rates as compared to traditional loans, along with a potential increase in the eligible loan amount.

Fannie Mae and Freddie Mac's green lending programs can prove beneficial to all involved, Shires said. “The agencies benefit because the loans don't count toward the lending cap. Lenders can offer a better rate and be more competitive. Borrowers are able to obtain a better rate and make their properties more efficient. All this savings is passed along to the tenants, who get housing at lower cost."

Qualifying for Green Financing

FHFA launched its green lending programs in 2016. For a property to qualify in 2017, the first full year of the program, borrowers were required to propose property improvements that would result in a 15 percent reduction in any combination of energy or water consumption. In 2018, this energy reduction threshold was raised to 25 percent, and it was raised again to 30 percent in 2019. Unlike in prior years, to meet eligibility requirements in 2019, 15 percent of the 30 percent have to be projects related to energy (versus all water projects like in prior years).

“Typical properties that are good candidates are those built pre-2000," said Shires, explaining that these types of buildings usually aren't as energy- or water-efficient as more recent construction and therefore offer the best opportunities for upgrades.

The application process for both agency's programs begins with a third-party analysis of the intended property.

“A consultant studies utility bills, inspects the property and creates a laundry list of projects projected to improve the use of water or energy, with estimated savings," Shires explained. "The investor can then pick three or four of these projects to meet the necessary threshold."

As the lender, we will escrow 100 percent of the cost of the planned green improvements and the borrower has one year to complete the intended improvements and must continue to provide post-completion reports in reduction.

New Requirements for 2019

New requirements announced for 2019 aim to standardize this reporting, as well as tighten the future energy- or water-reduction threshold.

“For 2019, the requirement is a 30 percent reduction of energy- or water-consumption on the property, and half of this must come from energy improvements," Shires said. “The water side is the least expensive way to meet the threshold. While energy-related improvements are more expensive, they achieve a higher savings."

Typical energy-related upgrades include changing to ENERGY STAR appliances, installing solar energy systems, improving insulation, replacing the boiler and/or adding LED lighting. On the water side, improvements include installing low-flow toilets or efficient shower heads, as well as water-saving irrigation systems.

"Freddie Mac has reported that water improvements translate to about $17 per month for the tenant, while energy improvements can amount to $44 per month," Shires said. "This savings is in line with FHFA's mission of creating affordable workforce housing."

A Greener, Leaner Mortgage Payment

Another incentive for green-leaning investors is HUD's Green Mortgage Insurance Premium Reduction. Known as the Green MIP Reduction, this program offers reduced mortgage insurance payments for HUD 223(f) borrowers purchasing or refinancing multifamily rental housing.

As of May, 2018, the Green MIP Reduction program reduces the MIP for qualified borrowers by 0.25 percent a year. To qualify, properties must receive a certified score of 75 on the ENERGY STAR program or a similarly high score on another designated program. The property must maintain the minimum score, and apply to be re-certified, over the life of the loan.

The Green MIP Reduction program typically appeals to borrowers pursuing new construction, acquisition or refinancing, as building from scratch makes it easier to plan to satisfy the certification requirements.

Energy-efficient buildings represent a positive step for everyone involved and a welcome gain in creating a more sustainable future.

©2020 Greystone & Co. II LLC. All Rights Reserved. Loan products are offered through Greystone Servicing Company LLC, Greystone Funding Company LLC, and/or affiliated companies.