HARDWIRING ENERGY EFFICIENCY INTO MULTIFAMILY LENDING 

Multifamily Buildings 2015

Sean Neill, Cycle‐7Elizabeth Derry, Community Preservation CorpDiana Glanternik, NYC Housing Development CorpKaryn Sper, Fannie Mae

STAGE IN LOAN CYCLE

ACTIVITY

PRE‐FINANCING / ORIGINATION

Developer is shopping for debt

TERM SHEET Developer secures term sheet(s) and negotiates for best terms.

LETTER OF INTEREST Developer and lender formalize terms and commit funds to loan doc development

SCOPE DEVELOPMENT Clarification/pricing of rehab scope.

LOAN DOCUMENTS Attorneys fine tune documents esp covenants and conditions precedent. 

LOAN EXECUTION / CNSTRCTN START

Loan is signed, construction begun.

CONSTRUCTION Loan admin ensures conditions precedent met prior to draws

INSPECTION/TEMP‐TO‐PERM CONVERSION

Lender inspection confirms all requirements for construction completion are met.  Loan converts to permanent.

SECURITIZATION Most (not all) loans bundled w/ other multifamily loans in MBS

SERVICING Lender’s servicer oversees the financial health of the building and compliance with covenantts. Work‐outs/foreclosures

UNDE

RWRITING

Leveraging SustainabilityFinancing Energy EfficiencyThrough Utility Cost Savings

Building Bridges to Net ZeroOctober 29, 2015

Who are we?The Community Preservation Corporation (CPC) is a non-profit, affordable housing and neighborhood revitalization lender founded in 1974 to address the renovation needs of aging and deteriorating multifamily housing stock in New York’s distressed neighborhoods.

CPC believes that stable and sustainable affordable housing is the foundation of strong communities and we strive to contribute to comprehensive neighborhood revitalization through our lending and partnerships.

What do we do?CPC provides construction and permanent financing to owners of multifamily housing in low and moderate income neighborhoods.

We use our flexible financing to support the preservation of existing and new construction of affordable rental housing throughout New York State.

Over our 41-year history, CPC has contributed to the preservation or creation of over 157,000 units of affordable housing, initiated numerous downtown revitalizations, and improved the quality and energy efficiency of the multifamily stock.

Why Sustainability?

Other Expenses69%

Fuel 14%

Electricity5%

Water12%

Utilities31%

As rents and utility costs have outpaced wages, the demand for affordable housing has grown dramatically, along with the number of New Yorkers suffering from rent burden: 56% of households are rent burdened and paying more than a third of their income in rent and utilities. Additionally, utility costs account for roughly 31% of the average operating expenses of a multifamily building and the cost keep climbing, straining budgets for owners, managers and developers. Energy efficiency and water conservation has never been more critical to the economic and environmental sustainability of our communities, and the long-term affordability of our housing stock.

Fuel (Oil & Gas) $   8,473,584.00 Electricity $   3,349,131.00 Water $   7,543,529.00 Utilities Sub Total $ 19,366,244.00 All M&O Expenses $ 61,719,053.00 

All Expenses v. Utility Costs CPC’s current M&O standards are derived from Income and Expenses statements annually submitted by our permanent loan holders. 

But How??????CPC has developed a financing methodology that can be integrated into the standard multifamily originations process to incorporate energy efficiency and water conservation measures into construction and permanent loans, monetize on potential savings, and add leverage to the first mortgage.

By using the projected savings of energy and water retrofit measures in our underwriting, CPC provides clients with the additional low cost, long term, capital needed to achieve quality retrofits and develop high performance buildings, locking in energy and water savings to insure long term economic stability of a property.

EEWCM

Lower Expenses

Higher NOI

Additional Debt Service

Larger Loan

Proceeds Cover EEWCM

NOI: Net Operating IncomeEEWCM: Energy Efficiency & Water Conservation Measures

A Comprehensive Initiative

OriginateNew originations are driven through outreach to borrowers with energy intensive buildings and conservation needs

UnderwritePractical underwriting principles are used to monetize operating savings from a retrofit

EvaluateTechnical assistance is provided ensure cost saving measures and sustainability strategies are implemented

CollaborateEngage external partners around programing and outreach to support CPC’s mission 

UnderwritingApproach: • CPC will increase the size of the first

mortgage to cover the additional cost of an energy and water retrofit by underwriting savings.

• Provides economic stability by reducing building expenses.

• Owners are able to retrofit their buildings without the need for incentives.

Process:• Projected utility cost savings, as indicated

in an energy audit or green physical needs assessment (GPNA), will be incorporated into the loan’s underwriting at a 50% discount.

• Percentage savings discount may be adjusted based on project metrics and risk factors.

• New Construction and Gut Renovations will reviewed for energy savings potential through an energy model.

