Green Rewards Could Save Your Cooperative Money

Many stories have been written about the value of employing energy savings devices throughout cooperatives. These stories explore the virtue of cost savings and the benefits of living green. But, did you know that going green can also reduce the cost of mortgage interest for your community’s loan?

What are Green Rewards?

The Department of House and Urban Development (HUD), Fannie Mae and Freddie Mac, collectively the government sponsored entities (GSEs), previously rolled out incentives including lower interest rates or reduced mortgage insurance cost for cooperative community loans that have adopted green or intend to adopt green energy programs. These green incentives have been extremely successful with borrowers.

What are the benefits?

The GSEs offer two avenues of achieving Green Rewards: a) those properties that were previously designed or renovated to be Green Certified under one of the several Green Energy Certifications or b) those properties that will do Green Energy retrofits as part of a refinancing of the property. Each of the GSEs has differences in their respective programs. It is important to consider each program individually and not confuse their attributes. As a loan underwriter recently said to me; “On the surface each program looks similar; however, in actual practice, the Fannie and Freddie programs are quite simple while the HUD program is cumbersome.”

How does my cooperative tell whether this program is a benefit?

Before considering the program differences, a broader approach is in order. Each of these programs have cost associated with them. These costs must be balanced against the potential savings. The savings come in two varieties: a) the actual utility cost savings and b) the interest rate or in the case of HUD, the reduction of mortgage insurance premium (MIP) that can be saved as a result of refinancing. Professional contractors will evaluate the property to determine potential utility savings and cost; however, paybacks from utility savings alone can be quite lengthy. On the other hand, the “loan savings” being either a lower interest rate or a reduction of the MIP are generally +/- .25 percent reduction in rate. Obviously saving a .25 percent point of interest is far more meaningful to a larger mortgage versus a smaller mortgage. To further illustrate, a $2.5 million mortgage at a rate of 4.50 percent versus a rate of 4.25 percent creates a savings of approximately $4,400 annually. Some Green HUD reports can have an up-front cost of as much as $10,000 to $15,000. Therefore, it would take nearly three years to repay the cost of the HUD report alone. On the other hand, a .25 percent point reduction in rate on a $20 million loan can create savings of over $35,000 annually. Therefore, it is essential to understand upfront what the potential loan and utility savings are versus the cost of reporting.

To have an existing property be Green Certified means something very different to each of the GSEs. Under the HUD programs, the MIP can be reduced to ¼ of 1 percent if the property is Green Certified. However, if the property is already deemed “affordable” by HUD (90 percent subsidized), then the property already qualifies for a reduction in MIP. The cooperative cannot stack the Green MIP reduction upon the affordable MIP reduction. As well, HUD requires more initial due diligence and ongoing monitoring than Fannie Mae or Freddie Mac under the certification program.

How do the programs compare?

Both Fannie Mae and Freddie Mac offer a Green Certification program. We recently had a client develop a new building (opened in 2016) that included significant energy conservation design and construction elements. There was little doubt that the client could obtain the Green Certification Program for either Fannie Mae or Freddie Mac. The cost of the certification of approximately $20,000 was significantly larger than the annual Green interest rate savings the $7.5 million loan would have generated. This is not to say Green Certification reward programs don’t work, but rather that they should be evaluated closely at the onset to insure cost and rewards are properly aligned.

The Green Certification programs continue to evolve and grow. A board should work closely with its lender at the outset to insure that the Green Certification rewards exceed the cost and commitment. The second broad class of Green loans comes from properties that would benefit from retrofitting to achieve Green energy savings. In each of the programs the onset is similar. An independent third-party company inspects the property and its records. A detailed report is prepared wherein building components are evaluated and charted such that retrofits and anticipated savings are readily identifiable. In a Green retrofit, your HUD lender should work with you through the report to identify what aspects of the property can be modified to reduce energy consumption.

HUD requires a significantly high level of savings with annual monitoring. If initial repairs do not meet the required goals, then additional retrofitting may be required. Your Freddie Mac or Fannie Mae lender will work with the board to understand the reports and focus to find energy savings in either energy (gas and electric usage) or water savings.

