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.