Green Lending Compliance: Balancing Costs and Opportunities
(l. to r.: Kevin Fagan, Gary Amey, Christopher Hoeffel, Cory Jubran)
SAN DIEGO–As sustainability takes center stage in the financial industry, green lending has become a niche area with unique opportunities and challenges, panelists noted here at the MBA Commercial/Multifamily Finance Convention and Expo.
As part of the conference’s Innovative Operations Track, Moderator Kevin Fagan, senior director and head of CRE Economic Analysis with Moody’s Analytics CRE, asked the panel about demand drivers.
“I would say the primary driver these days is the illiquidity of the capital markets, so green lending has become a bit of the carrot in that, if you move forward to a more green or more sustainable type of real estate, then you’ll unlock this source of capital,” said Cory Jubran, Senior Director of Originations with Nuveen. “So, the illiquidity in the capital markets these days is moving institutional developers and owners toward green banking as a way to solve their capital needs.”
Christopher Hoeffel, president of Counterpointe Sustainable Advisors LLC, said the demand driver might be a little broader than just capital availability–though that is important. “But if you are an owner of real estate now in a very competitive market, you need to be as efficient as possible. So we’ve got a lot of property owners who are looking to reduce utility costs, improve sustainability, reduce water usage and really just to reduce the cost of operating real estate.”
Sustainability also helps preserve value, Hoeffel noted. “There are a number of studies out there that say that a green building or a sustainable building commands higher rents and will trade at a lower cap rate,” he said. “They’re going to be more valuable than a building that is ‘brown’ or otherwise not sustainable.”
Property owners in some markets also face regulations that requiring a reduction in energy consumption, Hoeffel said. “Local Law 97 in New York is the most talked about, there’s been 100 different regulations around the country that are requiring a reduction in energy use in commercial real estate. So that’s driving property owners to look at sustainability as important factor in commercial real estate.”
On the capital side, some financial institutions in the U.S. and overseas have defined “green” or climate goals, Hoeffel said. “They want to bring their investment portfolios to net zero, or to reduce their Scope 3 emissions measurements, and they need to find investments that help them do that, so they there’s a lot of equity opportunities out there for power plants, wind farms, solar, etc., but there aren’t a lot of credit strategies. So, we find that by offering credit investment opportunities that are sustainable, we’re attracting a lot of capital”
Gary Amey, Managing Director, MAP Underwriting with Dwight Capital LLC, agreed that owners often want to reduce operating costs. “That’s primarily what we’ve seen the most of on my side is owners doing retrofit repairs to bring down utility costs, and in turn, drive revenue up, especially for owners that are still charging flat fees for utility reimbursements instead of a direct bill-back on the exact cost, they’re finding ways to make profit,” he said. “We’re starting to see that a lot more with owners: a flat-fee strategy for utilities. So that way, when they bring down the utility costs, they’re generating a lot more revenue at the end of the day. So that’s certainly something that we’re seeing a lot more.” In terms of new construction, Amey said the Green Mortgage Insurance Program from HUD gives you the ability to lower your MIP from 60 basis points down to 25 basis points. “So, by participating in that program and earning a green building certification, such as Energy Star New Construction, NGBS, or GreenPoint, you’re reducing not only costs for cash to close, but on a $50 million loan, $300,000 is the normal market MIP, and that’s being brought down to $125,000, so you’re saving $175,000 annually on MIP. So it’s a very attractive program on the construction side.”
