Over the last two decades, green building and remodeling have become a staple of the construction and property management sectors. It’s not hard to see why: Energy efficiency lowers operating costs. It makes a direct impact on the bottom line. Plus it’s good for the environment. But there’s more to the equation—particularly when it comes to affordable housing. Tom Peters, director of business development for Housing & Healthcare Finance, a North Bethesda, Maryland, firm that specializes in commercial lending for affordable, multifamily, health care, and senior housing, shares his insight.
What’s driving the move toward sustainability?
Peters: It’s a mix of factors. Building products have improved, and energy-related ones have dropped significantly in price. For example, when LED bulbs first came out, they ran about $60 per bulb. Now you can buy a package of six for $10. Building codes also have changed—today’s codes practically require green buildings. And it has proven economic benefits.
Green building and remodeling are playing an increasingly important role in affordable housing. What’s behind that?
Peters: A lot of affordable housing uses Department of Housing and Urban Development (HUD) financing, which provides credits that lower mortgage insurance premiums (MIPs) if you use green building practices. Those credits can save developers from 25 to 35 basis points, depending on the loan product. Some utilities also give developers financial benefits for energy-efficient upgrades. If you can lower utility costs, you increase the net operating income.
Can you provide an example of a project that used green practices to lower its MIP?
Peters: HUD has what’s called the Green MIP Reduction program, which cuts annual MIP to 25 basis points if you get certified through an approved green building standard/rating program. This project achieved that, so it qualified for the Green MIP Reduction. On top of that, the developer says the energy-saving elements only added about 1% to the total construction price.
What are some key elements affordable housing developers should consider with green financing?
Peters: Start with cutting utility costs, which can increase your net operating income. In addition, developers can lower utility cost expenses in a property appraisal. Let’s say a building was built in 2016 and has electrical energy costs that run at $150 per unit. When you compare what the codes called for five years ago with today, you might find that updating to the latest energy-efficient standards will save you $50 per unit. We can factor those savings into our underwriting. Instead of $150 for the electrical expenses, we’d use $100.
That puts more money toward the bottom line, which means you qualify for higher debt. In the HUD world, that also means you can get financing at a cheaper price—saving up to 25 basis points. And because you can consider MIP as part of the interest, it could end up saving you somewhere between a quarter and a half percent in interest over the term of a 40-year HUD mortgage higher leverage loan.
Of course, the key here is to look at the long term—the remaining life of the building and how competitive it will stay in the market. Those factors will help you determine if energy-related upgrades will help you’ll see a return on your investment.
Explore affordable and green financing solutions at hhcfinance.com.