How Mortgage Lenders Can Boost Sustainability

The Sallan Foundation
November 2, 2016
by Elizabeth Derry

If you’re like me then you’ve spent some serious time contemplating society’s inertia of energy efficiency and carbon reduction. At summits and roundtables, practitioners, myself included, eagerly debate the viability of the newest “emerald bullet,” whether it be new tech, codes, or policies that will finally catalyze large scale energy reduction. But what if the key to our low carbon future isn’t something new, but something old and familiar, and as ubiquitous to American life as Sunday night football and pumpkin spice lattes?

Mortgage lending!

As of 2015 there were 5.6 million multifamily rental buildings in the U.S., of which an estimated 61% are currently mortgaged.[1] With such pervasive influence over the economics and condition of our building stock, lenders have a tremendous opportunity to support measures that will not only improve loan performance but mitigate risks as well as improve the quality of the buildings and communities in which we live and work.

The Community Preservation Corporation (CPC), the company I work for, is a leading nonprofit affordable housing and community revitalization finance company. Given our business and mission, advancing sustainability in our lending portfolio makes perfect sense. The cost-savings associated with energy efficient construction and retrofits play a key role in ensuring the long-term economic stability of multifamily properties, which is also critical to the preservation of rental affordability. However, these decisions have not yet become the norm.

Recently, CPC launched a new initiative to support energy efficiency as a part of our mortgage lending platform. While a handful of other lenders have jumped into the efficiency game by providing “green loans” for property improvements, CPC’s program separates itself from the pack by integrating energy efficiency into the tried-and-true underwriting process thereby supporting efficiency projects through all the loan products we offer. Underwriting is the process a lender uses to evaluate if the risk of offering a mortgage loan to a particular borrower under certain parameters is acceptable. By underwriting a percentage of the savings from proposed sustainability measures, we’re able to provide our borrowers with additional low-cost, long-term capital in the mortgage to implement energy efficient upgrades.

In Fiscal Year 2016 CPC closed 11 loans (totaling 707 apartment units) that were able to support their retrofits by underwriting their energy savings, which netted a combined $5.05 million in additional loan proceeds.

We believe our underwriting method is replicable, and if energy efficiency became a standard part of multifamily lending practice, the environmental and economic impacts would be transformative, putting the lending industry at the forefront of the sustainability movement. This is why CPC is working to share our process, expertise, and lessons learned with other lenders in the multifamily affordable housing space.

Partnering with a dynamic group of private, NGO, and nonprofit organizations, CPC is in the process of developing a suite of resources designed to provide the information needed to educate lenders about the opportunities for integrating building energy efficiency as part of loan refinancing or acquisition. This group of stakeholders is currently working on a handbook that will be used as an energy efficiency primer for loan officers and underwriters. The handbook will identify the long-term benefits associated with more sustainable buildings, review updates to a conventional underwriting process to make retrofits easy and economically feasible, and provide a framework for discussing these opportunities with prospective borrowers.

Much has been written on how to complete an energy retrofit, but it has yet to be documented for a lender’s benefit and presented as complimentary to mortgage financing. This handbook will be accompanied by a series of web-based training to help advance lender knowledge of energy efficiency and improve lender confidence in evaluating such projects. With the project expected to be completed in early 2017, the initiative’s leaders will then work with CPC to share the training series and manual with additional audiences, especially those with a focus on community development lending.

Properties that have implemented energy efficiency and renewable projects have more sustainable cash flows and healthier economics. This leads to outcomes of real importance to mortgage lenders, such as lower loan to value (LTV) ratios and higher debt service coverage ratios (DSCR). All of these factors are giant gold stars for a lender as they increase a building’s value and lower the risk of default. Conservation of natural resources, climate protection, and contributing to the greening of our communities isn’t just good corporate social responsibly, it’s good for business.


Elizabeth Derry manages sustainability programs at the Community Preservation Corporation where she seeks to preserve affordability by implementing energy efficiency retrofits to improve building economics and tenant quality of life. Elizabeth holds a Master of City and Regional Planning from Rutgers University (2013).