Green bonds have been around since 2007, but they only really started to gain traction in 2014 when about $37 billion worth of bonds were issued in the U.S. That number jumped to $45.4 billion last year, according to Bloomberg New Energy Finance (BNEF).
These financing vehicles, which tout environmental and social good, can be big business. Fannie Mae accounted for much of these green mortgage-backed securities (Green MBS) with $19.8 billion contributed in 2018. These loans center on assets that have achieved green certification or those that can reduce their energy and water consumption.
“Multifamily had another outstanding year in 2018, thanks to our lenders,” says Rob Levin, senior vice president for multifamily customer engagement at Fannie Mae. “Together, we supported all market segments, bringing liquidity to the market while building a balanced portfolio that reflects our strategy with strong credit quality and mission-rich business.”
Getting With The Program
Lenders are taking advantage of the government-sponsored entities’ (GSEs) sustainability programs at an accelerated pace. Walker & Dunlop structured $392.3 million in green financing for three multifamily properties in Southern California in June 2018. Class A communities the Medici and the Orsini I in downtown Los Angeles were financed through $233.5 million in Freddie Mac Green Up loans. The third transaction in the portfolio, the Colony Townhomes in Santa Clarita, was completed on a compressed timeline through Fannie Mae’s Green Rewards program, rate locking in 14 days and closing in 32 days. The 752-unit, garden-style community received $158.7 million in financing.
All three assets are owned and were originally developed by the borrower, G.H. Palmer Associates. Each transaction provided a cash-out refinance to the borrower and was structured as a 10-year, non-recourse loan with interest-only for the entire term.
“Our team was able to provide great rates by leveraging our deep understanding of the GSEs’ green programs,” says Trevor Fase, who led Walker & Dunlop’s team. “We are pleased to continue working alongside G.H. Palmer. These transactions are just a few examples of many deals we’ve completed for the borrower over the past three years.”
Similarly, Greystone provided Becovic Management with $32 million in HUD-insured green financing for the 304-unit Central Park Metropolis in Plainfield, Indiana, in December. The 35-year loan features a fixed, low interest rate and qualifies for HUD’s green mortgage insurance premium (MIP) rate-reduction program. Funds will be used to refinance the asset.
“Our client really wanted to ‘go green’ with this refinancing,” says Eric Rosenstock, who originated the loan. “Greystone was able to get the right financing terms because of our unparalleled expertise with FHA/HUD lending.”
If last year is any indicator of this year’s volume, Greystone is in for another green year. The New York-based lender was Fannie Mae’s second-highest DUS producer for green financing in 2018.
Green programs also resulted in a cash-out refinancing for an Australian investor who owned two fully occupied (at the time of transaction) multifamily properties totaling 56 units in the Westlake neighborhood of Los Angeles. Continental Partners secured debt financing through Fannie Mae’s Multifamily Green Financing program.
“To ensure compliance with Fannie Mae’s Multifamily Green Financing, the sponsor was required to demonstrate 20 percent energy savings across the properties, which was achieved by installing energy-efficient appliances,” notes Zalmi Klyne, executive vice president of Continental Partners, who arranged the financing. “Because the sponsor met these requirements, we were able to save the borrower 20 basis points on its initial rate and utilized 50 percent of the energy savings to increase the net operating income (NOI).”
The green energy updates are expected to save the sponsor more than $25,000 on average, per year.
“Ultimately, we used innovative industry programs to save the sponsor money, lower their initial rate, and increase the amount of cash-out equity,” he continues.
The 10-year, interest-only, non-recourse loan is sized to 55 percent of value and is priced at 3.88 percent.
Creating A Lasting Bond
Equity Residential (NYSE: EQR) is the latest player to get into the green game. Though the Chicago-based apartment REIT isn’t a stranger to sustainability, it is taking its commitment a step further by issuing $400 million in green bonds through its ERP Operating Limited Partnership. The announcement was made in December.
The unsecured notes carry an all-in effective rate of about 3.85 percent and are due in 2028. The company will allocate an amount equal to the net proceeds from this issuance to one or more eligible green projects, such as its recently developed LEED-Platinum-certified 855 Brannan community in San Francisco. Equity Residential notes this is the first green bond issuance from an apartment REIT.
“We are very pleased with the demand for this issuance, especially from investors with an environmental focus,” says Mark J. Parrell, president of Equity Residential. “Our company has been an industry leader in ESG (environmental, social and governance) matters, and this issuance demonstrates another element of our support for sustainability in all that we do.”
To be sure, green financing isn’t just a stateside trend. The green bond market has expanded to more than $160 billion issued worldwide in 2017 — more than a 75 percent increase from 2016 levels and nearly four times the dollar volume issued in 2015, according to the Milken Institute.
Though official 2018 figures aren’t out yet, Moody’s predicts global green bond issuance to grow by around 60 percent, to more than $250 billion.
— Nellie Day, Editor, Western Real Estate Business magazine