Financing (Green) Buildings

Chris Pyke, USGBC James Finlay, Wells Fargo

Chrissa Pagitsas, Fannie Mae Nils Kok, UC Berkeley & GRESB

Why are owners building/retrofitting green buildings?

!   Increased net income & sales price

!   Increased demand from tenants and institutional investors

!   More and stricter environmental regulation

!   Risk-mitigation strategies Source: Eichholtz, Kok and Quigley (2012)

What is EEF? IT DEPENDS!

!   Generally: !   Energy Efficiency Financing (EEF) is capital ($$)

used to construct or retrofit properties to use less energy than conventional buildings

!   There is no one definition of EEF

EEF can be… !   A lower interest rate !   The provision of more debt than allowable under

conventional underwriting !   A different appraisal or property condition process !   A certification or label disclosed to investors

Who can use EE Financing?  1.  Single Family Residential: 1-4

units. Generally owner-occupied. Value <$1M.

2.  Small Commercial & Industrial: Small owner-user. Value < $2M.

3.  Medium Comm. & Industrial: Larger owner-user/part owner-user, local investor. Value $2M to $10M.

4.  Large Commercial & Industrial: Multi-tenant leased investment Value >$10M.

5.  Multifamily: 5+ units, affordable &market rate, rental apartments, condos & coops. Value $1MM to $200MM+.

6.  Special purpose: Gas station, fast food, hotel/motel, theater, data centers. Value $1MM to $20MM+.

7. MUSH: Municipal, University, Schools, Hospitals. Value $1MM to $300MM+.

What is the financing process?

Final  permuta-on  of  financing  tool  

Available  sources  of  capital  to  the  owner  

Needs  capital  to  acquire  a  property;  refinance  an  exis-ng  

property;  or,  make  improvements  to  an  exis-ng  property  

Owner  

Lender  provides  Debt  

Lender  sells  MBS  

Lender  holds  Loan  

Investor  provides  Equity  

Investor  holds  Shares  

Owner  uses  own  Cash  

How do our organizations fit in?

Final  permuta-on  of  financing  tool  

Available  sources  of  capital  to  the  owner  

Needs  capital  to  acquire  a  property;  refinance  an  exis-ng  

property;  or,  make  improvements  to  an  exis-ng  property  

Owner  

Lender  provides  Debt  

Lender  sells  MBS  

Lender  holds  Loan  

Investor  provides  Equity  

Investor  holds  Shares  

Owner  uses  own  Cash  

Wells  Fargo  &  Fannie  Mae  

GRESB  

Connecting the EEF pieces !   Wells Fargo: How appraisals impact EEF !   Fannie Mae: Example of a Green Loan and Green

MBS combination !   GRESB: What investors want to see regarding

sustainability of portfolios

Wells Fargo Environmental Loans & Investments

Money flows to investments

when there is a clear and

measurable risk adjusted rate of

return.

Define the Investment Risk High  Risk  

Corp.  Junk  Bonds  

OK  

Low  Risk  U.S.  

Treasury  

OK  

Unknown  Risk  

???  Not  OK  

Environmental Loans & Investments Financing is not the problem, poorly defined risk is the problem Compelling motivation by owners is lacking, there is always owner risk, “skin in the game” Rewards for investing in upgrades are: 1. Hard, quantifiable – Simple cost savings 2. Soft Qualitative – Risk, quality, reputation; health + productivity 3. Reversion – Added value at sale EE risks/benefits are complex, tools and experts lacking, specific hurdles vary by tribe

Environmental Loans & Investments Risk rungs during the development cycle 1.  Idea in the shower 2.  Ink on paper - - - - - - - - - - Appraisal Values 3.  Entitlements - - - - - - - - - - - - As-Is Value 4.  Vertical construction - - - - - - - At Completion Value 5.  Stabilized occupancy 6.  Stabilized history (3 years) - - - Stabilized Value

Construction lending/investment is “special”

Owner  

C  level    Exec  

Opera/ons    Staff  

Occupants  

RE  agent  

Appraiser  Banker   Loan    Underwriter  

Chief  Credit    Officer  Government    Examiner  

§  As Proposed value is about the future §  As-Is value is about now and past performance

The Mortgage/Investment Chain - all of tribe must agree

Appraisal    Management  Firm  

Appraisal    Reviewer  

•  Have due diligence documentation package ready

•  Know members of your tribe

•  Value beyond cost savings: risk, reputation, value at sale

•  High Performance building management clarifies risk, creates data, adds value

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Conclusions

Fannie Mae Mission and Portfolio !   Fannie Mae provides liquidity, stability and affordability

to the secondary mortgage market !   Multifamily Guaranty Book of $190B !   3.8M rental units

!  Includes Market Rate, Affordable Subsidized and Affordable by Area Median Income (AMI) properties

!   20% of U.S. Mortgage Debt Outstanding for Multifamily*

*As reported by Federal Reserve as of Q2 2010

What is “Green Financing” to Fannie Mae?