The required benchmark is currently 25 percent of utility savings for either water OR energy (gas/electric) cost. You cannot combine water savings and energy savings to meet the benchmark. In the Midwest, properties that have gone through the experience find energy savings are too cost prohibitive to meet the required benchmarks. Generally, the best savings come from water conservation directly related to efficient toilets and low-flow outlets. Freddie Mac and Fannie Mae do not require a minimum cost outlay to achieve the savings benchmarks.

Fannie Mae will pay for the report if the Green program is used. Freddie Mac will pay for the report regardless of the outcome. Both agencies require some annual reporting; however, there are not further retrofitting requirements if the savings are not achieved as anticipated. HUD as well doesn’t require a minimum retrofitting expense, but its benchmark guidelines are challenging. HUD also requires an assurance that if the energy goals are not met after one year that additional retrofitting requirements will be added until the goal is met. Therefore, cooperatives should consider having “comfortable room” in their initial estimates and costs to achieve the savings within the first year. Energy conservation has been and will continue to be a hot topic for the managers and owners of properties. The GSEs have all created programs to address and incentivize properties to get certified or retrofitted. As with any incentives, these programs have changed and likely will continue to evolve. It is important to compare and contrast each of the GSEs programs before selecting a single course of action. Go green and save green but be wise.  

Seven Common Budgeting Mistakes and How to Avoid Them

Each year, a cooperative’s board of directors must decide on a budget for the coming year in order to pay the bills in a timely manner, fund reserves and maintain the asset. This is a principal responsibility of the board of directors as outlined in the corporate bylaws.

Budgeting is challenging for all boards, regardless of the cooperative’s age, location, and needs. Here are a few considerations for your cooperative “budgeteers.”

1. The Annual Optimist

No one likes to increase monthly carrying charges for the membership. Often there is a tendency to make optimistic assumptions concerning what the coming year holds. You may want to assume that things will run smoothly without change and without special problems or needs. It never works out that way. A tree dies. A galvanized pipe breaks. A key employer in the area closes and lays off workers. The city increases property taxes. There is a fire, and you have a $10,000 deductible. Truly, you cannot predict the future. It is okay to base your budget on prior experience, but beware of assuming everything will run without incident. When you demand that a proposed increase be skimped to save a dollar, you may be skimping the cooperative and not the budget.

2. Investing to Manage Expenses

What are you currently earning in interest on your reserve accounts? Unless you have an investment secret that you need to share with all of us, most likely your interest income has been a fraction of what it used to be. Perhaps the best way to increase the return on your reserve funds would be to use reserves to update a specific facet of your operations to reduce an expense. A terrific example is replacing those old toilets with low-consumption toilets that reduce the water bills. It costs nothing to have an analysis done to see what the return on investment may be. Many cooperatives still have old HVAC systems that use the obsolete R-22 refrigerant. The cost of R-22 has sky rocketed. Your reserve funds may net you better operations by planning replacement of old equipment. Any savings can be invested back into your reserve accounts.

3. The Annual Pessimist

The only thing worse than trying to enter the fiscal year too optimistically is the damage done by that board member (or members) who are never satisfied with anyone or anything. “How dare you suggest that the rates be increased when nothing is done right in the first place? We pay too much for this or that. Staff is incompetent. No one monitors what is paid.” You know this person. He wants to complain about everything, regardless of reality, aging of the asset, the challenges involved in the daily operations of the cooperative, especially in a constant, negative environment. Should you manage the property efficiently? Of course. Should you expect champagne conditions on a beer budget? Perhaps not. Work to control costs but do it with a positive attitude that does not create friction. future. If you do this year’s budget without measuring it against long-term needs, you are passing on a problem to future board members. They may be faced with a 10 percent increase due to the failure this year to increase rates by 3 percent. Your cooperative should never just be a place where people live solely for the “low rents.” Your cooperative should facilitate community living, too. Budget carrying charges/ maintenance fees properly; do not budget just for a “low rent” philosophy. You may end up with only “low rent” residents who do not understand cooperative living.

