With greater focus on investments that meet environmental social governance (ESG) standards, it becomes easier to obtain financing to buy or build apartment buildings if the apartments have relatively affordable rents or if the buildings are designed to be good for the environment.
“You get more sources of capital interested in developments that address ESG,” says Rob Hinckley, senior managing director of JLL Capital Markets’ New York office, Americas.
Indeed, many sources of capital have made bold promises to their stakeholders to make investments that not only deliver a reliable return on investment, but also meet high ESG standards. This includes large institutional investors such as public pension funds, which are often accountable to their pension holders. Public companies such as commercial banks are often keen to show investors that they have made investments that meet their own ESG standards.
“We all believe the industry as a whole will focus more on the benefits and incentives of achieving and complying with ESG standards,” says Kelli Carhart, head of multifamily debt production for CBRE.
Equity partners come forward for ESG developments
These ESG standards can now help developers attract financial partners to their new apartment construction projects.
For example, JLL is now helping a developer raise the financing to build a new apartment tower in downtown Brooklyn. New apartments will need to be designed sustainably and assess their use of utilities to comply with all New York City rules. These green features are helping the project attract a joint venture partner who now plans to bring enough equity to the project to cover 20% of its development costs. The partner is an insurance fund that favors investments that meet its new standards.
The specific terms that capital providers offer to properties that meet their ESG requirements can vary widely.
“ESG has yet to be standardized, especially in the ‘social’ and ‘governance’ categories,” says Carhart. “The evolving nature also makes measuring ESG a bit more subjective within the industry.”
Labor housing gets better deals on permanent loans
Apartment buildings may also continue to benefit from lower interest rates on permanent loans from certain lenders if they comply with ESG standards. This is especially true for properties labeled as “workforce housing”.
Lenders Freddie Mac and Fannie Mae offer permanent loans with lower interest rates– often dozens of basis points lower than their usual fixed interest rates – to these housing for labor. Other lenders are also keen to provide permanent loans that will help them fulfill their promises to be more socially responsible. But these lenders often don’t offer better interest rates for these loans…yet.
“While life insurance companies are tracking ESG and trying to find ways to measure it in their portfolio, there is no price differential for loans with ESG criteria, at this time,” says CBRE’s Carhart.
Federal Housing Finance Agency (FHFA) officials who oversee Freddie Mac and Fannie Mae are now requiring that at least half of the apartment loans Freddie Mac and Fannie Mae buy in 2022 be for properties with affordable rents at moderate and low income households.
Apartment communities can get even lower interest rates from lenders if their rents are affordable enough to earn government subsidies such as federal low-income housing tax credits.
“The current focus on ESG and social impact investing has also sparked considerable interest from the private sector to seek creative ways to help create and preserve affordable and workforce housing. work,” said Maria Barry, national director of community development banking for Bank of America.
Freddie Mac and Fannie Mae must ensure that at least a quarter of the home loans they buy in 2022 will be for properties with affordable rents for households earning up to 60% of the region’s median income.
Freddie Mac and Fannie Mae also continue to offer preferential interest rates to apartments that use fewer utilities like electricity and water.
“The ‘environmental’ requirements of ESG requirements have been encouraged by agencies for several years through their green programs,” says CBRE’s Carhart.