Featured ExpertMarket News 10/ 18/ 2016

Fannie and Freddie Step Up Green Lending

Multifamily borrowers are finding extra “green” in their wallets thanks to Fannie Mae and Freddie Mac green financing programs. Both agencies are using financial incentives to encourage energy efficiency and reduced water consumption.

The continued expansion of green loan products by two of the industry’s biggest lenders is clear evidence that the commercial and multifamily real estate industry has reached a tipping point. Gone are the days when “going green” was simply a trendy catch phrase. The green movement is becoming more entrenched among property owners as a proven way to create a positive social and environmental impact and generate savings that benefit the bottom line.

Fannie Mae already has established quite a track record with its Green Financing program. Since it was first introduced three years ago, the agency has closed about $1.2 billion in green loans. Changes made over the past year to make it more enticing to borrowers are expected to drive even more business to the program. Freddie Mac is a more recent addition to green financing with its new Green Advantage program that launched in August.

Both Fannie Mae and Freddie Mac offer borrowers the opportunity to tap into more favorable pricing and potentially higher underwriting values that can boost loan amounts. For example, NorthMarq recently helped a client close a $75 million green loan through Fannie Mae for a 340-unit property. By qualifying for the green loan, the borrower secured a 30 basis point price reduction that lowered the adjustable rate to 2.864%, which was on par with that of life insurance company lenders.

Over the case of the 10-year loan, the more favorable rate will save the borrower approximately $145,000 per year. That case shows how acute the interest in green financing is, not only for social and environmental reasons, but for purely economic reasons.

Freddie goes green
Freddie Mac’s Green Advantage program provides added incentives that layer on top of the agency’s existing multifamily loan offerings. Deals that qualify for green financing are counted as part of Freddie’s uncapped business and can access more favorable pricing, which currently amounts to a 15-30 basis point reduction in spread. The pricing benefits alone are a huge incentive for borrowers to introduce green initiatives at their properties. However, if a property already qualifies for an uncapped loan, such as 100% affordable, there is no additional discount on pricing.

How it works: There are a few different areas to save with the Green Advantage Program. The main opportunity for most borrowers is to complete a Green Up Assessment. That report will take about two weeks to complete and Freddie Mac will even reimburse the cost of the report up to $3,500. If the Green Up Assessment shows potential savings of 15% or more on either energy or reduced water/sewer consumption, then that loan may be eligible for pricing benefits and additional proceeds and at least $250/unit of costs.

Who qualifies: The Green Advantage program is aimed at incentivizing properties that are at least 20 years old (15 years for tax credit properties) and have not already been “greened up” with a significant rehab affecting HVAC systems or plumbing systems. Properties that already have green certification in place, such as LEED or Energy Star ratings, would automatically qualify for the financing.

In most cases, a property owner simply has to identify the opportunity to achieve the savings of 15% or more and commit to following through to achieve the savings. For example, an assessment might reveal an opportunity to achieve savings by introducing more energy-efficient windows, low-flow shower heads or energy efficient appliances. A borrower would be required to start work on executing those green initiatives within 180 days of closing and complete the work within 2 years.

Fannie improves on existing program
Fannie Mae has three different green loan options within its Green Financing Program: Green Rewards, Green Certification and Green Preservation. Although there is no specific qualifier on age of a property, the program is aimed at incentivizing properties that were built prior to 2006.

For most borrowers, the focus is on Green Rewards, which provides incentives to owners to initiate green renovations, retrofits and repairs that will result in a minimum energy or water use reduction of 20%. Green Certification provides loans for properties that have already obtained one of 11 different certifications, such as LEED or ENERGY STAR®. Green Preservation is designed for properties that are already affordable and are trying to preserve that affordability.

Fannie Mae does share some similarities with Freddie Mac’s Green Advantage program. Green loans made through Fannie Mae program also are treated as uncapped business. The potential savings on loan price are slightly higher at 15-39 basis points.

Fannie Mae has introduced some modifications in the past year to further improve on its existing program. One of the notable changes is that the agency now underwrites 75% of the expense savings, which can increase the size of the loan amount for the borrower. The agency also is willing to underwrite up to 25% of the savings incurred on the tenant side. In other words, whatever electricity or water bills are being paid and tracked by individual tenants, the borrower can count up to 25% of those savings towards the underwriting as well.

These changes speak to the broader aim of both Fannie Mae and Freddie Mac, which is to drive a positive, measurable impact to each pillar of the Triple Bottom Line – financial, social and environmental. The key to unlocking those savings is simply understanding how the different green loan options work, what properties are eligible and how to take the necessary steps to qualify.

Download PDF