On January 28th, 2016, HUD announced a new program offering significant mortgage insurance premium (MIP) discounts for multifamily properties. To qualify, buildings must be certified and agree to meet certain energy efficiency targets during their operation.
The MIP program is available for projects with “FHA firm commitments issued or reissued, and closed, on or after April 1, 2016.” It applies to both market-rate and affordable projects, including new-construction and gut, substantial, and moderate renovation projects.
New-construction and gut–rehab projects can secure a wide variety of green certification options, including Energy Star, LEED, EarthCraft, National Green Building Standard (NGBS), Enterprise Green Communities, GreenPoint Rated, Passive House, and the Living Building Challenge.
Refinance and acquisitions not undergoing renovations must be certified under either LEED Existing Building Operations and Maintenance (EBOM) or the Energy Star for Existing Buildings programs. Larger rehab projects must be certified under EarthCraft, GreenPoint Rated, or NGBS, unless previously certified under another green program.
The MIP discount is 45 basis points, which can add up to hundreds of thousands of dollars in savings over the typical seven- to 12-year loan life. This savings can significantly improve cash flow for current building owners, as well as increase the value of a property when it is sold (since the discount can apply to future funding).
Standard of Proof
In addition to meeting a green certification standard to earn the MIP discount, projects must cross other hurdles. They must prove, using the Energy Star Portfolio Manager, that they meet a specific energy-efficiency target, as well as that they meet that target when the building is occupied.
Portfolio Manager isn’t hard to use. It uses the property’s actual utility consumption data to generate a 1 to 100 Energy Star score. The score is based on comparing the specific property to similar properties nationwide. A score of 50 represents median energy performance. If a building scores above 75, it's considered energy efficient.
New-construction and substantial-renovation projects, based on their design and specifications, must meet a minimum score of 75 in Portfolio Manager to qualify for a MIP discount. Since utility consumption data aren't available before occupancy, the Energy Star score is determined through the preparation of an energy model, typically using software tools that project the annual energy use of a project, such as eQUEST or REMRate.
Using these modeling tools during the design process allows a project team to prepare a series of “what if” scenarios to identify the most cost-effective ways to meet their energy-efficiency target. An initial report, the Statement of Design Intent (SEDI) for new construction and gut rehabs, or the Statement of Energy Performance (SEP) for existing buildings not undergoing gut rehabs, is produced through Portfolio Manager.
The reports use building data and project energy efficiency from the energy models. When the project is occupied, actual energy-use data are entered into Portfolio Manager and the results reported annually to HUD for review.
In order to meet the requirements for the MIP discounts, projects must include an SEDI or SEP report and show that they'll meet green building certification through one of the approved programs. This involves working with a rater or verifier to review program requirements and scoring sheets and confirm that the project will meet certification requirements at completion.
Working together as a team through the design development phase, the architect, engineers, contractors, owners, and raters will evaluate various options that affect energy performance, certification requirements, and cost implications, ultimately resulting in a high-performance, cost-effective project that will meet the MIP discount requirements.
Energy Models as Predictors of Performance
It's important to prepare accurate energy models based on building design and specifications well in advance of construction. While energy models aren't perfectly predictive of energy use, they are the best indicator of how different specifications will affect a building’s energy performance.
The information provided by an energy model will be used to set the project's energy-use baseline. After occupancy, the owner must confirm that the building has, in fact, met that baseline. This isn't always an easy task in multifamily buildings, particularly when tenants are paying their own energy bills.
Collection of actual utility data is necessary to track building performance in Portfolio Manager. When a building isn't master metered for electricity or natural gas, access to individual account data is necessary. HUD allows for using a sample of 25% of all unit types, including variations by size, orientation, exterior wall area, and floor location for reporting.
Of course, receiving permission from tenants to access their utility data can be a challenge. We recommend that all leases include standard utility waivers. That will allow landlords to enter data from all tenant utility bills into Portfolio Manager, guaranteeing that a project will meet ongoing reporting requirements.
Third-party services such as WegoWise can simplify the process of collecting and reporting the required data as well as provide more in-depth analysis of energy and water use.
A project receiving the MIP discount must complete the green building certification process and provide documentation that certification was achieved. Green building certifications include both requirements and optional points for resource efficiency, durability, indoor air quality, water efficiency, and ongoing operations and maintenance, in addition to energy efficiency.
The certification process typically involves site inspections during construction and upon completion of the building to confirm that program requirements are met, in addition to documentation on material sustainability and indoor air quality. The person providing the certification services must be retained by the owner, contractor, or architect prior to construction. This individual provides guidance through the process, verifies that work is done correctly, and generates the final certification documents at completion of the project.
HUD’s MIP program has made a significant commitment to high-performance multifamily construction to move the market toward sustainability and energy efficiency. Building owners can reap significant financial benefits by pursuing these incentives while lowering costs of building operation for themselves and their tenants. Loans are available through HUD FHA lenders approved to provide multifamily loans.