Projected Savings• Identified in an Energy Audit, Model, or GPNA

Risk Discount• CPC applies discount

Underwrite Savings• Captured as reduced operating expense

Last year there were 761 multifamily real estate transactions in NYC. 

That’s 47,885 units and $12.6B

$4,000/unit for 

EEWC

47,885 x $4,000 = $191,540,000

ADDITIONAL INVESTMENT EACH YEAR

metric tons of CO2

40,000

8,500cars off the road

Integrating Energy Efficiency into Affordable Multifamily Housing 

Lending Practices

Established in 1971 under laws of the State of New York as a public benefit corporation for the purpose of financing affordable multi‐family housing in the City of New York

Governed by 7‐member Board of Directors appointed by Mayor and Governor; chaired by Commissioner of NYC Department of Housing Preservation and Development

A staff of 173  manages over $12.97 billion of assets, including a multi‐family portfolio of over 190,000 units with $9.76 billion in mortgage loans and loan interests as of October 31, 2014

The #1‐ranked issuer in the nation of affordable multi‐family housing bonds in 2012, 2013 and 2014* CY 2014 was a record year with a total issuance of $1.9 billion $23.8 billion of mortgage revenue bonds issued since inception $10.08 billion of bonds outstanding as of June 30, 2015

General obligation of HDC rated Aa2/AA by Moody’s and Standard & Poor’s, respectively

Separately capitalized, mortgage insurer (REMIC) rated AA by S&P.

NYC Housing Development Corporation

14*Source: Thomson Reuters Securities Data Corporation as of 12/31/14.

Mayor de Blasio rolled out the City’s new housing plan, Housing New York, on May 5th, 2014, which commits to create and preserve 200,000 affordable housing units over 10 years. 

Since 2003, HDC has financed 112,513 units under prior administration’s housing plan and used over $13.7 billion in bonds.

HDC, in working with other City housing and community development agencies, was involved in shaping the policy and strategies in Mayor de Blasio’s new housing plan. HDC will continue to provide efficient and innovative financing tools to help implement the plan and achieve the 200,000‐unit goal.

Housing New York: HDC’s Role

15

One City/ OneNYC

• Administration target: 80% reduction in greenhouse gas (GHG) emissions by 2050 (80x50) 

• Why Focus on Existing Buildings? – 71% of NYC’s GHG emissions comes from the energy used in buildings 

– At least 80% of buildings that exist today will still exist in 2050 

Affordable Housing Strategy: Background

• HDC/NYCEEC Program for Energy Retrofit Loans (PERL) experience:

– Launched in 2012, will have closed 3 projects by end of 2015

– Terms diverge from original conception– Most affordable housing needed more than just EEWCMs/ 30‐year recap trigger

– From PNA + energy audit ‐> GPNA

Affordable Housing Strategy: Summary

• HDC Requirements Divided by Type of Project– New Construction & Substantial Rehab: Enterprise Green Communities– GPNA for Preservation:

– Mod Rehabs: incorporate EEWCM recommendations into assessment and final scope

• Benchmarking

New Construction Substantial Rehab Mod RehabNo GPNA GPNA GPNAEGC EGC No EGC but requirement

to integrate some EEWCmeasures into mod rehabscopes

Benchmarkingaccount set up atconversion

Benchmarking accountset up beforeconstruction close

Benchmarking account setup before constructionclose

Affordable Housing Strategy: GPNA

• HPD and HDC have integrated energy audits into physical needs assessments, now called Green Physical Needs Assessments (GPNAs). 

• Template report:– standard PNA 15‐year useful life table/replacement cost schedule

– energy audit– table that identifies incremental cost of upgrading replacements to more energy efficient version

– Scope recommendations  • HDC and HPD pre‐qualified firms

• HDC/HPD Borrowers to set up benchmarking accounts for their projects in an online pre‐qualified benchmarking software platform. – prior to construction closing for preservation projects– prior to conversion for new construction projects

• Services: hands‐on project setup assistance, ongoing automated data retrieval, utility spike alerts, quarterly reports, and uploading data into the EPA’s Portfolio Manager software database and sharing the data with an HDC‐HPD master account

• This initiative will provide: regularly updated utility information and analysis to owners, reduce the burden associated with manual data entry required for building benchmarking; valuable information on utility usage and GHG emissions in the affordable housing sector by migrating all data into one platform

Affordable Housing Strategy: Benchmarking

21

Fannie Mae Multifamily Green Initiative:Integrating Green into Multifamily FinanceOctober 29, 2015

© 2015 Fannie Mae

22

Our Multifamily Green Financing Framework

Fannie Mae Multifamily Green Financing must result in apositive, measureable impact to

each pillar of the Triple Bottom Line.

