Although builders and renters are beginning to embrace green building, lenders are taking a longer time to get comfortable financing the added cost of energy-efficient, sustainable development.
Research shows that green building ideas add value: These ideas increase the average construction cost of developments by just 2.42%, but a green project can cut its energy bills by about a third, according to The Costs and Benefits of Green Affordable Housing, by New Ecology, Inc., and a wide range of green building experts.
Green housing experts argue that if green projects earn more in rent and spend less on power, then the net operating incomes of these properties will be larger. Lenders should take this into account when they underwrite loans and make larger loans to green projects.
However, lenders typically do not offer a premium to green developments. “It’s too new,” said Gerry LaHaie, vice president of large multifamily loans for Fannie Mae.
Most permanent and construction lenders seem to agree. The response of lenders approached for this story ranged from blank looks to skepticism.
Several major banks have announced their support of green building. Citigroup, for example, has pledged to work toward what the company calls “a sustainable future.” Citigroup Foundation has already backed this pledge with a commitment to invest $1.5 million in green affordable housing.
However, no lender contacted for this story has yet begun to offer green multifamily projects loans with substantially different terms than those received by conventional projects. Fortunately, no lenders reported penalizing green projects either.
Fannie Mae has created an energy-efficient mortgage program to offer homebuyers larger loans when they purchase energy-efficient housing, but the program remains small.
However, once life-cycle savings from energy efficiency can be included in a project’s underwriting, a major barrier to creating green projects will collapse.
“That’s the Holy Grail,” said Bart Harvey, chairman and CEO of Enterprise Community Partners, Inc., and a strong advocate for green building.
To include the life-cycle costs of green building ideas in mortgage underwriting calculations, lenders first need dependable information on how those ideas have worked in projects in the past.
“If you have enough information, you can underwrite it,” LaHaie said. Unfortunately, there are still just a handful of Leadership in Energy and Environmental Design-certified apartment buildings in operation, and almost all of those are in New York City.
Building value
Compared to the trickle of green projects produced by market-rate builders, the affordable housing industry has a flood of new green projects under development. That’s because the funding sources that pay for affordable housing have recently begun to reward projects that put green building ideas into practice, especially projects that are more energy efficient than required by the local building code.
In particular, many of the state agencies that run the low-income housing tax credit (LIHTC) program now reward green projects in the competition for subsidy – 11 more wrote new green incentives into their competitions for 2006.
Also, two of the largest companies that invest in LIHTCs, Enterprise Community Partners, Inc., and the Local Initiatives Support Corp. (LISC), have both begun to push green building.
In the fall of 2004, Enterprise announced its Green Communities initiative, pledging to invest $555 million over five years in grants, loans and equity to help create 8,500 green affordable homes.
One year later, Enterprise had already invested in 77 green projects, totaling 4,300 homes, with another 16 developments totaling 800 units in the pipeline in communities ranging from Austin, Texas, to Missoula, Mont., to New York City. According to Enterprise, Green Communities is on track to reach its five-year goal in less than four years.
“The interest and investments have far surpassed our expectation,” said Stockton Williams, Enterprise vice president for public policy.
“Some experts believe that in the case of a correction in tax credit prices, green projects might hold their value better than typical tax credit deals,” Williams said.
The local offices of LISC are also promoting green development by forging alliances with other organizations in their areas. For example, the Boston office of LISC has partnered with New Ecology, Inc. The experts from New Ecology now sit down with the sponsors of every project funded by LISC in Boston to help the sponsors identify opportunities to create a greener building.
The national offices of LISC are now considering a credit enhancement program for mortgages to green projects. Under this program, LISC would guarantee the increased net operating income created at affordable green projects, allowing lenders to safely make larger loans to the properties.
“We’re hoping to move the conventional markets toward recognizing that these green financial benefits are there,” said Greg Maher, vice president and deputy general counsel for LISC. “You’re going to start to see lenders view this as an opportunity.”
