With escalating construction and operating costs, owners of multifamily buildings often look at green building programs as just another cost.
But there are many times when green initiatives can actually provide great ROI or even save money immediately with government incentives and rebates.
One such cost savings avenue is HUD’s Green MIP reduction program.
Mortgage Insurance Premiums (MIP) can add as much as 0.65% amortized interest over the life of a market rate development loan. For affordable development, that number is 0.45%. On loans of $6-15 million, MIP can be a sizable number – from $400k to $1.2 million.
Both existing and new multifamily projects can pursue the Green MIP Reduction program. The intent of the program is to incentivize energy use reduction. The win-win would be to achieve positive ROI via energy savings while also reducing debt costs.
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 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:
1. 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
Living Building Challenge
2a. 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,
2b. New Construction – Achieve an 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 system – Depending on the project’s code year and geographic location, one or more programs 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 owners and developers reduce costs. 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 that are worth investigating.