!   Green Financing is capital (loan proceeds) that may result in: !   Reduction of operating costs for owner !   Reduction of utility costs for tenant !   Reduction of loan risk for lender !   Improvement of property quality for everyone !   Preservation of affordable / work force housing for Americans

!   Through the investment in Energy and Water Efficiency improvements, at the time of: !   Refinance of an existing Fannie Mae loan !   Acquisition of a property with a new Fannie Mae Loan that is

subsequently sold to Fannie Mae !   addition of Supplemental loan to an existing Fannie Mae loan.

Cycle of Financing Owner  • Acquires  or  Refinances  

Lender  • Underwrites  loan  &  orders  reports  

• Provides  primary  financing  

Fannie  Mae  • Provides  secondary  financing  • Securi-zes  Loan  into  MBS  

Investor  • Buys  MBS  based  on  informa-on  disclosed  

Servicer  • Manages  Asset  for  life  of  loan  

Confiden-al  -­‐  Internal  Distribu-on  

Green Refinance Plus Terms !   Affordable Subsidized Multifamily Rental Buildings !   Acquisition/Rehab and Refinance deals !   4-5% additional loan proceeds compared to

Fannie Mae’s regular DUS Affordable Preservation execution

!   Lower DSCR (1.15x) !   Higher LTV (85%)

Connecting the Green Financing Components Green  MBS:    Fannie  Mae  discloses  a  green  financing  solu-on  or  a  green  building  cer-fica-on  enabling  MBS  investors  to  deploy  their  investment  dollars  to  support  energy  and  water  retrofi[ng.  

Green  Financing  

Green  Building  

Cer-fica-on  

Green  Loan:  Fannie  Mae  provides  secondary  market  liquidity  allowing  the  financing  of  energy  and  water  efficiency  improvements  or  to  support  proper-es  with  a  green  building  cer-fica-on.  

Refinance  

Acquisi-on  

Supplemental  

Green  Property:    Owner  improves  property  or  obtains/maintains  green  building  cer-fica-on.  

Energy  &  Water  Efficiency  Improvements  

Green  building  cer-fica-on  by  third-­‐party  (e.g.  LEED,  Green  

Communi-es)  

Examples: Green MBS

!  Has US Green Building Council’s LEED certification Platinum level !  Building design is 35% more energy-efficient than code requires.

!  Financed with Green Refinance Plus !  Financing provided for property improvements including replacing old inefficient gas-fired furnaces and installing energy efficient lighting

Green  Financing  Product  Enhancement  

Green  Building  Cer-fica-on  

What is GRESB? GRESB’s added value

¡  Measure sustainability performance at portfolio level ¡  One approach and one methodology for listed property companies and

privately managed funds ¡  Aligned with international reporting frameworks (Global Reporting Initiative,

EPRA, INREV) ¡  Used as a due diligence and engagement tool by institutional investors

“GRESB’s mission is to enhance shareholder value by evaluating and

improving sustainability practices in the global real estate sector”

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GRESB data used by 38 (global) investors…

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…and GRESB is supported by All major industry associations across the globe

Supporting members •  Association of Institutional property investors in the

Netherlands (IVBN) •  Association of Foreign Investors in Real Estate (AFIRE) •  Australian Council of Super Investors (ACSI) •  British Property Federation (BPF) •  Danish Property Federation

•  Property Council of Australia (PCA) •  Real Property Association of Canada (REALpac) •  Responsible Investment Association Australasia (RIAA) •  United Nations Principles for Responsible Investment (UNPRI) •  Association for Real Estate Securitization (ARES)

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About the GRESB Survey •  The basis for the benchmark

•  Online survey, 35 questions •  Explicit link to Global Reporting Initiative (GRI) and EPRA/INREV

Best Practices Recommendations

•  Methodology of GRESB scoring •  8 aspects, focus on environmental performance •  Management & Policy vs. Implementation & Measurement •  New Development section for pure-play development funds

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GRESB Methodology & Scoring The scoring of individual questions in the GRESB

Survey is based on the relevance of the topic to investors, with a strong focus on Implementation & Measurement. A selection of questions is scored based on a respondent’s primary property type. As such, GRESB takes into account the unique characteristics of a property type not only in benchmarking, but also in the scoring of Survey questions.

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Measuring sustainability performance GRESB Four Quadrant Model

How due diligence and engagement works

Financing (Green) Buildings

Chris Pyke, USGBC James Finlay, Wells Fargo

Chrissa Pagitsas, Fannie Mae Nils Kok, UC Berkeley & GRESB