U.S. households residing in multifamily housing – one in four households – spend approximately $40 billion on energy every year. A 20 percent increase in energy efficiency for these homes would save $8 billion per year and cut greenhouse gas emissions by 430 million tons, according to the Department of Housing and Urban Development.
To address these issues, HUD now offers a reduced annual mortgage insurance premium for energy efficiency and green building standards: The Green MIP Reduction. The Green MIP Reduction cuts the MIP from current rates, which generally are between 45 and 70 basis points, to 25 basis points for properties that meet one of the listed industry-recognized energy efficiency and green building standards. Fiscally minded taxpayers will be pleased to know that even with the reduction in MIP for energy-efficient loans, HUD predicts that loans under this program will generate net revenue for the federal government.
To earn the Green MIP Reduction, the project owner must demonstrate that the project has achieved – or must certify that it will pursue, achieve and maintain – an industry-recognized standard for green building. Further, the owner must certify that it has achieved, or will achieve, a score of at least 75 on the 1-100 Energy Star score using Portfolio Manager and maintain that score for the life of the loan, with certifications done annually. For existing buildings, the owner must benchmark the building, then process a statement of energy performance in the Portfolio Manager with a score of 75 or greater and apply for Energy Star certification. If the existing property has a score of less than 75, a qualified green building professional would need to audit the building and design a program to achieve the green building certification and meet the required energy score.
- Developer's perspective. Tyler Downs, principal of Wazee Partners LLC, is utilizing the Green MIP Reduction for the upcoming 165-unit multifamily, mixed-use development known as West End 38 Apartments in Wheat Ridge, which is being financed through HUD’s 221(d)(4) program. Downs’ advice to other developers using the Green MIP Reduction in the 221(d)(4) program is to select an experienced, HUD-compliant green building consultant and to continually involve the consultant in your engineering and architecture meetings as early in the process as possible.
The program will provide the West End 38 project around $90,000 a year in MIP savings, according to Downs. The cost to participate in the program also was in the neighborhood of $90,000 for the green program certification fees and the cost of Group14’s consultant fees, which include commissioning and application – the ongoing monitoring will be separate. Most notably, Downs does not believe there will be a significant increase in actual construction cost (and perhaps no increase) to achieve green program compliance for this project. The program cost was not significantly burdensome, perhaps in part, because the construction industry has made progress in adopting some of the standards of the certification program Wazee Partners chose as baseline construction standards, he said. For this project, the payback for the cost to achieve green program compliance will be within one to two years.
- Sustainable design consultant’s perspective. Building green doesn’t cost more; you just have to “design smart to build green,” said Josh Marceau, sustainable design consultant at Group14 Engineering, the consultant for the West End 38 project. Many studies show that there is no cost to build green, or that the cost is very low, he said.
“For example, think about the balance between the building envelope and its mechanical systems,” said Marceau. “A green building that has better exterior insulation than a standard building will allow you to save money by downsizing the mechanical system, which is one of the biggest costs to a project.”
There are many opportunities to save money as well. For example, water-efficient fixtures are more energy efficient and will save owners money.
One of the benefits of the Green MIP Reduction program is the exposure and education it provides. Any time we can expose builders or designers who would otherwise build a standard product to a thirdparty green building rating system, they will learn something and change their practices, he said. We are seeing an increase in developers whose decision-making is based on the triple bottom line of people, profits and the planet.
- Lender’s perspective. Most of the borrowers Scott Graber, vice president of multifamily and senior housing at Gershman Mortgage, works with are using HUD’s Green MIP Reduction program. One reason for this is that since most loans are on a balance between being either replacement-cost constrained or debt-service constrained, the impact of not using the Green MIP Reduction is too much of a risk, he said.
“In approximate terms, on a roughly $17 million debt-service constrained new construction loan, a 40-basis-point increase – if the developer did not pursue the Green MIP Reduction – would result in a reduction in mortgage proceeds and increase in equity requirement by $940,000,” he said. “On the flip side, in that same example, utilizing HUD’s Green MIP Reduction, there would be roughly $120,000 of upfront MIP reduction savings, plus 40 basis points of effective interest rate savings (approximately $67,000 per year), and $940,000 more in mortgage proceeds.”
Originally published in the Colorado Real Estate Journal.