The Success and Ensuing Debate Around Fannie Mae’s Green Initiative
No single debt program is more responsible for catalyzing green lending in commercial real estate than Fannie Mae’s Green Initiative. The initiative launched in 2009 and has since developed into three separate programs: Green Rewards, Green Preservation Plus program, and Green Building Certification Pricing Break.
Multifamily buildings qualify for Fannie Mae’s Green Initiative program by being:
- Properties that have been awarded one of 14 green building certifications, such as LEED or ENERGY STAR®
- Properties have Fannie Mae-financed improvements that target at least a 25% reduction in energy or water consumption. (For loans originated prior to 2018, the consumption reduction target was 20% or greater.)
It’s hardly a controversial program from the standpoint that operational efficiencies not only drive significant savings that can get capitalized as higher net operating income (NOI) (and therefore asset value), but that “green” designations also make an asset a more attractive acquisition – less risky from the lender or security holder’s perspective.
The controversy only arrived after the spectacular success of Fannie Mae’s programs became clear: $27.6B in Green Mortgage-Backed Securities were issued in 2017 alone after a mere $111M two years prior. The extraordinary ramp and interest in these financing options catalyzed a debate over whether the buildings getting the loans were truly eligible and, if so, whether they were staying in compliance with loan covenants over time.
Part of the challenge comes from the fact that there is no single globally accepted definition of what constitutes a “green” building for underwriting purposes. In an effort to accommodate a reasonable variety of opinions, Fannie included a number of existing standards, like LEED and ENERGY STAR, in eligibility criteria. By stepping into this fray, Fannie Mae has made a tremendous contribution to green finance and permanently cemented the dual green premiums of lower risk and higher return into the real estate market.
But they have also created a vociferous debate about the quality of the underwriting when it comes to green bona fides and ensuring loan compliance over time. It’s a debate sure to continue until more objective measures are to be had, and consensus forms around what constitutes a building’s sustainability merit.
So, how do we move forward...? One answer might be in moving off idiosyncratic sustainability measures taken at a single point in time (aka “certifications”) to a dynamic set of measures applicable to any commercial building or transaction. These would be performance measures that track aspects of sustainability around which there is consensus - water, energy, carbon matter, for example - and that is also objectively measurable on a routine basis, say annually.
From here, investors lenders can discount interest rates to reflect the lower risk they perceive from green(er) assets while investors can be assured of more consistency and transparency into green securities predicated on underlying real estate assets, like CMBS.
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