Environmental Archives - Scotsman Guide

Author Showcase: Brian Decker, Modern Lending

Carl White — Fri, 17 Nov 2023 22:31:44 +0000

In Episode 021 of the Scotsman Guide Author Showcase, Carl White interviews Brian Decker of Modern Lending about his article, “Take the Jolt Out of Power Bills,” in the November 2023 issue of Scotsman Guide Residential Edition.

Brian Decker is CEO of Modern Lending, a mortgage bank operating in 15 states with locations in California, Tennessee and Arizona. In 2022, Decker stepped into a full-time role as CEO of Modern Lending. That same year, he also founded Soar Energy with HGTV stars Tarek and Heather El Moussa, as well as United Wholesale Lending CEO Shelby Elias.

The post Author Showcase: Brian Decker, Modern Lending appeared first on Scotsman Guide.

Come to the Rescue after Disaster Strikes

Laura Brandao — Thu, 01 Dec 2022 09:00:00 +0000

There’s weather and then there’s extreme weather — the kind that devastates an area in the matter of moments, leaving families homeless and facing insurmountable losses. For folks in a presidentially declared major disaster area who have lost their primary home, mortgage originators can be of great comfort and assistance.

The source of aid? The Federal Housing Administration’s 203(h) loan, a government-insured mortgage program that can help get affected residents back into a safely constructed home sooner rather than later. The first question to ask yourself is, what is a presidentially declared major disaster area?

If a borrower has fallen into the ‘derogatory credit’ category, a lender may look at their credit history to see if it was acceptable prior to the presidentially declared major disaster.

These are usually declared in any area that suffers a severe natural disaster. This can be such things as hurricanes, tornadoes, earthquakes, volcanic eruptions, landslides and other major catastrophic events. This presidential declaration labels the disaster to be of such severity that it is beyond the combined capabilities of state and local governments to respond. Government experts consider the extent of the disaster, the impact on individuals and public facilities, and the types of federal assistance that might be needed. In some cases, the final determination can take weeks.

Families who are the victims in one of these disaster areas are suffering from loss of home, community and services; fractured infrastructure; interruption of supply chain; and in many cases, loss of life. Mortgage lenders and originators have the resources to help by utilizing the FHA 203(h) program.

Rebuilding communities

Why FHA 203(h)? Some of the advantages of the program, including the option for 100% financing, is that it includes lower mortgage rates and more flexible qualification requirements, as well as a lower credit-score requirement. This specialty program is designed to help victims in these disaster areas recover by making it easier for them to obtain mortgages and either become homeowners or reestablish themselves as homeowners.

Any person whose primary residence has been destroyed or severely damaged in a presidentially declared disaster area is eligible to apply, even if they were renting the property. The program provides mortgage insurance to protect lenders against the risk of default on loans to qualified-disaster victims.

Due to the nature of the work needed to correct the damage sustained by these homes, this is a construction program, not a renovation program. An FHA 203(h) mortgage is one way to provide a displaced homeowner with a way to move out of a disaster area or to rebuild their damaged home and return to it.

One of the goals of this program is to help retain a sense of community by offering financing that entices victims to remain in place rather than relocate. Rebuilding communities retains the integrity of neighborhoods and supports recovery of the area at large while providing local businesses with continued traffic that ensures they can continue to operate. A community rebounds easier when its local businesses “survive the storm.”

Understandable hardships

The 203(h) program offers features that make homeownership easier. For example, since no downpayment is required, the borrower is eligible for 100% financing if they choose and qualify. Repayment terms of 15 or 30 years are available.

Closing costs and prepaid expenses must be paid by the borrower in cash or through premium pricing by the seller, subject to a limitation on seller concessions. The lender also collects an upfront insurance premium (which may be financed) from the borrower at the time of purchase, as well as monthly premiums that are not financed but added to the regular mortgage payment.

Borrower credit qualifications and rules are still required. But the minimum credit score for the 203(h) loan is lower than for many other government-backed and conventional mortgage programs, which aids disaster victims who also may be dealing with credit challenges. (Lender overlays also may apply.)

Thankfully, this age of technology can help families recover some of what was lost. Given the nature of the circumstances that established the need for this specialty program, borrowers will need to work closely with their mortgage professionals to provide the required documentation. Lending agencies are familiar with the hardship of destroyed records due to the devastation of the homes they were stored in.

