During the past few months, there has been a lot of chatter and rumors regarding the impending FHFA changes. Several clients called to ask me if I had details regarding the changes and how it would affect their projects. For their part, FHFA was very tight lipped about the potential changes and no news was released until the official press release last month. Prior to this, all I knew was that my contacts at both the Fannie Mae and Freddie Mac green programs had been asked by FHFA to run several scenarios to see how they would have played out against the program projects performed in 2018.
Now that FHFA has published their 2019 directive, let’s review the key points and how they affect the Fannie Mae and Freddie Mac green programs.
In December 2017, FHFA lowered the lending cap for each agency to $35 billion in 2018. This represented a reduction of approximately 4% from the 2017 lending cap of $36.5 billion. For 2019, the lending caps for each agency will remain steady at $35 billion. As in the past years, the green initiative programs from Fannie Mae (Green Rewards) and Freddie Mac (Green Up) will remain excluded from this cap.
In order to gain this exclusion, the new directive requires projected savings of 30% (total water and energy) with a secondary requirement that 15% of the savings are from energy reduction. This is in contrast to the 25% reduction in EITHER water or energy that was required over the past year.
Prior to this announcement, one of the common knocks on this program was that it was a glorified waterwater savings program. This was due to the fact that complying via water savings was often much cheaper than doing so via energy savings. Therefore, it is not surprising that the new directive requires at least a portion of the savings to be from energy savings.
So what does this mean practically and, to answer the question on everyone’s mind, will it be more expensive to qualify?
With regard to the 30%, a property can comply with 30% energy reduction, 20% energy reduction and 10% water reduction, 15% reduction in each, or any combination that includes a minimum of 15% energy savings. Of note, it is possible that some measures, such as shower head replacement, will result in a few percentage points saved for both the water and energy sides.
Whether this ends up costing more to comply really depends on the specific of each property. In practice, what this likely means is that the most expensive water-only option of replacing toilets will be performed as a lower rate. In its place, properties will need to look at some of the lower relative cost energy items such as lighting or lighting controls, insulation (piping, wall, and/or roof), or HVAC controls such as programmable thermostats. If a property has all of these in place, then there is the potential that the property will need to include higher cost items such as solar power generation, HVAC system replacement, or window upgrades. In short, after reviewing our recent projects, this is likely to result in an increase in costs, but not a significant one for most properties.
So when does this all go into effect? The official date is for all loans that will be closing after January 1, 2019. Therefore, in practice, any loans that are engaged now will end up falling under the new guidelines.
Confused? Need some direction? Want to understand the borrower benefits to these green initiatives?
Please be in touch and the GRS team would be happy to assist you.
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GRS Group is a leading provider of commercial real estate (“CRE”) services worldwide. With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with a global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.
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