Loan programs promote energy-efficient apartment developments

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September 27, 2017


Key Points

Green multifamily lending

  • Government-backed loans help fund energy-savings efforts in new and existing multifamily projects.
  • Green Building Certification offers lower interest rates for energy-efficient developments.
  • Green Rewards include interest-rate breaks and larger loans for owners who commit to reducing energy use.
  • Green Rebates go to those who closely monitor their buildings' energy use.
  • Green Preservation Plus promotes energy-efficient affordable housing.

Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that finance multifamily loans, each offer loan programs designed to aid apartment owners who want to build energy-efficient multifamily projects, or make changes to existing buildings to improve their energy efficiency.

Fannie Mae's green-financing programs, called Green Building Certification and Green Rewards, launched in 2015. Like other GSE loan programs, the green loans are originated and funded by lenders, and purchased by the GSEs, which securitizes the loans for sale in the secondary market.

Under the Green Building Certification program, interest rates on Fannie Mae-backed loans are decreased by one-tenth of 1 percentage point (10 basis points) if owners make energy-saving investments that are approved by one of a variety of certification programs listed on Fannie Mae's website.

Fannie Mae purchased its first loan under the program in April 2015, which funded a 50-unit building in Maplewood, N.J., that had once been a police station and municipal court. Included in the design was an efficient water-management system, green-power generation and use of recycled materials — all of which contributed to the building earning a LEED New Construction Certification. Wells Fargo originated the $10.2 million loan for the building, and Fannie Mae estimates that the interest-rate reduction will save the borrower $100,000 over the life of the loan.

Similarly, the Green Rewards program offers a lower interest rate, up to 10 basis points, on Fannie Mae-backed loans. To qualify for the program, borrowers must commit to reducing annual energy or water usage by 20 percent. Under the terms of the program, Fannie Mae counts the projected energy savings as operating-expense savings, which also increases the potential loan amount for the property being financed.

The loans funded through the Green Building Certification and Green Rewards programs are used to back green bonds that are marketed as investments in eco-friendly projects. 

The Freddie Mac program, also started in 2015, is called Green Rebate, and encourages borrowers to monitor their buildings' energy use under the Environmental Protection Agency's Energy Star program. Participating borrowers receive $5,000 loan rebates for every property that is monitored, regardless of whether they reduce energy usage in their buildings. Freddie Mac lists on its web site the steps necessary to register a property and become eligible for the program.

The 2015 programs join an older energy-efficiency funding program from Fannie Mae called Green Preservation Plus (formerly Green Refinance Plus). It's aimed at affordable-housing developments and offers loans with higher loan-to-value ratios and lower debt-service coverage-ratios for borrowers who spend at least 5 percent of the mortgage amount on energy- and water-saving improvements. Fannie Mae lists other details of the program on its website.

Although the improvements spurred by the loan programs reduce energy consumption, that's not the GSEs’ only motive for offering them. Freddie Mac says if tenants' energy costs were reduced by 10 percent in the multifamily developments it helps to finance, about 10 percent more units would be judged affordable housing under Federal Housing Finance Agency guidelines.

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