In difficult times like these, supporting documentation from other sources such as the IRS or other agencies will need to be relied upon. If a borrower has fallen into the “derogatory credit” category, a lender may look at their credit history to see if it was acceptable prior to the presidentially declared major disaster. If derogatory credit was a direct result of the effects of the disaster, the borrower will be deemed a satisfactory credit risk.

Flexible guidelines

Unlike some other government-backed and conventional mortgages, the FHA 203(h) program does not apply borrower income limits. Lenders typically use a debt-to-income (DTI) ratio of 43% to determine the loan size that a borrower can afford, although it is possible to qualify for a 203(h) loan with a DTI ratio of 50% or higher under certain circumstances (varies by lender).

The DTI ratio represents the maximum percentage of a borrower’s monthly gross income that can be spent on fixed monthly housing expenses. This includes the mortgage payment, property taxes, homeowners insurance and mortgage insurance premium, as well as other potentially applicable expenses such as homeowners association fees, plus other monthly debt payments such as credit cards, auto loans and student loans.

The higher the debt-to-income ratio applied by the lender, the larger the loan your borrower can qualify for. Circumstances under which it is possible to get approved for an FHA 203(h) loan with a DTI ratio of 50% or higher include borrowers with excellent credit scores or job histories. Borrowers making larger downpayments and those with supplemental sources of income that may not be reflected on their mortgage application, such as from a spouse or part-time work, also may qualify with a higher DTI ratio.

Lenders may exclude the mortgage payments on a borrower’s destroyed or severely damaged home when calculating the DTI ratio for a new mortgage. Excluding the payments on their current residence can significantly improve a borrower’s ability to qualify for a loan or enable them to afford a higher loan amount.

In this case, the FHA 203(h) lender is required to verify that the borrower is working with their existing lender to address the mortgage on the damaged or destroyed home. Additionally, any homeowners insurance payouts must be applied to the mortgage on the affected property.

● ● ●

Homeowners who have survived a disaster and live in one of these presidentially declared major disaster areas need to be made aware of the FHA 203(h) option. It might just be the solution to start putting the fractured pieces of their lives back together. ●

The post Come to the Rescue after Disaster Strikes appeared first on Scotsman Guide.

A Storm Brews in Florida, Even After Hurricane Ian

Melody Wright — Thu, 01 Dec 2022 09:00:00 +0000

Not only did interest rates continue to climb in fourth- quarter 2022, but impacts from Hurricane Ian resulted in a 31% decrease in Florida mortgage applications, compared to an overall decline of 14% nationwide, according to the Mortgage Bankers Association’s weekly application survey.

Just when it feels like mortgage sentiment could not get any worse, Hurricane Ian’s immediate impact to Florida’s loan origination business is dire and could potentially manifest in an inflection point when it comes to climate concerns. With inflation at a 40-year high, interest rates rising above 7%, and labor and materials still in high demand, CoreLogic reported that the country is at a crossroads when dealing with risk management for properties subject to extreme climate events.

The true cost of Hurricane Ian may be much more significant not only in total dollars but in its true impact to the mortgage origination market in Florida.

Mortgage originators in Florida will closely watch rebuilding efforts across the state after this hurricane, along with what type of future resiliency standards will be required and at what cost. Meanwhile, originators in other areas of the U.S. that are at risk of extreme climate events could be watching warily for what happens in the Sunshine State.

Coastal allure

Dubbed the most hurricane-prone state, Florida has seen eight major hurricanes — Category 3 and higher — since 2000, meaning that Floridians endured storms with 100 mph-plus winds each of these times. And with oceans forecasted to warm, the intensity and frequency is only expected to increase.

In 2009 and 2020, the Federal Emergency Management Agency (FEMA) and the Florida Division of Emergency Management partnered to run “Phoenix,” a simulation of a Category 5 hurricane hitting Tampa Bay. The results were devastating: 30,000 missing, another 300,000 seeking shelter and $200 billion in damages.

Although a majority of Americans now believe that climate risk is increasing, many appear undeterred by these concerns, lured by Florida’s coastal beauty and lack of a state income tax. Americans among the thousands headed to Florida in 2021, per the 45th annual National Movers Study published by United Van Lines, which ranked Florida No. 5 for inbound migration. What these newcomers might not have realized, however, is that a storm has been brewing in Florida — and it is not named Ian.