4. No Long-Range Plan

Do you have a 10-year plan for your cooperative? A 5-year plan? Have you forecast operations, income needs and reserve usage? NAHC holds seminars on long-range planning. As a member of the board of directors, you are a fiduciary, responsible not only for the moment but for the COOPERATIVE HOUSING QUARTERLY | WINTER 2018 future. If you do this year’s budget without measuring it against long-term needs, you are passing on a problem to future board members. They may be faced with a 10 percent increase due to the failure this year to increase rates by 3 percent. Your cooperative should never just be a place where people live solely for the “low rents.” Your cooperative should facilitate community living, too. Budget carrying charges/maintenance fees properly; do not budget just for a “low rent” philosophy. You may end up with only “low rent” residents who do not understand cooperative living.

5. Current Events

On a national, state and local basis, things change and things happen that affect the economy of individuals, businesses and governments. Does your board of directors pay attention to these events and trends? You will find you are not immune to these changes. For example, after September 11, 2001, insurance rates sky-rocketed. Today, unemployment is at record low levels nationally and in many states. You are competing for professional staff and services. So how will you adjust your budget to anticipate higher personnel costs, higher health and employee benefit expenses? New HUD mandates on property upkeep? New demands for security and security systems in a social time where crime is down, violence is up and everyone is suing property owners if the victim suffers injury. As a board member and trustee, you need to keep up with current events and not assume immunity from the impact of these events.

6. Reserves

Reserves, reserves, reserves! Board members, do you know what your reserve balances are? Do you know how much is set aside monthly for your reserve accounts? Do you know where they are invested? Are they fully FDIC insured? Do you know the trend in reserve funding over the past years and the forecast for the coming 5-10 years? Reserves and proper funding of the reserve accounts, both for capital replacements (RR) and for the general operating reserve (GOR) are the difference-maker for your cooperative. They provide you with operational and budgeting strength if well-funded and planned for the future.

7. The Big Picture A board of directors, as stewards of the corporation, acting in the best interests of the cooperative as a whole, should view the budget process in the overall, big picture and less as a microscopic examination of each and every individual expense. Whatever one tries to pin down to an exact value will mean absolutely nothing as soon as the new budget year begins. Have a long-range plan. Commit to that plan and do not allow the skimpers to take over the budget process. Each year, NAHC has training in budgeting. Do you attend that class? Do you need to go back and not only attend it but pay attention to what is presented? In conclusion, as a steward of the cooperative corporation, avoid the common mistakes and attitudes mentioned earlier. Be a positive participant in your cooperative’s operation. See if one or two of the “budget mistakes” noted in this article are familiar to your board of directors. Focus on those to strengthen your budget and in the end, your cooperative.

Bill Henley serves as the vice president of The Columbia Property Group, Inc. He provides over 40 years of experience in multifamily housing with extensive knowledge in cooperatives and real estate management. Henley oversees the Georgia portfolio which contains over $51 million of multifamily assets.

Project Costs: What’s the Bottom Line?

“How much will this cost?” is one of the first and foremost questions addressed when a capital project is presented for board review and approval. Whether the project in question is mandatory (like a code required fix) or discretionary (like new landscaping or interior finishes), the cost should and will inevitably be a key factor in the decision making.

If one has ever bought a car, one knows that there is always a difference between the initial price and what one pays at the end of the transaction. Though hardly alone in doing so, the automobile industry is notorious for touting the sticker cost or minimum monthly payment in large writing while effectively burying the fine print (taxes, licensing fees, optional items). By the time they are added, along with financing, the cost is unsurprisingly much higher. Such, too, are the costs of capital projects; it can be difficult to assess a total project cost based on the estimate or proposal.

A roof replacement is a good example. First, there are the hard costs: roofing materials themselves and labor associated with their installation. Lumped in with these hard costs are optional extras, like smaller roofs nearby (bulkheads, awnings, etc.) that should be replaced at the same time, or maybe additional insulation or possibly even extras on top like solar panels. Squaring away all the potential add-ons, should leave the cooperative with the base hard costs of the project. It is also necessary to include soft costs in these calculations. Depending on the location and circumstance, there will be further costs for permitting, taxes and insurance.

For the roof replacement, there may be a permit required from the local town or city, taxes on the roofing materials (if not included in the contractor’s price or exempted) and supplemental insurance if the cooperative’s carrier requires it. Oversight can be another tricky soft cost to estimate. Depending on the scale of the project, personnel on behalf of the cooperative will need to be available for coordination and periodic observation to confirm that the project is completed correctly. This person can be a volunteer board member or a member of the cooperative management team; just remember that the cost of involvement in a larger scale project may not be included in the management team services.