© 2015 Fannie Mae

• Lower credit risk

• Higher cash flows

• Higher property value

Financial

• Greater affordability for tenants

• Create higher quality more durable housing

• Healthier housing

Social

• Lower use of energy, water and natural resources

• Greater resiliency to natural disasters

Environmental

23

Fannie Mae Mission and Portfolio

Fannie Mae provides liquidity, stability and affordability to the secondary mortgage market

Fannie Mae’s Multifamily Portfolio includes: Loans having an aggregate unpaid principal balance of over $200B

as of Q1 2015 All types of loans and properties: Market Rate, Affordable, Seniors,

Student Approximately 20% of all U.S. Multifamily Mortgage Debt outstanding

as of year-end 2014

Multifamily Mortgage Business serves property owners by providing financing solutions that meet business needs

© 2015 Fannie Mae

Fannie Mae Multifamily has provided liquidity, stability and affordability to the multifamily market for over 25 years.

24© 2015 Fannie Mae

Simplifying the

Approach to Green

Financing

25

Integrating Green into Multifamily Finance

© 2015 Fannie Mae

• Loans may be originated by any Fannie Mae Multifamily LenderOriginating

• High Performance Building module of PCA identifies energy- and water-saving retrofits

• Property owner commits to specific retrofits reducing energy or water consumption by at least 20%

• Lender underwrites up to 50% of projected savings

Underwriting

• Loan securitized and disclosed to investors as Green MBSSecuritization

• Lender escrows cost of energy- and water-saving retrofits, and releases $ to property owner at retrofit completion

• Property owner reports Energy Performance Metrics annually

Asset Management

Environmental Defense Fund’s

Investor Confidence ProjectFormalizing the Market for Underwriting

OPPORTUNITY

A large and growing number of capital providers want to play a role in energy efficiency.

THE PROBLEMU

ND

ERW

RIT

ING ● Land 

appraisal● Lease-up

analysis ● LTV● Credit quality

of Guarantors● Debt Service

Coverage

CO

ND

ITIO

NS

PREC

EDEN

T ● Land purchased

● Equity spent● Firm

construction contracts

● Building permits received

SER

VIC

ING ● Debt Service

Coverage Monitoring

● Distribution blockers

● Audit● Acceleration/

workout

Well-established processes for underwriting, loan documentation and administration do not exist for EE.

LOA

N A

DM

INIS

TRAT

ION ● Review of CPs

● Draw down approvals

● Bank inspections

● Lien Waivers

UNDERWRITING AND LOAN ADMINISTRATION FOR COMMERCIAL NEW CONSTRUCTION

THE PROBLEMA menu of methods for evaluating energy efficiency opportunities and measuring pre-and post- retrofit savings.

WHAT CAN I TRUST FOR UNDERWRITING?• What is measured and how?

• What assumptions applied and how justified?

• How is data normalized?

• How is data gathered and over what duration?

• How are post-retrofit management techniques accounted for?

• What techniques were applied to adjust for factors outside the energy project?

THE PROBLEMLittle or no methodological link between of each stage of a retrofit process (or missing links!).

Preliminary Audit

Energy Assessment

CommissioningMeasurement & Verification

Benchmark

Ongoing Commissioning

IMPLICATIONSNo objective, demonstrable history of savings performance and, even if there were, no agreed upon path to replicating it.

Lender cannot• Project future cash flow• Underwrite to savings• Justify higher loan to value• Build the case for a loan product

and energy efficiency market• Continues to rely on anecdotes and case

studies• Fails to deepen and develop new financial

products and strategies

IMPLICATIONSCapital lined up to invest in EE cannot flow efficiently.

EE PROJECTS

GRANTS & ENHANCE-

MENTS

EQUITYDEBT

AN ANALOGYThe World Trade Organization spent years on “data harmonization”. Without it, no market. Everyone spoke a different language.

RESPONSE – The Investor Confidence ProjectAn agreed upon set of procedures for energy efficiency retrofit processes, drawn from existing methods.

STAGE IN LOAN CYCLE ENGINEERING ACTIVITY ICP Requirement

PRE‐FINANCING / ORIGINATION

Benchmarking, prospecting for good buildings

Benchmarking standard –starting point established

TERM SHEET Establish savings target

LETTER OF INTEREST Confirm target

SCOPE DEVELOPMENT Energy Assessment/Audit Audit protocols

LOAN DOCUMENTS Design/bidding, specifications established

LOAN EXECUTION / CNSTRCTN START

Design, Construction & Verification Plan (DCVP)

CONSTRUCTION DCVP oversight Commissioning Plan

INSPECTION/TERM CONVERSION

Commissioning  M&V Plan

SECURITIZATION

SERVICING M&V/Ongoing Commissioning M&V, OngoingCommissioning