Costly insurance

Prior to Hurricane Ian’s landfall this past fall, the annual cost of a homeowners insurance policy in Florida was forecasted to reach $4,231 this year, which is three times higher than the U.S. average, according to the Insurance Information Institute. As a result, human interest stories from local media chronicle the struggle of property owners to afford and maintain insurance coverage.

A regular homeowners policy does not include flood insurance. Currently, only 18% of Florida homes have flood insurance, prompting President Joe Biden to state that many in Florida will need to rely on FEMA grants to rebuild. As a result of losses and liquidity issues, in 2022 alone (prior to Hurricane Ian’s landfall), six homeowners insurance providers became insolvent while many others are on the brink.

In July 2022, the Florida Office of Insurance Regulation placed 27 companies on a watch list due to financial-stability concerns. Florida’s insurer of last resort, Citizens Property Insurance Corp. (which is backed by the state and established by the Florida Legislature to protect homeowners who are unable to obtain coverage in the private market) recently reached 1 million policies as a result of affordability and coverage concerns.

Hefty price tags and insolvent insurance companies, however, aren’t the only thing current and future Floridians have to worry about when it comes to homeowners insurance. Apparently, Florida insurers aren’t effective at paying claims in general. The state is responsible for a whopping 79% of the nation’s homeowners insurance lawsuits while only accounting for 9% of all claims.

And of the $51 billion that was paid out by Florida insurers over the past 10 years, 71% went to legal fees and public adjusters. So, when hurricanes arrive and a homeowner has coverage, a tug of war ensues with insurance providers, with the homeowner left holding the bag until the matter can be resolved, typically through litigation.

Unaffordable rebuild

With CoreLogic estimating that losses from Hurricane Ian could total between $41 billion to $70 billion for both insured and uninsured wind and flood damage, the storm could be the death knell for many of these insurance providers. And if you add in severe labor shortages, supply shortages and wage inflation, the true cost of Hurricane Ian may be much more significant not only in total dollars but in its true impact to the mortgage origination market in Florida. This also will be true in other areas impacted by the increased frequency and intensity of climate events.

Although the first social media posts after Ian’s landfall lauded messages to rebuild, what will be the true appetite once people are in position to rebuild? Structures will need to be able to withstand a Category 5 hurricane like the one simulated in the FEMA-backed Phoenix project. Ian impacted both modest and luxury residences. For example, Lee County was devastated by the hurricane and about 100,000 of the 400,000 homes in the county are long- or short-term rentals.

Mortgage industry insiders know that individual and institutional investors comprised 16% to 24% of all U.S. home sales in 2020 and 2021. From a demand perspective, who will be able to afford these properties to either reside in or to elicit passive income when the price tags might include a total-loss scenario in a labor market that may not improve?

A perfect storm of inflation, labor shortages, interest rate hikes, insurance risks and extreme weather events has hit the mortgage industry in Florida. One has to wonder about its impacts to not only Florida but the industry at large. ●

The post A Storm Brews in Florida, Even After Hurricane Ian appeared first on Scotsman Guide.

Leasing the Green Way

Suzanne Hollander — Thu, 01 Dec 2022 09:00:00 +0000

Traditional office and retail buildings need to shrink their carbon footprints. According to the World Green Building Council, 39% of global energy-related carbon emissions come from buildings. Of this total, about 28% are operational emissions that are created to heat, cool and power buildings. The remaining 11% is created from the construction process.

As the discussion of climate change becomes increasingly mainstream, a global commitment to reduce carbon emissions is emerging. For example, The United Nations’ Race to Zero campaign, which has the goal of net-zero carbon emissions worldwide by 2050, has thus far created a coalition representing 120 countries along with more than 1,100 cities, 1,100 educational institutions and some 8,200 companies, including nearly 600 financial institutions.

Green leases provide a structure for landlords and tenants to achieve measurable energy-efficiency and environmentally sustainable outcomes that benefit both parties and the environment.

Many landlords, tenants and local governments also are joining the carbon-reduction movement by embracing green leasing. Commercial mortgage brokers should explain to their clients that green leasing is a growing trend that appears to be here to stay. This type of leasing has become an industry tool to facilitate faster adoption of sustainability upgrades.

Such retrofits result in better spaces for tenants and higher asset values for owners. In combination with a growing suite of financing programs and incentives, it has never been easier for real estate owners and developers to increase the sustainability of their properties.

