By Joel Berg
In theory, the savings from energy-efficient building features should give both residential and commercial mortgage borrowers extra income to service their debt, helping to qualify them for larger loans.
But even though ready-made home loan products have made the process of valuing those savings relatively straightforward, such products have found few takers, partly because few consumers are aware of them, industry experts said.
“This is the ultimate niche market,” said Bruce Everly, the general manager of EIM, an energy services firm in Indianapolis. “You’ve got something better than kryptonite here, and nobody knows about it.”
The process is less developed for commercial real estate, but a group has formed to try to answer the questions sparked by “green” buildings.
“There’s a significant profit opportunity for lenders that understand these issues and can appropriately value the costs and benefits,” said Scott Muldavin, a financial-industry consultant in San Rafael, Calif.
He is the executive director of the Green Building Finance Consortium, whose members include the National Association of Realtors, Cherokee Investment Partners, and several other real-estate-related firms.
Paul Brumbaum of Wells Fargo & Co. said some green features, such as more efficient heating and air-conditioning systems, are easy to understand, but a so-called living roof is more complicated.
“The idea of having plants on the roof and irrigation ? most peoople would probably look at that and need to understand how is this not going to become a maintenance issue or a replacement cost issue,” said Mr. Brumbaum, a vice president who acts as an environmental liaison among Wells’ three commercial real estate financing divisions.
The $482 billion-asset company has made loans on about eight green buildings. In several of those deals, the developers found tenants willing to pay for green features through higher rents, Mr. Brumbaum said. “We really didn’t have to go into a long analysis of what the features of the building would be worth.”
That could change, he said. “As more of this gets done on a speculative basis, lenders are going to have to get more versed in those things.”
One of the loans was a $20.5 million construction loan for an 11-story office tower in Boise developed by Christensen Corp. Gary Christensen, the developer’s owner, figures that energy-efficient features will save about $2 per square foot in operating costs. But the appraiser would credit him with only half that amount, he said.
“The appraiser did a very extensive study of green building techniques and materials and worked very hard to understand ? how it would be feassible to achieve these kinds of savings,” he said. “But at the same time, it was very hard to give me full credit for what I was proposing.”
On the residential side, lenders can offer ready-made products known as energy-efficient mortgages. Lenders used to be reluctant to make such mortgages, because of the cumbersome process for underwriting them, said Pat Goolsby, the president of Criterion Mortgage, a San Antonio brokerage. Revisions in the early 2000s simplified the process.
Nonetheless, Ms. Goolsby said, despite rising energy costs, “I can’t really say that there’s a huge or even an increased demand for it.”
“We’re certainly trying to get there,” she said. Energy-efficient mortgages make up 70% of the $50 million of loans her firm brokers annually, she said.
The mortgages are available for new-home buyers through Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs. New homes can typically qualify as energy efficient through the Energy Star program the Environmental Protection Agency runs.
Similar mortgages are available for buyers of existing homes who want to fold into their loan the cost of upgrades such as new windows, insulation, or furnaces.
Mr. Everly said that in his experience 93% of customers who are offered an energy-improvement mortgage tack on at least an extra $10,000. One reason for the lack of consumer awareness could be that brokers are reluctant to push the product because they are afraid of driving off customers, he said.
Brokers also may have other products that can stretch a buyer’s dollar, said Jonathan Philips, a senior director of Cherokee Investment Partners, a Raleigh firm that specializes in developing former industrial sites, known as brownfields, and encourages green home building.
A stronger selling point would be a lower interest rate for buyers of green homes, Mr. Philips said. A lower rate would be feasible if data could prove that people with green homes were less likely to default or miss payments, or that their homes had a higher resale value.
“If there were a lower rate associated with this product, you can bet it would jump to the forefront for anyone selling mortgage products,” said Mr. Philips. The data remains to be collected and analyzed, he said.
“We believe that these things ultimately do make economic sense,” he said. “Right now, there just isn’t a recognition that permeates the marketplace.”
Mr. Muldavin said the Green Building Finance Consortium hopes to generate understanding of green buildings in the banking industry. Studies have shown the benefit of green buildings in general, but no one has found a way to independently evaluate the benefits of a particular building with particular features in a particular location, he said.
“There is a tremendous amount of money to be made by new green building products and services companies – but perhaps even more importantly, a tremendous amount of money to be lost by existing companies that serve the building industries,” Mr. Muldavin said. “Lenders need somebody independent to assess these claims and identify what we’re talking about.”
Mr. Muldavin said he expects no trouble persuading banks to use tools his consortium is developing for evaluating green buildings. The tools should plug directly into existing underwriting software, he said. The entire project may take several years, but some of the tools should be ready, and freely shared, in six to nine months, Mr. Muldavin said.
The nonprofit U.S. Green Building Council in Washington, which promotes green construction, certifies buildings that meet its Leadership in Energy and Environmental Design standards. Taryn Holowka, a spokeswoman, said a LEED building can cost an extra 7% to build but can also cost nothing extra.
Mr. Christensen said that knowing the market for class A office space in downtown Boise, he had to design a building with rental rates comparable to its neighbors’. “We had to stick to a budget, and that was the driving force,” he said. “We worked backwards from that.”
Nonetheless, the building is expected to qualify for the highest LEED certification, platinum, Mr. Christensen said. Green features include toilets flushed with recycled rainwater. Over all, he said, it did not cost more than a traditional building.
Banks are among those building green. PNC Bank, for example, has erected more than 20 green branches in New Jersey, Ohio, and Pennsylvania and has built a LEED-certified office in its home city, Pittsburgh.
Though the bank has financed redevelopment of brownfields, it has not specifically gone after customers who want green buildings. “It doesn’t seem that the number of these has justified really coming up with an individual program at this juncture,” said Brian Goerke, a spokesman. “But we have talked about it, and we’ll continue to.”
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