Greenlighting Green Lending
Sponsors tap into creative, competitive financing products for sustainability-focused renovations, forging a winning scenario for owners, residents and municipalities.
In recent years, sustainable building products and systems have soared to unprecedented prominence. These solutions’ cost effectiveness, and the legions of owners implementing them, have seen correspondingly dramatic increases. It’s no surprise that innovative ways to finance green upgrades are multiplying just as rapidly.
Securing capital for sustainability-related improvements is getting easier, reports Donald King, executive vice president of Walker & Dunlop. “If you look at the numbers, (they’re) really telling.”
He points to the surge in his own firm’s green lending volume from $1.4 billion in 2016 to $6.4 billion last year. Over the same period, green lending at Fannie Mae jumped from $3.6 billion to $27.6 billion, while at Freddie Mac it rose from $3.3 billion to $19 billion. “Clearly, the market has bought into this movement.”
In his view, the GSEs offer the most competitive products for financing sustainable upgrades. Interest-rate discounts for properties that go green can exceed 30 basis points, he noted.
Add on the further benefits of reduced utility costs, higher resident quality of living and green marketing leverage, and, King said, “everybody wins in green financing.”
Through its Green Advantage program, Freddie Mac recently financed improvements to a 28-year-old, 430-unit property in Texas—a state grappling with a severe water shortage. The water-saving refinements reduced costs by $500 per unit, slashed water usage by about five million gallons per year and cut utility costs by $105,000 annually. Furthermore, added Peter Giles, vice president of production and sales for Freddie Mac Multifamily, “the property is on track to see a full return on investment in two years.”
Noting that pricing for green projects has remained competitive, King expects this trend to continue, with interest rates moving up and down regularly. “We have been seeing downward pressure on spreads, and therefore, lower interest rates for borrowers,” he said, citing increased lender competition as the catalyst.
Beyond the GSEs, other alternatives are available to owners for financing green upgrades. Established in 2011 as the first institution of its kind, Connecticut Green Bank helps property owners shift away from the tendency to finance such upgrades with reserves or commercial loans, explained John D’Agostino, associate director of the bank’s multifamily housing program, which provides three loan products:
- In the 30-plus states that have authorized Commercial Property Assessed Clean Energy (C-PACE) financing, market-rate properties can access the program’s secured, upfront financing. C-PACE loans for energy improvements with savings in excess of 100 percent of the initial investment—including cost of the upgrades and financing costs—are repaid on the property’s tax bill. C-PACE recently closed its 200th project since entering the market in 2013, D’Agostino said.
- Income-eligible properties can gain financing through Low-Income Multifamily Energy (LIME) loans. Offered in partnership with Capital for Change—a local community development financial institutions (CDFI) lender—the LIME loan is unsecured, offering such properties upfront financing for energy improvements whose savings-to-investment ratio exceeds 1.3-to-1.
- Solar Power Purchase Agreements (PPAs) are solar-only financing for both market-rate and income-eligible properties. The PPA structure offers upfront financing for solar PV systems providing electricity at a lower cost than utility rates. A 20-year term with options to purchase after the fifth year applies, D’Agostino noted.
In addition to term financing, Connecticut Green Bank offers two pre-development loans aimed at reducing risk to property owners during the energy improvement evaluation process, according to D’Agostino.
“(The Sherpa and Navigator) loans provide either a standardized or customized mechanism for property owners to identify their highest-ROI energy opportunities as part of their long-term physical needs planning,” he explained.
Financing rehabs, new construction
In addition to its standard utilization, C-PACE can be used in a capital stack for either rehab or new construction. According to Woolsey McKernon, senior vice president & chief revenue officer for CleanFund Commercial Pace Capital in Sacramento, Calif., those projects are the firm’s largest and most engaging.
CleanFund’s ability to replace high-cost mezzanine financing—at interest rates in excess of 10 percent—with alternative capital through C-PACE at a rate closer to 6 percent has caught developers’ attention, McKernon observed. One such sponsor is Dallas-based Alterra Worldwide, which in 2016 completed the transformation of a century-old Dallas office building and onetime warehouse into a 238-unit multifamily community and a 274-key, dual-branded Marriott hotel.
“The Butler Brothers Building was paying (more than) 12 percent for mezz (financing), and they were coming up at the end of completing a mixed-use development a block from Dallas City Hall,” he explained. “(C-PACE) provided a great alternative because (it) has to be tied to eligible improvement projects.” The result was a gut rehab. The financing was used to replace the windows, mechanical systems, HVAC and roofing, along with adding insulation and installing water-saving plumbing and irrigation.
In addition, the company has been focusing on new multifamily housing, according to McKernon. CleanFund is working with the developer and lender on a $100 million San Francisco infill development to furnish $10 million in C-PACE funding. “That’s a drop in the bucket compared to the addressable market opportunity.”
Getting the go-ahead
“Five to 10 years ago, municipalities would offer either a tax abatement for an existing building or a potential floor area ratio (FAR) density bonus to the owner or developer going green,” Sowards explained. But as markets and technologies have improved, these former incentives have become mandates.
Still, she continued, “it’s a great time to investigate and get involved. Being smart and innovative about how you finance your projects is always a smart move; it makes it easier to get projects a green light.”
You’ll find more on this topic in the April 2018 issue of MHN.