Green loans can offer big savings to multifamily property owners in Texas, but only if utilized properly
Few trends have had bigger impacts on multifamily financing over the past few years than the movement to reward green upgrades. Both Fannie Mae and Freddie Mac have programs that reward borrowers with interest rate discounts and proceed benefits if they make upgrades that save between 15 to 20 percent in water and/or energy usage. By making these upgrades, borrowers can realize significant savings on interest rates of agency loans, lower utility costs and possibly increase proceeds by an additional 5 percent.
However, many factors make it difficult to wait to make energy and water upgrades until the agency loan has been received. Moreover, in Texas, many municipalities are providing incentives to install new toilets or watersaving features, making it affordable for the current owner to implement such upgrades soon after acquisition.
According to the Federal Reserve Bank of Dallas, between 2005 and 2016 the Dallas-Fort Worth area saw net migration of 838,501 people; Houston saw net migration of 815,799 people during the same period. This heavy population growth has prompted state and local officials to look for new ways to conserve water while meeting demand from new residents. To do this, municipalities are approaching multifamily property owners, particularly owners of Class B and C assets, about using water more efficiently.
Furthermore, as cap rates have tightened and loan proceeds have reached lower leverage points in Texas, bridge loans for multifamily deals have become popular structures for acquisitions. And as more bridge loans are sought for acquisitions of Class B and C properties — which are prone to chronic energy and water issues — the question of when green upgrades should be made becomes integral.
The answer: as part of a refinancing or at the time of sale.
Timing Is Everything
It is crucial to make green upgrades at the right time. The purpose of getting the lower rate and extra proceeds on your Fannie or Freddie loan lies in the idea that the agency loan is the catalyst for making these green upgrades in the first place. You are thus unlikely to be rewarded for green upgrades made prior to the closing of the agency loan, beyond getting the property energy-certified by an approved rating agency.
Waiting can be difficult on bridge loan acquisitions, since a major benefit of bridge loans involves the ability to roll capital expenditure dollars into the loan amount. Often a bridge loan is computed as a percentage of the total cost of the acquisition and the value is determined on an as-stabilized basis. Thus, you can get these proceeds up front for many renovations.
This presents a tough choice: you can get money up front to make renovations, but you may not get rewarded later with your agency exit. The key is to know whether you’re going to refinance later with an agency loan or sell.
If you plan to sell, showcasing available water or energy upgrades from which the buyer can benefit may be a selling point. Traditionally, water upgrades are the least expensive to make, so marketing the absence of low-flow toilets or faucets will appeal to buyers.
In Texas, this appeal has been heightened, with many cities ready to offer incentives for water upgrades. For example, Dallas offers a $90 rebate for each high-efficiency toilet installed on units built before 1994. New Braunfels offers a $350 rebate for a conversion to drought-tolerant landscaping and San Antonio offers free, high-efficiency showerheads and faucet aerators.
These features allow new owners to not only reap the benefits of green programs, but to also recoup the costs of upgrades prior to the end of the loan term, resulting in long-term savings for the buyer.
Going the Certification Route
Should you make both energy and water upgrades prior to selling, you may want to consider getting your property certified for energy efficiency. Getting a certification from a pre-approved company can also yield a lower rate for you and your future buyer.
Usually, the easiest certifications to achieve are Green Globes or Energy Star, both of which require owners to enter energy data into an online assessment, giving an indication of how close the property is to attaining certification. The two programs have different metrics for scoring water and energy upgrades, so it’s good practice to evaluate both.
Many investors recognize the benefits of going green and intentionally target upgrade opportunities on property tours. Should you become certified, your future buyer will qualify for the interest rate reduction, making your property more marketable.
Considering the bigger picture is critical when making green upgrades, and having an experienced mortgage banker by your side can help maximize your returns. Understanding of the programs offered by your municipality can also be a great selling point to a buyer and can reduce the cost of the upgrades needed to qualify for the agency green programs.
A strong acquisition strategy is vital, and knowing how to capitalize on opportunities in the debt markets is equally as important.
In the words of ancient Chinese military strategist Sun Tzu, “Strategy without tactics is the slowest route to victory, and tactics without strategy is the noise before defeat.”