Additionally, depending on the project, neither the board member nor management team may be technically proficient enough to observe the project properly, in which case an outside professional (like an architect/engineer) may be needed. Last, but not least, once all the soft costs have been added, there must be contingency allowances. A certain percentage of between 5 and 15 percent varying by project should be added and set aside in case of unforeseen problems that may arise. If one has ever seen one of the popular home improvement shows on cable where people renovate or flip houses, one knows something always goes wrong: unexpected damage that was previously concealed; unexpected delays due to weather; a surprise potentially hazardous material (like mold or asbestos) that needs to be tested and abated. As with the roof example, one could come across all three: structural beams that were damaged and now need to be repaired, a delay due to rain or snow, older roofing materials that contained asbestos at some point in time and may need to be tested and/ or abated.

At the end of the day, the project’s soft cost combined can add up to the cost of the base project itself. This scenario may sound crazy, but it is true. The consumer company, SoFi Lending Corp.*, had an advertisement placed in the Black Friday shopping circulars of several newspapers; it was designed to look like a normal advertisement for holiday shopping from a department store, but it featured a teddy bear for $87.56, a waffle iron for $182.67 and blender for $1,458.71. Its point was that with bad financing from high interest credit cards, one pays much more than one realizes for consumer goods. The same holds true for capital projects: a base proposal from a contractor may come at one price, but the true cost will undoubtedly be higher.

A Credit Check Pitfall Cooperative Boards Can Avoid

A Credit Check Pitfall Cooperative Boards Can Avoid

By Randall Pentiuk, Esq., and Kerry L. Morgan, Esq.

In considering a new member, cooperative boards usually include a credit check authorization form in their application packet. The credit check form to be signed by the applicant is usually straightforward, authorizing the board to run a credit check on the applicant to be used in the membership eligibility process. The Fair Credit Reporting Act (FCRA) indicates that the credit check authorization form, however, “consists solely of the disclosure.” See 15 U.S.C. § 1681b(b)(2)(A)(i).  Thus, courts will carefully scrutinize authorizations which add additional language to the disclosure.

As it happens in life, someone had a new idea. The thinking goes like this:

“Why not include some additional language in the disclosure? In addition to the housing applicant authorizing the cooperative to run a credit check, let’s add release and indemnity language in the disclosure form.  That way, if the cooperative misuses the credit check information, it can’t be sued because the applicant has released the cooperative.”

Good idea?  Bad idea? New ideas sometimes lead to unexpected consequences. A recent case of interest to cooperative boards was decided in California. It did not involve an application to a cooperative. It involved an application for employment, but the principle is the same. The applicant sought a position with a company, and the company asked the applicant to sign an authorization allowing the company to run a credit check under the FCRA. So far so good. The applicant filled out and signed a one-page form entitled “Pre-Employment Disclosure and Release.” That form contained acceptable disclosure language, but it also added the following language:

“I understand that the information obtained will be used as one basis for employment or denial of employment. I hereby discharge, release, and indemnify prospective employer, PreCheck, Inc., their agents, servants, and employees, and all parties that rely on this release and/or the information obtained with this release from any and all liability and claims arising by reason of the use of this release and dissemination of information that is false and untrue if obtained by a third party without verification.”  Syed v. M-I LLC, CIV. NO. 1:14-742 WBS BAM (E.D. Cal. Oct. 22, 2014).

Note the additional language—“I hereby discharge, release, and indemnify.” The applicant alleged that the FCRA prohibited this language on the disclosure form.  On Appeal, the Ninth Circuit Court of Appeals agreed. The Court found that the employer’s agent’s Pre-Check, violated the FCRA by adding this additional release language. It was a good idea that led to a bad result for the employer.

The Court’s exact ruling held that a prospective employer violates 15 U.S.C. § 1681b(b)(2)(A) when it procures a job applicant’s credit report after including a liability waiver in the same document as a statutorily mandated disclosure. The Court also held that, in light of the clear statutory language that the disclosure document consists “solely” of the disclosure, a prospective employer’s violation of § 1681b(b)(2)(A) is “willful” when the employer includes terms in addition to the disclosure, such as the liability waiver here, before procuring a credit report or causing one to be procured. A “willful” violation triggers statutory damages from $100 to $1,000 per violation, punitive damages, and costs, including attorneys’ fees.