Green-leasing basics

A green lease is a general term used to describe a rental contract between the owner of a commercial property and a tenant, containing clauses and provisions that prioritize environmental preservation, sustainability, energy savings and the reduction of carbon emissions in building operations.

Green leases provide a structure for landlords and tenants to achieve measurable energy- efficiency and environmentally sustainable outcomes that benefit both parties and the environment. These leases often implement requirements for separate utility meters, tenant accountability in their energy use and landlord accountability in the building’s total energy-use performance (including common areas).

Buildings that are recognized as green often see increases in net operating incomes and property values.

There also are performance standards for building systems, as well as procedures for transparency and sharing of energy-use information between tenant and landlord. The goal is to use this information to gather data on energy usage and then implement further energy reductions.

Some green leases may be structured so that all parties work toward bringing the building up to meet the requirements of energy conservation programs, such as the Leadership in Energy and Environmental Design (LEED) or Energy Star programs. The Urban Land Institute and the U.S. Department of Energy published a joint document that details the value of implementing sustainable property improvements and green leases.

This is not a “one size fits all” type of lease. Clauses included in each green lease depend on many factors, including the use of the property, the age and style of the building, the mix of tenants and the landlord’s motivation for going green. Newer buildings may be built with energy-saving equipment in place, whereas older buildings may require retrofitting.

Carrot and stick

To incentivize landlords and tenants to implement green leases, various local governments and federal agencies are introducing what may be described as a carrot-and-stick legal approach.

Some jurisdictions, including the state of California, are enacting legal mandates enforced through local laws, as well as various ordinances and codes. These require property owners to develop, construct, improve, operate and maintain their properties in an energy-efficient and environmentally sustainable manner.

Another example is New York City’s Local Law 97, which sets a cap on carbon emissions. It will take effect in 2024 and become stricter in following years. The law applies to most privately owned buildings of at least 25,000 square feet. The goal is to reduce building emissions by 40% in 2030 and by 80% in 2050. Noncompliance may result in fines against the property owner.

Financial incentives

On the support side, federal, state and local governments are offering financial and other benefits such as allowing for buildings with additional floors, expediting permits, and offering tax credits, abatements and rebates to property owners who meet environmental requirements.

Buildings that are recognized as green often see increases in net operating incomes and property values. Some mortgage lenders offer reduced interest rates and/or reduced points to an owner to implement green strategies.

There are government-approved lending programs that can cut the costs of installing energy-efficient equipment or materials. These include Property Assessed Clean Energy (PACE) programs and U.S. Small Business Administration green loans.

Depending on state legislation, PACE financing may be used finance energy-efficiency improvements. In some states, commercial PACE financing may fund a portion of a new construction project or finance leases and power purchase agreements.

Additionally, some federal, state and local governments are adopting legislation to provide additional tax benefits associated with green strategies. A local consultant may help an owner understand the types of financial incentives and tax benefits available in their municipality and state.

And, of course, there is the savings from reducing energy usage. According to a 2020 study co-authored by the Urban Land Institute and the Rocky Mountain Institute, a property owner who has implemented a green lease can recoup the cost of energy-efficiency improvements by increasing the net operating income up to 5.6%. The property value may increase by $5 to $11 per square foot, and the building may generate a higher internal rate of return of up to 1% over a five-year period.

Solutions to challenges

There are challenges with green leasing, however. A main obstacle is that the landlords and the tenants are often perceived to be on opposite sides of the issue. Landlords generally want to maximize recouping as much of their green-improvement costs from tenants as possible. On the other hand, tenants want to ensure the costs passed to them through a green lease are as low as possible.

There also is the perception that green buildings require increased costs. For property owners, especially those with older buildings, the upfront costs for retrofitting systems to meet green standards tend to be expensive.

Costs for such work vary greatly, depending on the project and location. Past studies have found that the price to reach LEED status, the best-known energy-efficiency certification, depends on which of the four levels of LEED you seek. The higher the level, the more expensive the process becomes.

Lease alternative

Normally, traditional commercial leases allocate energy and operating expenses (including utilities) between landlords and tenants through a net, gross or modified lease structure. These agreements historically have not incentivized energy-use reduction nor the investment of funds to improve major building systems to increase energy efficiency.

