The Growth of Green Finance in the Capital Stack – Multifamily Real Estate News


Green finance has come a long way since Fannie Mae issued its first multi-family green bond in 2012. In today’s ESG-centric market, multi-family developers and owners are recognizing the impact of climate change and are turning to the financial and operational benefits of green financing programs.

GSE’s Green Bonds and Green Building Certification products offer fixed and floating rate loans and up to 80 percent loan-to-value. The Green Rewards program rewards borrowers for building improvements that achieve 15 percent energy savings and 30 percent overall efficiency with price incentives, although borrowers are required to submit annual energy use reports.

This Los Angeles student housing project near the University of Southern California used $6,494,438 of C-PACE funding to invest in seismic reinforcement and water control upgrades. This was the developer’s first C-PACE project, and Nuveen managed to attract a new community to the C-PACE program. Image courtesy of Nuveen Green Capital

According to its 2021 annual report, Fannie Mae’s green financial volume increased 3.6 percent to $13.5 billion in 2021, from $13.0 billion in 2020. In December 2021, the agency also announced that its green MBS Issuance has reached $100 billion, making Fannie Mae the first green bond issuer to reach this milestone. Fannie Mae’s Green Rewards and Green Building certification products offer fixed and floating rate loans and up to 80 percent loan-to-value.

In 2021, the agency added BREEAM to the list of green assessment certifications it accepts as part of its green building certification program. Multifamily borrowers with top-tier certifications (BREEAM, LEED, Passive House and others) are eligible for the best rates and receive a 25 basis point reduction. Less robust certificates in lower tiers bring smaller rate cuts, but for long-term loans even a 10 or 20 basis point cut is still beneficial.

The GSE programs are well-suited for multifamily borrowers who “want to acquire an older vintage asset or want to refinance it and reinvest in an asset,” noted Greystone director Phil Cathlina.

Greystone recently provided a 10-year non-recourse Fannie Mae DUS Green Loan with 9.5 years of income guarantee on a 406-unit property in Okemos, Michigan to undertake renovations on the property, which was completed in 1989.

However, some GSE funding programs are not for the faint of heart. “Green Rewards requires them to put down funds, (and) that requires a different level of commitment.” Gary Pool, senior managing director and co-leader of the Fannie Mae platform at JLL. A borrower must deposit 125 percent of the estimated cost of making these improvements.

keep pace

Commercial Property Assessed Clean Energy, a policy-based program, is also gaining traction among borrowers looking to reduce their carbon footprint. With C-PACE financing, borrowers can take out loans for sustainable improvements and repay the loan as an allocation to their property tax bill. Repayments are remitted to the lender. Loans are not publicly funded and typically have terms of 10 years and up to 30 years.

“Builders can use this to compare their financing What they fund,” said Jessica Bailey, President and CEO of Nuveen Green Capital. She co-founded Greenworks Lending, which was acquired by Nuveen in 2021.

Borrowers who want to use 80 to 85 percent of their principal can typically fund 25 to 30 percent through C-PACE, with between 50 to 55 percent coming from a senior lender, according to Shawn Heyl, founder and CEO of Green Pace Financial , a capital markets advisory firm based in San Diego.

Qualified improvements range from the building envelope to lighting, energy efficient windows, green roofs and electric vehicle charging stations, as long as they improve the building’s energy use.

As construction costs increase, C-PACE funding remains constant in the capital stack, making it more attractive to developers. Bank Street Lofts, a 149-unit property in Baltimore, benefited from Nuveen Green Capital’s long-term, fixed-income C-PACE equity, which funded nearly $9 million for energy efficiency improvements. Image courtesy of Nuveen Green Capital

pressure to go green

As more states introduce energy and carbon reduction requirements into building codes, developers are trying to move forward. “We’ve got more mandates coming our way in terms of energy use,” Baily said, noting that she’s seen a lot of activity in C-PACE funding for new builds.

Borrowers can take advantage of C-PACE financing for new developments, making upgrades that go beyond building codes while benefiting from fixed rate financing. “Mezzanine financing is very expensive, while our multi-family home prices are currently around 5 percent with long-term payback,” commented Heyl. “That makes us very attractive for construction,” says Heyl.

