As published in Scotsman Guide's Commercial Edition, August 2012.
Commercial mortgage brokers should be well aware of the growing market interest in green construction and renovation. In fact, nonresidential green building has increased dramatically in the past few years — from representing a 2 percent market share in 2007 to 38 percent this past year. And it is projected to reach as much as 48 percent by 2015, according to McGraw-Hill Construction data.
There also has been increased demand for retrofitting and renovating existing buildings, particularly through the rating system of the U.S. Green Building Council (USGBC) Leadership in Energy and Environmental Design (LEED). By 2015, the USGBC expects that the green share of the largest nonresidential retrofit and renovation activity will more than triple, growing between 25 percent and 33 percent of activity by value — a $14 billion to $18 billion opportunity in major construction projects alone.
Despite this interest and the returns perceived by investors and developers of green buildings, commercial lenders have lagged behind in responding to market needs with appropriate financing and refinancing products that specifically cater to green makeovers. As a result, many industry professionals are now pushing for a better understanding of green building and more products that take into account the many advantages a sustainable building has, including improved asset value, better occupancy and healthier cash flow.
Many lenders have taken a traditionally conservative stance on green-building valuations, which has led to much confusion among commercial mortgage brokers as to whether they should be seeking out green projects for loans or dragging their feet. In fact, with the exception of a handful of programs mostly affiliated with the U.S. Department of Housing and Urban Development or the government-sponsored enterprises, large commercial lenders have not yet found a way to support developers who would like to build a green project and simultaneously keep an eye on their shareholder responsibilities. It’s not clear if all of these factors have led to missed opportunities for all involved.
The market has been moving in the right direction, however. Although some larger lenders are taking incremental steps toward green-lending advances, the insurance industry seems to be more comfortable in embracing the state-of-the-art systems and high-efficiency designs resulting from green practices, particularly the more-demanding LEED rating system. This is evidenced by the increasing number of insurers awarding these developments with higher ratings.
Some community banks also are beginning to buck the large-lender trend. Their financial innovations may one day change the way lenders value a greener product. For example, community lenders like Houston-based Green Bank, to name just one, have begun lending programs with loan products that favor green development projects. These lenders have loan products that provide advantageous terms like interest-rate discounts, longer amortization periods and even preferential reviews.
Despite the innovations of banks like Green Bank, many community banks still are choosing to stay conservative with regard to green lending. A number of reasons are driving this trend, but two clearly stand out:
There is no universal standard when it comes to measuring the exact benefits of green or LEED-built developments.
Different local and state governments have a varied degree of preferential initiatives and diverse values when it comes to sustainability, green building and LEED.
So, where does all this leave commercial mortgage brokers when it comes to green deals? At least for the time being, they may be treading water.
Much of the hesitation to develop green loan products emerges from the lack of sufficient data for many lenders to give special treatment to green projects — despite data from the USGBC and other sources that suggest an increase in net operating income (NOI) because of bottom-line savings in energy costs and increased rents.
There also is much reluctance triggered by the dismal amount of green projects in the multifamily sector, where the majority of commercial loans are being made in today’s market. Many community lenders think that until there is more data out of the large multifamily sector, they simply aren’t going to fight against years of tradition. Although this viewpoint is understandable, this may be exactly the crux of the matter concerning green-loan products: There is a lack of data, which, in turn, leads to an overall lack of education about green projects.
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