The split-incentive challenge is illustrated by these traditional commercial lease structures. Basically, landlords don’t want to carry the upfront burden to make these costly improvements. Tenants, meanwhile, don’t want to spend money to improve the landlord’s underperforming property for something that will remain in place after the end of the lease term.

Under these traditional types of leases, tenants often worry that cost-sharing agreements will inordinately increase their expenses, especially in substandard buildings that may be hit with fines due to the building’s noncompliance with city policies. They also may have concerns that operational language will result in a less-than-comfortable space or that the addition of a green lease will delay the lease-up process.

In contrast, green-lease practices are attractive to owners due to lower energy and operating costs, especially if they are able to qualify for financing or tax incentives to implement these changes. They also are good for tenants by reducing their occupancy costs and meeting corporate environmental metrics. Furthermore, implementing green strategies may give the building a market cachet that can translate into higher rents, increased net operating income and greater value.

●●●

Mortgage brokers should explain to their clients the benefits of green leasing, a trend that is growing throughout the U.S. This form of property lease, supported by tenants and owners alike, has become an industry tool to facilitate faster adoption of sustainability upgrades that result in better spaces for the tenants and higher asset values for the owners. ●

The post Leasing the Green Way appeared first on Scotsman Guide.

Sustainability for Success

Rob Finlay — Wed, 02 Nov 2022 04:02:00 +0000

Today’s commercial mortgage lenders are confronted with numerous borrowers who claim to deliver a high return on investment. These borrowers represent themselves as high-value, low-risk vehicles for capital growth.

Increasingly, investors and the public are demanding that their money goes toward ventures with the triple bottom line at heart. The triple bottom line adds impact on people and the planet to the traditional bottom line: profit. Lenders must now consider how their borrowers operate responsibly and sustainably, in addition to their fiscal viability.

While meeting the expectations and objectives of investors is important, lenders also derive practical benefits from working with ESG-centric borrowers.

While compliance with public expectation is crucial, lenders now realize attention to the triple bottom line also creates tangible value that supports the generation of stable returns, risk reduction and new origination opportunities. Commercial mortgage brokers can facilitate the underwriting of projects and mitigate long-term risk by working with borrowers who are on board with the sustainability movement known as ESG.

ESG defined

ESG (environmental, social and governance) is an emerging sustainability framework by which many types of organizations are guided. The framework measures and guides a company’s impact on the environment, how they treat people (both internal and external parties), and their ability to operate ethically and transparently.

ESG is a framework that takes an integrative approach to corporate sustainability. It goes beyond traditional, isolated factors to help organizations and investors guide and measure the impact of their operations in each area. On the environmental side, ESG addresses preservation of the natural environment, stewardship of natural resources, human health, water and energy consumption, renewable energy use, reduction of the carbon footprint and coping with climate risks.

The trend toward environmental, community and operational sustainability is causing borrowers who are more reliable, productive and equipped to flourish.

In social terms, ESG looks at how the operation supports the well-being and success of employees, its positive impacts to the community and its level of social goodwill. Examples of this component include diversity, equity and inclusion in building a team; forming partnerships with nonprofits and other community organizations; and providing the community with equitable access to products, services and resources.

Lastly, governance addresses how the organization implements internal regulation and auditing to stay compliant with legal and regulatory requirements. This component also measures how the organization provides transparency to and supports the needs of all stakeholders.

Gaining popularity

In a 2022 global ESG study by Harvard Law School, 89% of global investors indicated that ESG is a component of their business strategy, with 26% saying it is central to their approach. Overall, worldwide ESG adoption grew by 5 percentage points compared to 2021. Europe had the highest percentage of ESG users at 94%. In North America, 78% of investors have adopted ESG in some form.

Furthermore, 42% of global investors (up from 37% last year) cite client demand and external pressures as drivers of ESG adoption. Commercial mortgage lenders feel this pressure, too, as investors and administrative agencies increasingly push for sustainability, positive social impact and regulatory compliance.

As the trend picks up steam, North American investors are becoming less cynical regarding the motives for ESG initiatives, although 61% said they believe adoption is driven by public relations and marketing objectives. But concerns over “greenwashing,” or companies appearing to work toward sustainability without making legitimate progress, seem to be thinning.

Although many investors see the pragmatic economic drivers of the adoption trend, the movement is buttressed by a public that is earnest in its convictions. The data makes it clear that ESG is quickly becoming a standard across all industries and regions.

