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Smaller Carrot for Green Rehab

energy efficiency
March 2020

Apartment owners are still spending money to save water and energy, even though lenders don't offer the same incentives they used to.

Sustainability and resource efficiency are always very important," says Todd Bracey, Vice President of Asset Engineering for Alliance Residential, headquartered in Phoenix.

In recent years, owners have rehabbed thousands of apartment communities to reduce water and energy consumption. Many received low interest rates from Freddie Mac's or Fannie Mae's Green Financing programs in exchange for commitments by the communities to cut their spending on utilities. Those incentives won't be as strong in 2020, although apartment managers still put renovations that save water and energy high on their list of capital expenditure priorities.

"There is a great focus on environmental sustainability...energy improvements are either number two or three on your list," says Lela Cirjakovic, Executive Vice President of Waterton, based in Chicago.

Agencies Lenders Remain Committed to Green Lending

Freddie Mac and Fannie Mae lenders say they are still "committed to doing green loans," but it's not clear what kinds of incentives they will offer borrowers to get those deals done, experts say.

Until recently, apartment communities could get an extra-low interest rate from Freddie Mac and Fannie Mae lenders as a reward for saving energy and water. Communities were able to cut the interest rate on permanent loans by up to half a percentage point if they reduced energy and water use by 30 percent or more, or if they qualified for a green certification like Leadership in Energy and Environmental Design (LEED).

Waterton's Cirjakovic says, "Did we take a deeper dive on sustainability with the Green Programs? Of course!"

Those incentives shrank this fall. The federal officials who tell Freddie Mac and Fannie Mae how much they can lend no longer allow the mortgage giants to make an unlimited amount of loans to energy-efficient apartment communities. As of October, Freddie Mac lenders were still offering qualifying communities an interest rate discount of 20 basis points, according to CBRE Capital Markets. But Fannie Mae lenders were not consistently offering discounts to more efficient apartment communities.

On the other hand, both of the mortgage giants affirmed their interest in supporting energy improvements in the apartment communities with whom they lend.

Local Governments Get Involved

Local governments are also demanding that owners and managers make apartment homes more efficient. "I think we will see the regulatory environment change on this in the future," says Cirjakovic. "We see certain cities like Chicago requiring that multifamily communities report on consumption." New York City also recently passed a law that will require many apartment buildings to limit their energy use during the next decade.

Owners and managers frequently make such renovations simultaneously in all of a community's apartment homes, both vacant and occupied. "Water and electricity conservation measures are typically deployed systematically across an entire property—often driven by incentive programs," says Alliance's Bracey.

Initially, the most popular renovations to make apartment communities more efficient are water-saving fixtures and energy-efficient appliances. Investors are careful not to leap into technology that may become outdated in a few years—although many have widely replaced the light fixtures in their communities with energy-efficient LED fixtures. "It's a quick opportunity to reduce costs," says Cirjakovic.

Owners and managers have also invested in more expensive technologies. "We have been adding solar panels at some of our properties, and these have become more efficient and reliable while also decreasing in cost," says Elie Rieder, CEO of Castle Lanterra Properties, based in Suffern, N.Y.