C-PACE programs are typically funded through private lenders in accordance with state and city regulations. The program offers fully amortizing financing, allowing owners to secure long-term, fixed-rate financing for their projects. In addition to financing 100 percent of projects, C-PACE can also be used retrospectively for retrofits.

“What makes it even more exciting is that in most cases we can go back up to three years and reimburse the developer for any construction costs that were used for energy savings and apply that to either debt reduction or anything that helps project,” Heyl said.

shift priorities

Source: Fannie Mae Multifamily emissions data to November 30, 2021

The availability of C-PACE in all states and jurisdictions is promising. Many leading lenders, both banks and debt funds, are skeptical of C-PACE because it takes precedence over the mortgage. C-PACE funding takes precedence over the senior lender. “The senior lender needs to be comfortable because they ultimately have to give their approval.” A lender will not sign C-PACE if it over-leverages the property, Bailey noted.

“We need more lenders who understand what PACE is bringing to the table,” Heyl noted. C-PACE is currently active in 30 states and the District of Columbia, with an additional eight laws in development. “Over the past two years, C-PACE has become more mainstream…it’s no longer on the fringes of the commercial lending world,” Bailey said.

Owners even turn to C-PACE when a senior lender exits or increases its costs. “We see how C-PACE funding is helping us, and it has allowed us to get into projects that building owners didn’t think about,” she shared. “It’s the first time since I’ve been doing this that we’re offering lower rates than senior lenders.”

Multifamily owners also need to consider that Gen Z is becoming the largest renter population, a new base of young professionals who are sustainability conscious. The results of AMLI Residential’s 2022 Sustainable Living Survey showed that climate change is an important issue for renters, with 80 percent of residents saying that living in a sustainably built home is beneficial to their health and 72 percent saying they look more for solutions to environmental problems today compared to five years ago. Millennials and Gen Z respondents said they were more concerned about climate change and excited about sustainability.

By financing sustainable upgrades, borrowers can reduce energy and water use and make their buildings more durable. Greystone provided a $48 million non-recourse Fannie Mae Multifamily Green Rewards loan to Club Meridian in Michigan. The borrower used the loan for acquisition and renovations. Image courtesy of Greystone

fill the gap

State and national green banks are a big part of the financing options for owners when it comes to meeting their ESG goals. As of 2021, there were 21 green banks in the US. Some of these are state-sponsored, others are non-profit, and others, like California’s Green Bank, are part of state infrastructure banks. According to a 2021 report by the American Green Bank Consortium and the Coalition for Green Capital, green banks had a total of $1.69 billion in clean energy investments in 2020, with $442 million in green bank funds . Cumulative investments by green US banks in 2020 were $7 billion.

In July, the Clean Energy and Sustainability Accelerator was presented to Congress as part of the Inflation Reduction Act of 2022 package. Also known as the Green Bank Bill, it includes $27 million earmarked for a national green bank that would invest in renewable energy, clean energy and climate-resilient infrastructure, among other decarbonization initiatives.

In upstate New York, the multi-billion dollar, state-backed NY Green Bank is working with the private sector to advance the availability of green finance. NY Green Bank, a division of the New York State Energy Research and Development Authority, provides financing to fill gaps in the pre-development, construction and refinancing phases when a building owner is seeking sustainable retrofits but cannot fund these projects.

According to the institution’s 2021-2022 Impact Report, it completed 17 transactions with a total capital of $437.8 million, resulting in a reduction of 1.3 million tons of carbon emissions. In 2021, Bank of America invested $314 million in NY Green Bank to help the fund meet growing demand for capital for clean energy projects.

“We’ve been able to structure financings that allow for more ambitious ranges for both new and existing buildings,” said Andrew Kessler, president of NY Green Bank. “The owner can supplement this senior financing with a subordinated loan from us, for example to cover the installation of solar panels on a roof that needs to be replaced,” Kessler said.

Read the September 2022 issue of MHN.


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