Renters and Lenders Reward Green Apartments

MultiFamily Executive Magazine
By Bendix Anderson
June 12, 2017

Sustainable development is becoming standard in some markets for new luxury rental housing.

There’s a financial reward for developers who make apartments more energy-efficient and better for the environment: Many renters will pay a little more to live in an energy-efficient, sustainably designed building. Also, a growing number of lenders will reward sustainably designed apartments with better loan terms.

How much more will renters pay for a sustainable design?

Renters are willing to pay an average of $32.64 more in rent per month to live in an apartment building that has earned a certification for sustainability or green building, according to the latest Renter Preferences Survey from Kingsley Associates and the National Multifamily Housing Council.

That’s significant money—but still less than renters are willing to pay, on average, for additional storage space outside their apartment ($34 a month) or a community vegetable garden ($35 a month).

“We haven’t had a single developer tell us they’re seeking National Green Building Standard certification [to obtain] additional rent, and we certify more apartments than any other green building certification program in the U.S.,” says Michelle Foster, vice president of innovation services for Home Innovation Research Labs.

Instead, both apartment developers and renters now seem to take it for granted that new apartments will be energy efficient and will include sustainable-design features such as good indoor air quality and bike rooms. “More multifamily developers are building properties that meet sustainable-design standards and having those buildings certified green than ever before,” says Foster.

Renters may also stay longer in sustainably designed homes. “There is lots of research that renters want to live a sustainable lifestyle and do care about the environment,” says Foster. “I suspect a green building can help tenants be more satisfied, which can reduce tenant turnover and vacancy rates.”

Lenders offer better terms to efficient apartments.

Once an apartment has become more efficient and has a stack of low utility bills to show for it, lenders will recognize the proven improvement in operating income that can support a larger loan.

But until recently, most lenders had refused to recognize the likely savings that would result from a developer adding extra insulation or other energy-related improvements to an apartment building. So developers and building owners have had a hard time borrowing money to pay for energy-efficient renovations, forcing some to come up with the cash to pay for the upgrades themselves.

That’s changing now, starting with the largest loan programs for apartments in the country, from Fannie Mae, Freddie Mac, and the Federal Housing Administration. Apartment borrowers may also be able to get lower interest rates from agency lenders if they promise to complete energy-efficiency improvements at their properties.

For example, Fannie Mae will include 75% of the likely savings from energy improvements when the GSE estimates the likely operating income from the building to underwrite a loan. That means the property will be able to underwrite more debt, so the borrower gets a larger loan.

Fannie also offers energy-efficient buildings interest rates 39 basis points lower than its usual rates on permanent loans. Other agency lenders offer a similar incentive. Fannie will even help pay the extra cost for the needs assessment a building will need to do for a green renovation. The regular needs assessment required for a typical permanent loan costs about $5,000, depending on the size of the building. A green needs assessment is more likely to cost $8,000.

So far, banks haven’t generally included prospective utility cost savings in their estimates of the net operating income from a building when they lend from their own balance sheets. However, many of these banks originate loans for agency loan programs, so they’re already recognizing energy efficiency in other parts of their business. It may only be a matter of time before banks apply the same ideas to loans they make from their own balance sheets.

“We’re so much closer to a tipping point than we have ever been,” says Sadie McKeown, COO and executive vice president at Community Preservation Corp. (CPC).

CPC is encouraging conventional banks to recognize the value of energy efficiency. The firm has created a handbook for lenders to use when they underwrite loans to energy-efficient apartment buildings: Underwriting Efficiency: A Mortgage Lender’s Handbook for Realizing Energy and Water Efficiency Opportunities in Multifamily Housing.

CPC’s free handbook shows bank lenders how to incorporate the likely savings from energy and water improvements into their underwriting for first mortgages on apartment properties.

McKeown hopes the handbook will move the day forward when most lenders recognize the value of energy efficiency. “By 2020, we should be there—I think that’s achievable,” she says.
By Bendix Anderson

Produced by Hanley Wood Strategic Marketing Services, sponsored by PNC Real Estate.
PNC Real Estate is not responsible for the accuracy of the statements herein.