Escalating construction costs and changing regulations can challenge the most skilled project estimators. Not meeting financial targets can cost owners hundreds of thousands or even millions of dollars, or worse: force bankruptcy.
Smart financing can ameliorate a project’s financial position and help a project maintain healthy returns. One area where costs can be controlled is that of Mortgage Insurance Premiums (MIP).
Returns of $400k to $1.2 million on a loan from $6 million to $15 million can be expected.
MIP can add 0.65% amortized interest over the life of the loan for market rate development, and for affordable development, that number is 0.45%.
An existing or new multifamily project can pursue HUD’s Green MIP Reduction program. The intent of the program is to incentivize energy use reduction which will deliver return on investment through energy savings while reducing mortgage insurance premiums.
Developers and Building Owners have an opportunity to reduce FHA mortgage insurance premiums (MIP) by 0.25% if the project achieves certain efficiency and environmental standards. The following 40-year loan amounts will net these approximate savings:
- $4 million loan
- Market rate savings – $340,000
- Affordable housing savings – $168,000
- $15 million loan
- Market rate savings – $1,275,000
- Affordable housing savings – $630,000
- $25 million loan
- Market rate savings – $2,100,000
- Affordable housing savings – $1,048,706
How does a market rate or an affordable housing property qualify?
There are specific green building and energy performance criteria required to earn Green MIP financing; however, not pursuing the program correctly can force a project out of the program and force a loss in savings and valuation.
HUD 223(f) borrowers can qualify by completing the following:
- Certify with one of the following green building programs:
- Energy Star High Rise or Home
- Green Point Rated New Home Multifamily
- Passive House, Enterprise Green Communities
- Earth Advantage
- Living Building Challenge
- Existing Buildings – Achieve an ENERGY STAR® score of 75 and maintain the score annually. If the score drops below 75, a capital needs assessment (CNA) with an ASHRAE Level II Energy Audit is required; Or,
- New Construction – Achieve ENERGY STAR Statement of Design Intent (SEDI) score of 75 or higher based on building plans.
Three critical steps to help ensure program success include:
- Selecting the correct green building rating: Depending on the project’s Code year and geographic location, one or more program may add more cost to a project than what the net savings may deliver. Ensure the optimal certification is chosen, one that does not place undue burden on your project/property.
- Operational efficiency: Ensure energy conservation measures are maintained during operations.
Occupancy behavior may force the ENERGY STRA Score to drop below 75. Consistent and persistent operations review as it pertains to energy consumption is critical to maintain a high score.
- New Construction SEDI Score: Proper planning and energy modeling will be required to deliver a score over 75 and to maintain an ENERGY STAR Score of 75 throughout the term of the loan.
In summary, economic challenges require creative thinking and access to cost-cutting tools that help incentivize owners to build and maintain much needed housing. Through HUD’s Green lending program and through energy efficient design and operations, a project can net millions of dollars in returns and increased valuation; multiple wins across the board.
For more information, contact Moe Fakih below:
Moe Fakih, Principal