HARDWIRING ENERGY EFFICIENCY INTO MULTIFAMILY LENDING

Transcription

1 HARDWIRING ENERGY EFFICIENCY INTO MULTIFAMILY LENDING Multifamily Buildings 2015 Sean Neill, Cycle 7 Elizabeth Derry, Community Preservation Corp Diana Glanternik, NYC Housing Development Corp Karyn Sper, Fannie Mae

2 UNDERWRITING STAGE IN LOAN CYCLE PRE FINANCING / ORIGINATION TERM SHEET LETTER OF INTEREST SCOPE DEVELOPMENT LOAN DOCUMENTS LOAN EXECUTION / CNSTRCTN START CONSTRUCTION INSPECTION/TEMP TO PERM CONVERSION SECURITIZATION SERVICING ACTIVITY Developer is shopping for debt Developer secures term sheet(s) and negotiates for best terms. Developer and lender formalize terms and commit funds to loan doc development Clarification/pricing of rehab scope. Attorneys fine tune documents esp covenants and conditions precedent. Loan is signed, construction begun. Loan admin ensures conditions precedent met prior to draws Lender inspection confirms all requirements for construction completion are met. Loan converts to permanent. Most (not all) loans bundled w/ other multifamily loans in MBS Lender s servicer oversees the financial health of the building and compliance with covenantts. Work outs/foreclosures

3 Leveraging Sustainability Financing Energy Efficiency Through Utility Cost Savings Building Bridges to Net Zero October 29, 2015

4 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.

5 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.

6 Why Sustainability? 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. 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. Other Expenses 69% Utilities 31% Fuel 14% Electricity 5% Water 12% Fuel (Oil & Gas) $ 8,473, Electricity $ 3,349, Water $ 7,543, Utilities Sub Total $ 19,366, All M&O Expenses $ 61,719,053.00

7 But How?????? EEWCM 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. Proceeds Cover EEWCM Lower Expenses 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. Larger Loan Additional Debt Service Higher NOI NOI: Net Operating Income EEWCM: Energy Efficiency & Water Conservation Measures

8 A Comprehensive Initiative Originate New originations are driven through outreach to borrowers with energy intensive buildings and conservation needs Underwrite Practical underwriting principles are used to monetize operating savings from a retrofit Collaborate Engage external partners around programing and outreach to support CPC s mission Evaluate Technical assistance is provided ensure cost saving measures and sustainability strategies are implemented

9 Underwriting Approach: 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

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11 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

12 40,000 metric tons of CO2 8,500 cars off the road

13 Integrating Energy Efficiency into Affordable Multifamily Housing Lending Practices

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

15 Housing New York: HDC s Role Mayor de Blasio rolled out the City s new housing plan, Housing New York, on May 5 th, 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. 15

16 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

17 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

18 Affordable Housing Strategy: Summary HDC Requirements Divided by Type of Project New Construction & Substantial Rehab: Enterprise Green Communities GPNA for Preservation: Benchmarking Mod Rehabs: incorporate EEWCM recommendations into assessment and final scope New Construction Substantial Rehab Mod Rehab No GPNA GPNA GPNA EGC EGC No EGC but requirement to integrate some EEWC measures into mod rehab scopes Benchmarking account set up at conversion Benchmarking account set up before construction close Benchmarking account set up before construction close

19 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

20 Affordable Housing Strategy: Benchmarking 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

21 Fannie Mae Multifamily Green Initiative: Integrating Green into Multifamily Finance October 29, Fannie Mae 21

22 Our Multifamily Green Financing Framework Fannie Mae Multifamily Green Financing must result in a positive, measureable impact to each pillar of the Triple Bottom Line. 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 2015 Fannie Mae 22

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 Q 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 Fannie Mae Multifamily has provided liquidity, stability and affordability to the multifamily market for over 25 years Fannie Mae 23

24 Simplifying the Approach to Green Financing 2015 Fannie Mae 24

25 Integrating Green into Multifamily Finance Originating Loans may be originated by any Fannie Mae Multifamily Lender Underwriting 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 Securitization Loan securitized and disclosed to investors as Green MBS Asset Management Lender escrows cost of energy- and water-saving retrofits, and releases $ to property owner at retrofit completion Property owner reports Energy Performance Metrics annually 2015 Fannie Mae 25

26 Environmental Defense Fund s Investor Confidence Project Formalizing the Market for Underwriting

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

28 THE PROBLEM Well-established processes for underwriting, loan documentation and administration do not exist for EE. UNDERWRITING AND LOAN ADMINISTRATION FOR COMMERCIAL NEW CONSTRUCTION UNDERWRITING Land appraisal Lease-up analysis LTV Credit quality of Guarantors Debt Service Coverage CONDITIONS PRECEDENT Land purchased Equity spent Firm construction contracts Building permits received LOAN ADMINISTRATION Review of CPs Draw down approvals Bank inspections Lien Waivers SERVICING Debt Service Coverage Monitoring Distribution blockers Audit Acceleration/ workout

29 THE PROBLEM A 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?

30 THE PROBLEM Little or no methodological link between of each stage of a retrofit process (or missing links!). Benchmark Preliminary Audit Ongoing Commissioning Energy Assessment Measurement & Verification Commissioning

31 IMPLICATIONS No 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

32 IMPLICATIONS Capital lined up to invest in EE cannot flow efficiently. EQUITY DEBT GRANTS & ENHANCE- MENTS EE PROJECTS

33 AN ANALOGY The World Trade Organization spent years on data harmonization. Without it, no market. Everyone spoke a different language.

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

35 STAGE IN LOAN CYCLE ENGINEERING ACTIVITY ICP Requirement PRE FINANCING / ORIGINATION TERM SHEET LETTER OF INTEREST Benchmarking, prospecting for good buildings Establish savings target Confirm target Benchmarking standard starting point established SCOPE DEVELOPMENT Energy Assessment/Audit Audit protocols LOAN DOCUMENTS LOAN EXECUTION / CNSTRCTN START Design/bidding, specifications established Design, Construction & Verification Plan (DCVP) CONSTRUCTION DCVP oversight Commissioning Plan INSPECTION/TERM CONVERSION SECURITIZATION Commissioning M&V Plan SERVICING M&V/Ongoing Commissioning M&V, Ongoing Commissioning