What should you do? The best place to start is to look at your membership application packet, especially the credit check disclosure form. Read it carefully. Does it contain any language about “discharge, release, and indemnify?” If so, send it off to your legal counsel for review and possible revision. There may be an opportunity to keep the release language in a separate stand-alone document that covers the entire membership application process. But one thing is for certain: to let such language remain in the credit check authorization form is inviting disgruntled and denied applicants to go to a lawyer of their own and question why they were denied membership. That could lead back to the FCRA and the possibility of damages. Why expose the cooperative when prior legal review, care and planning can better ensure that your membership application package is in tip top legal shape?

Randall Pentiuk is the founding member, attorney and managing shareholder at Pentiuk, Couvreur and Kobilijak, PC. In Wyandotte, Mich.

Kerry L. Morgan, Esq., is an attorney with the firm of Pentiuk, Couvreur and Kobilijak, PC. He leads the firm’s Civil Rights and Employment Practice along with Class Actions and Complex Litigation.

Understanding HUD and the Budget Process

Understanding HUD and the Budget Process

By Judy Sullivan

The Department of Housing and Urban Development (HUD) is currently operating with funding under a Continuing Resolution (CR) that expires April 28, 2017. The federal government operates under a Fiscal Year (FY) which lasts from October 1 to September 30, of the following year. However, Congress did not approve a budget for the current FY, and in order to avoid a government shutdown, it has passed a series of CRs with the current CR expiring this April. When the government operates under a CR, funding continues at the previous FY levels (By the way, all other federal departments are also currently operating under a CR).

Every year, usually in February, the president submits a budget to Congress. This is the starting point for the budget process because Congress uses the president’s budget to begin its budget deliberations.

According to the Blueprint * document the Trump Administration submitted, the president is considering cuts to the HUD budget in order to increase defense spending. The president’s 2018 budget requests $40.7 billion in gross discretionary funding for HUD, a $6.2 billion or, 13.2 percent decrease from the 2017 annualized CR level.

Following, are some of the programs impacted:

  • The Community Development Block Grant Program (CDBG), which has enjoyed bipartisan support in Congress, is budgeted to receive $3 billion this fiscal year; yet, the proposal would cut those funds entirely for the future. By eliminating block grants for community development and housing production, states lose their ability to address pressing needs such as cleaning up struggling neighborhoods;
  • Housing for the elderly — known as the Section 202 program — would be cut by $42 million, nearly 10 percent; and
  • There is a huge capital needs backlog (close to $40 billion and growing at a rate of $4.3 billion per year). Unfortunately, the proposed budget cuts the resources needed to repair and rehabilitate HUD developments. These cuts mean that despite the billions of dollars invested over decades, HUD properties fall further into disrepair.

*Budget blueprint document

How Does the Federal Government Create a Budget?

There are five key steps in the federal budget process:

Step 1: The President Submits a Budget Request

The president sends a budget request to Congress each February for the coming fiscal year, which begins on October 1.

Step 2: The House and Senate Pass Budget Resolutions

After the president submits his or her budget request, the House Committee on the Budget and the Senate Committee on the Budget each write and vote on their own budget resolutions.

Step 3: House and Senate Subcommittees “Markup” Appropriation Bills

The Appropriations Committees in both the House and the Senate are responsible for determining the precise levels of budget authority or allowed spending for all discretionary programs.

Step 4: The House and Senate Vote on Appropriations Bills and Reconcile Differences

The full House and Senate then debate and vote on appropriations bills from each of the 12 subcommittees.

Step 5: The President Signs Each Appropriations Bill and the Budget Becomes Law

The president must sign each appropriations bill after it has passed Congress for the bill to become law. When the president has signed all 12 appropriations bills, the budget process is complete. But rarely is work finished on all bills by October 1.


How can you weigh in on the HUD Budget?

Deep cuts to the HUD budget are expected this year. It’s not too early to contact your members of Congress to urge them to tell Budget Committee members how important HUD funding is to you and your cooperative. The timing is perfect as the budget process is just beginning. Call them today! is an easy way to find your senators and representative.

The following are links to Congressional Budget Committee members:

House Budget Committee Members

Senate Budget Committee Members