Creating value

Trends aside, ESG creates value for investors (including mortgage lenders), according to a McKinsey Quarterly report. The study found that strong ESG propositions correlated with higher equity returns and reductions in risk.

With the rising demand for ESG-focused real estate investments, lenders need to build loan portfolios backed by assets and firms that make conscientious operations a priority. While meeting the expectations and objectives of investors is important, lenders also derive practical benefits from working with ESG-centric borrowers.

Lenders prefer to work with borrowers who will produce reliable returns over the long term. And as the McKinsey report stated, ESG-centric borrowers are likely to produce steady returns with less risk. The report also found that organizations with better ESG performance had higher credit ratings, making them more desirable borrowers. Additionally, lenders want to know the firm they’re investing in will scale up and become a viable long-term client, providing future origination opportunities as they grow and optimize their portfolios.

Fortunately, ESG creates operational advantages for companies that adopt it. By putting people, planet and prosperity at the forefront, firms garner the support of their community, their industry and governmental bodies. This backing puts them in an ideal brand and operational position to expand into new markets and develop existing ones.

It’s easier to attract clients, partners, employees and capital with the goodwill generated via ESG. The framework supports a firm’s sustainability in the most literal sense. A commitment to sustainability results in efficiencies that reduce development, construction and operational costs. Minimized energy and materials consumption (and minimized waste) add up to significant savings over the life cycle of a real estate project.

ESG also promotes the upward momentum of an organization by instilling a sense of purpose in stakeholders, particularly employees. Organizations with a conscientious and inspiring corporate culture foster productivity and job satisfaction that contribute significantly to the bottom line and solvency. For commercial mortgage lenders, the results of these considerations are debts serviced on time, the creation of new lending opportunities and goodwill for the entire institution.

Reducing risk

In addition to how the noted benefits support the growth and longevity of a company, much of the value created for lenders by ESG initiatives is centered on reducing risk. Conscientious borrowers are more likely to follow through on their loan obligations. That’s not merely the result of good intentions but solid business practices and the support of the public, industry and government. The transparency created by ESG adoption helps lenders better understand their borrowers’ financial and legal statuses.

The governance component of the ESG framework produces borrowers that operate responsibly and transparently concerning legal and regulatory requirements. This aspect gives lenders added assurance that the borrower will not face legal and regulatory hurdles or barriers that could suspend the operation and result in delinquency or foreclosure.

Local governments and taxing authorities are more likely to provide favorable treatment via fiscal incentives and zoning or permitting variances. These variables present significant risk to both borrowers and lenders for new development projects, especially when the sponsor doesn’t have community buy-in.

When it’s time for a borrower to sell or refinance, ESG supports higher valuations and market appeal. Sustainable projects generally experience higher demand, occupancy and valuations that ensure a positive outcome, resulting in successfully paid debts and new financing for subsequent projects.

● ● ●

The trend toward environmental, community and operational sustainability is causing borrowers who are more reliable, productive and equipped to flourish in the unfolding commercial real estate landscape. ESG creates economic, social and environmental value that mitigates risk for lenders and encourages a generation of new lending opportunities. ●

The post Sustainability for Success appeared first on Scotsman Guide.

Seeking A Safe Haven

Ann Atkinson — Tue, 01 Nov 2022 08:00:00 +0000

It may not be the case in every market, but the nationwide consumer sentiment toward buying a home is at its lowest level in more than a decade. This has implications for owners of multifamily housing properties. And it’s a trend that commercial mortgage originators should follow closely.

Recent surveys show that fewer consumers believe now is a good time to buy a house. Fannie Mae’s Home Purchase Sentiment Index, which tracks the public’s attitude toward homebuying, decreased for a sixth consecutive month this past July to a reading of 62.8. The August index was down 13 points on a year-over-year basis. It was the lowest positive sentiment level toward homebuying since 2011 and well below the all-time high set in 2019.

Commercial mortgage originators know that the dynamics of the owner-occupied housing market often impact the outlook for apartments.

The survey also found that a mere 22% of surveyed consumers in August 2022 felt that it was a good time to buy a home. Meanwhile, the share of respondents who believed that it’s a good time to sell dropped from 76% in May to 59% in August.

These results are not unexpected after the Federal Reserve raised the federal funds rate from historic lows of near zero in March 2020 to a range of 3% to 3.25% in September 2022. To combat ongoing inflation, the Fed is prepared to continue raising rates. These increases, combined with higher home prices, are creating a slower pace of purchases as properties are staying on the market longer.

