Turning Green Theory Into Action
By Thom Amdur
3 min read
This month’s TCA explores an area of transaction opportunity that I am particularly passionate about. Energy efficiency and sustainability is a rare area where mission, policy, and business opportunity should align, yet there continue to be misconceptions, split incentives and other barriers that sometimes make it difficult to achieve utility efficient outcomes in the real world. Recent developments are narrowing the gap and better aligning incentives.
The big and widely reported news from early February was FHA’s announcement to owners that pursue, achieve and maintain an industry-recognized standard for green buildings are eligible for a dramatically reduced Mortgage Insurance Premium (MIP). The MIP “discount” is substantial enough to drive developer and owner behavior and I think this will spill out into the broader debt market. This change raises the bar set by Fannie Mae and Freddie Mac in underwriting green improvements in their own multifamily products. It should also substantially increase the amount of energy performance data available for lenders and researchers to study, which should encourage more and new innovative energy efficiency lending products and make the broader larger finance community more comfortable with energy efficiency underwriting.
Other recent developments, like the December extension of renewable energy tax credits, as well as the credit for energy efficient new homes, give some comfort that transactions in developers’ current pipelines will be able to utilize current efficiency incentives when they get to the closing table.
Less well covered has been the IRS’s recent rule change regarding utility allowances as submetered properties. The practical effect of the rules is that it allows LIHTC owners that submeter utilities at their properties to use the energy consumption model for calculating utility allowances. This is an important step towards addressing the “split incentive” problem associated with many energy efficiency transactions.
Before this rule change, LITHC properties that were submetered were not economically incentivized to make utility improvements in the residents’ units since investments made were not reflected in the utility allowance and thus could not be captured over time. The change also should result in a second practical value for owners and energy efficiency professionals: It is often difficult to get actual consumption data from utilities. With these regulations finalized some owners may opt not to individually meter apartments but rather choose submeter so they can have easier access to the data.
These are exciting times but ultimately someone has to do the work! We believe that Energy Efficiency is one of the most important tools in an asset manager’s toolbox and that at most firms the asset management executives should be the point person for pursuing these opportunities.
Whether it’s energy efficiency, rent optimization or any number of risk and asset management topics, the message I hear from countless owners is that the opportunities are there, but they don’t know how to create an effective internal system to attack them methodically. NH&RA is invested in helping further develop this important aspect of our business and we are excited to announce the launch of NH&RA’s Asset Management Council, which will have a kick-off event on June 6-7 in Arlington, Virginia. Through a unique peer network approach, this new council will focus on sharing insights and best practices on a range of topics, from staffing and hiring to structuring the department to identifying and implementing measures to generate NOI. We invite you and your team to join the conversation.
