Securing funding for energy efficiency projects within the commercial sector is difficult due to the perceived risk by lending institutions. Architects and engineers have advanced energy efficient technologies considerably over the past several years, which often mitigates any risk associated with these projects. However, underwriting and risk valuation processes have not yet found an appropriate path to considering not just energy-related risks, but benefits when evaluating prospective commercial mortgage applicants.
This Summit session presented potential interventions to properly address energy factors in commercial mortgages, as well as an action plan to implement them. The panelists presented Lawrence Berkeley National Lab’s scoping study, which determined where limitations currently exist in the underwriting sequence and what corrective actions can be implemented moving forward as energy efficient buildings become commonplace. The sequence, which is similar for many financial institutions, entails the following:
- Borrower Input – The Borrower provides the lending institution a proforma to establish net operating costs, income, building value and any additional relevant financial information that may improve their application
- Appraisal – The Lender conducts an appraisal to verify the financial information provided, specifically, the value of the building
- Evaluation of Underwriting Criteria – The Lender will often create their own proforma with potential recalculation of the net operating income, loan to value ratio (LTV), and debt service coverage (DSCR)
- Property Condition Assessment (PCA) – This assessment provides a layout of building systems, but often lenders are unaware of what relevance the status of these systems have to a property’s value
- Funding Decision – This is finalized by the Lender once complete
The glaringly apparent missing piece in this sequence is the inability to identify savings and value added from energy efficiency measures applied to a property. Also missing is the connection between each succeeding stage, with outcomes from one having little to no impact on successfully passing to the next. UC Berkeley’s scoping study suggested the incorporation of interventions that address the energy efficiency of a property, by demonstrating the energy factors that “move the needle.” These energy factors include increased occupancy, rental income and value and the creation of a simple energy efficiency metric, and the inclusion of energy efficiency in the PCA evaluation and proforma.
Fannie Mae is one example of a lending institution taking progressive action to incentivize energy efficiency in commercial project proposals. Through its Green Financing program, Fannie Mae offers preferential pricing and reduced interest rates for qualified projects that are able to actualize a minimum of a 20% annual savings in energy or water use. This requirement was not arbitrarily established – in order to substantiate the green market to investors, energy efficiency benefits must be tangible. This increases the ability to achieve cost savings, reallocate funds to additional improvements, increase property value, and increase confidence that the borrower will be able to repay their loan. Additionally, Fannie Mae has developed and implemented a High Performance Building Module within its PCA, which requires an ASHRAE Level II energy audit and identification of cost effective improvement opportunities.
Energy efficiency has proven to not only improve a building’s energy performance through the application of innovative technologies and strategies, but it has also resulted in increases in occupancy numbers, marketability and rental income. While the commercial buildings sector has progressed to implementing energy efficiency measures and actualizing cost-savings, there is more progress to be made to ensure that these energy factors are acknowledged within the underwriting process.
If you attended this session during the Better Buildings Summit, and would like to learn more about this topic, please contact sector lead Cindy Zhu. You can watch for presentation slides, which will be posted on the Better Buildings Summit page within the next two weeks. http://betterbuildingssolutioncenter.energy.gov/summit