Housing impact

Commercial mortgage originators know that the dynamics of the owner- occupied housing market often impact the outlook for apartments, so it’s likely that slowing home sales will continue to increase the demand for apartments. Interestingly, the locational aspect of multifamily demand has shifted dramatically, influenced directly by the COVID-19 pandemic.

With so many people now able to work remotely, the movement of renters out of expensive coastal markets has been occurring more frequently, with many of these people in search of more space and lower costs. A variety of cities, including Atlanta, Austin, Miami, Phoenix and San Diego (as well many other Sun Belt markets), have been widely reported as common destinations for people leaving more expensive and populous areas.

A recent examination of financial details for Freddie Mac multifamily loans by commercial real estate data company Trepp reflects the trend of relocating to the Sun Belt. Among states with more than $500 million in commercial mortgage-backed securities investments in 2021, the largest annualized net operating income (NOI) growth occurred in Arizona (11.1%), Utah (10.5%), South Carolina (9.8%) and New Mexico (9.4%).

The national average NOI increase for 2021 was 3.5%. But much of this growth was centered in the Mountain region (8.5%), the South Atlantic region (5.9%), and the Southeast Central region (5.7%).

Rising costs

Reduced homebuying activity, as well as large groups of renters moving from certain markets to others, have contributed to historically high rent-price growth. Yet they aren’t the only notable factors.

Apartment owners today are reporting inflation and rising operating costs across numerous expense categories — including gas, labor, building supplies, insurance and utilities. That said, however, some multifamily developers who are leading new-construction projects (and some owners who are maintaining and renovating existing communities) are indicating that building-material costs are starting to level off.

AAA data shows that gas prices have fallen considerably in recent months. Owners and developers also have likely learned to better plan for higher-priced materials. Whatever the case, the cost of construction materials isn’t stinging quite as much, and the happy result is more projects finishing on budget.

Apartment owners today are finding more flexibility in requesting additional funds from debt and equity providers to compensate for rising costs. This is primarily because demand remains high for units across the multifamily sector. Lenders know that both elevated rent prices and lower vacancy rates will be common for the foreseeable future, thereby lowering their risk.

Slowing demand

While apartment rents are still increasing in some markets, however, rising interest rates have caused capitalization rates to increase. Some investors in the process of purchasing apartment communities have been forced to pare back their acquisition activities.

Buyers also may have to come back to the negotiating table with sellers since, factoring in higher interest rates, they can no longer get the same financing terms. The bottom line is that buyers today simply can’t pay as much as they could just a few months earlier.

The good news is that financing is still available. Some of the more aggressive lenders have clearly slowed or stalled their funding activities in response to market volatility. But more conservative lenders that are better positioned to hedge risk remain active debt options for borrowers. The Federal Housing Administration, Fannie Mae and Freddie Mac are prime examples.

Notably, however, Fannie and Freddie have forecast a contraction in 2022 originations. Citing heightened market uncertainty and a volatile Treasury rate environment, Freddie Mac’s midyear outlook projected a full-year origination volume of $440 billion to $450 billion, down 8% to 10% from 2021. Similarly, Fannie Mae downwardly revised its 2022 multifamily originations expectations, from $475 billion to $425 billion.

ESG momentum

Another aspect of the multifamily investment equation that originators should be aware of is the rise of interest in environmental, social and governance (ESG) property investment standards — and their potential impact on prices. ESG strategies are used by socially conscious investors to determine how well a company safeguards the environment; how well it manages relationships with employees, suppliers, customers and the community; and how well company leadership handles executive pay, internal issues and shareholder rights.

The government-sponsored enterprises, Fannie and Freddie, are becoming more pronounced proponents of the ESG investment strategy, a movement in which the U.S. still lags behind European nations. In a recent study by real estate services company Cushman & Wakefield, sustainability was identified as the primary investor focus across ESG’s three categories. The same study found that multifamily assets certified by the Leadership in Energy and Environmental Design (LEED) program garner rents that are 3.1% higher. Cushman & Wakefield pointed out that the agencies have established significant incentive programs for apartment assets that satisfy green-building certifications and efficiency metrics. These incentives include lower interest rates and additional loan proceeds.

