Preserving Multifamily Housing through the Green Refinance Plus Program

Preserving Multifamily Housing through the Green Refinance Plus Program

Children encourage sustainability at City Gardens Apartments. Image courtesy of Gary Krueger Photographer. The Green Refinance Plus program, launched in 2011, enhances the HUD/Fannie Mae Risk Sharing Initiative that aims to preserve multifamily housing. The Green Refinance Plus loans spread risk between FHA and Fannie Mae and enable at least 5 percent of the loan amount to go toward energy-efficiency improvements. HUD “takes the ‘top loss’ position” on the amount borrowed specifically for energy-efficiency improvements, explains Theodore Toon, director of FHA Multifamily Development. HUD also has an oversight role to ensure that improvements and upgrades address green building and energy efficiency. In June 2012, Fannie Mae and FHA initiated the first Green Refinance Plus loan for $19.4 million to Limited Income Communities (LINC) Housing’s City Gardens Apartments in Santa Ana, California (described below).

Assistance for Refinancing and Energy-Efficiency Upgrades

Owners of multifamily housing typically refinance their mortgages every 10 to 15 years. Older developments, however, can be difficult to refinance, which in turn makes it hard for owners to make capital improvements and energy-efficiency upgrades. In exchange for helping to refinance a property, the Green Refinance Plus program, like its parent program, requires owners to maintain their developments’ affordability restrictions for the duration of the loan and supports sustainability upgrades that save money for tenants and owners.

When Fannie Mae and FHA announced the program, they set a goal to originate $100 million in loans, says Bob Simpson, head of Fannie Mae’s affordable multifamily division. That amount is not a hard cap, says Simpson; Fannie Mae will offer the loans according to the market’s needs, and there is no minimum loan amount. Since the program’s launch, Fannie Mae and FHA have issued about $40 million in Green Refinance Plus loans to three properties. To qualify, a property must be at least 10 years old and have at least 5 units.

Green Property Needs Assessment (PNA)

City Gardens Apartments received the first Green Refinance Plus loan, which financed water-conservation improvements. Image courtesy of Gary Krueger Photographer. Applicants for the Green Refinance Plus program must complete a Green PNA, an assessment that identifies energy- and water-efficiency opportunities that match “the property’s needs and the owner’s strategy,” says Chrissa Pagitsas, program manager for Fannie Mae’s Multifamily Green Initiative. These assessments identify energy-efficiency operations or capital improvements that will reduce the property’s aggregate energy use by at least 20 percent. Typical capital needs identified by a Green PNA might include buying ENERGY STAR® appliances, replacing existing heating and cooling systems with more energy-efficient ones, caulking windows, and installing timers on water irrigation systems. Although the Green PNA does not exclude solar generation and other renewable energy items, Pagitsas explains that the assessment focuses on the most cost-effective improvements that also upgrade the property’s physical condition.

City Gardens Apartments

City Gardens Apartments in Santa Ana, California was built in 1969, “when gasoline was going for maybe 35 or 40 cents a gallon” and there “was not a lot of focus on energy efficiency,” says LINC Housing president and chief executive officer Hunter Johnson. The California-based nonprofit purchased the 274-unit development, which includes studios and 1- and 2-bedroom apartments, in 1996. The property’s rents are limited to 60 percent of the area median income; in the Santa Ana market, which Johnson describes as “very tight,” this income group includes firefighters, teachers, and police officers.

In 2012, the property’s tax-credit investor exited the deal, prompting LINC Housing to refinance the property’s loan. During the property’s capital needs assessment, LINC Housing considered physical improvements such as roof repairs, but also explored energy-efficiency upgrades that would save water and gas. That focus on energy efficiency, says Johnson, is “what led us to the Green Refinance Plus program.” Improvements at City Gardens included replacing inefficient boilers, installing solar hot water systems and recirculating water pumps, replacing outdoor lighting with more efficient fixtures, and trading incandescent bulbs for compact fluorescents. LINC Housing will also replace grass with native plants and install an irrigation system that will not activate if it’s raining.

Johnson estimates that improvements to the property’s gas and water systems will save LINC Housing about $40,000 a year. He points out that some of the upgrades — in-unit changes, such as swapping out bulbs and installing new ceiling fans — will benefit residents, saving each household a few dollars per month on its electricity bill. Even such modest savings can be helpful, he says, especially for people on limited incomes. Pagitsas adds that even energy- and water-efficiency improvements that reduce only the tenant’s costs “make the property more marketable and competitive with other properties in the area,” which benefits owners and tenants alike.

The Green Refinance Plus loan made it possible for LINC Housing to buy out its partner, refinance existing debt on City Gardens, and accomplish about $3 million in improvements (of which $500,000 was invested in upgrades that promote sustainability). The improvements will extend City Gardens’ financial viability for the owner, and affordability restrictions on the rental units will continue until 2061. With its first loan, the Green Refinance Plus program has successfully addressed its major goals.