The sustainable-finance incentive programs offered by Fannie Mae and Freddie Mac each serve apartment owners who facilitate renovations that enhance efficiency via energy and water conservation. If participating owners are financing properties that are also categorized as affordable, these incentives are even more appealing. Owners that incorporate sustainability enhancements into their repositioning plans will not only be able to access lower financing rates through the agencies but also can increase their rents to further boost their return on investment.

The multifamily sector’s push toward greater sustainability, as well as an overall interest in ESG strategies, will continue to climb. Many consumers who rent want to lower their carbon footprint and are willing to pay a bit more to live in eco-friendly communities. Likewise, investors large and small are looking to increase allocations to ESG-focused projects, including multifamily properties. Amid the market uncertainty of the day, the sustainability movement is a positive one.

● ● ●

Multifamily housing remains in high demand, due in part to the higher prices and rising interest rates associated with owning a single-family home. While apartments are facing their own headwinds of higher construction costs and interest rates, originators should be aware of special government-backed environmental programs that can make multifamily investments even more attractive to their clients. ●

The post Seeking A Safe Haven appeared first on Scotsman Guide.

Avoiding SBA Dangers

Brian Congelliere — Tue, 01 Nov 2022 08:00:00 +0000

One of the most common mortgage programs for small businesses also is one of the best. The U.S. Small Business Administration (SBA) and its well-known 7(a) loan can be a great way for small-business owners to get the capital they need to meet business goals and continue growing their companies.

The loans that most often languish in underwriting and closing for weeks or months are those that, from the beginning of the process, ride the line of eligibility or don’t quite fit in the credit box for a given SBA lender.

With long loan terms, competitive interest rates and high maximum loan amounts, the standard SBA 7(a) loan program has become extremely popular. Originators should know that these loans can be used for just about any business purpose. Because of this flexibility, they can be used in creative ways to meet the specific real estate financing needs of nearly any type of small-business owner.

Despite the benefits of SBA 7(a) loans, many small- business owners are turned off by these products because of the sheer amount of documentation required and the process delays that can often accompany a government-backed lending program. This doesn’t mean that it’s impossible to navigate this process quickly and efficiently, but there are challenges that must be addressed.

With the right knowledge ahead of time, many of the obstacles that slow down the loan evaluation and approval process can be avoided, or at least mitigated, resulting in a much smoother transaction and a faster time to close. To better educate commercial mortgage brokers who are interested in pursuing SBA loans as a product option, it is crucial to discuss common problems in the SBA loan process and look at solutions for how to avoid them.

Loan qualifications

Some of the most important aspects of the SBA loan process are eligibility and qualifications. The loans that most often languish in underwriting and closing for weeks or months are those that, from the beginning of the process, ride the line of eligibility or don’t quite fit in the credit box for a given SBA lender.

Of course, there are plenty of situations where a creative solution can help a loan request fit within a lender’s credit parameters. Often, however, a proposal that barely meets qualification criteria only begins to seem more of a risk as it moves down the pipeline. Therefore, at the beginning of the process, it is imperative to make sure that the transaction is SBA eligible and will in fact qualify for a loan.

One of the most important issues to note with respect to loan qualification includes cash flow. If a business does not show enough earnings on its most recent tax forms to cover the proposed loan payments, it is unlikely to qualify for an SBA loan. If cash flow is tight during the prescreening process, many times the picture gets even worse in underwriting. That is why it is vital to double check that numbers are calculated to match how an underwriter would analyze a transaction.

Another key qualification is collateral. The SBA requires that a borrower pledge any available collateral (including personal real estate) on any loan of $350,000 or more, until the loan is either fully secured or all available collateral has been pledged. It is important to make sure that borrowers understand this rule so that it does not arise later in the transaction and jeopardize the deal.

Many lenders will have their own policies on their ideal credit profile for a borrower. With respect to the SBA, however, it is important to make sure that a borrower has not previously defaulted on a government-backed loan, including student loans or prior SBA loans. A default on any of these types of debts will immediately prohibit a borrower from moving forward on a new SBA loan.

As a general rule, make sure to check the borrower’s credit score and their history of open and closed accounts. If the borrower has derogatory accounts or high balances, this will cause trouble during the approval process and should be addressed before the loan is sent to underwriting.

Liens and encumbrances

Loans often get held up by preexisting liens filed against a business that have yet to be removed and which will prevent an SBA lender from filing in the first position. It is imperative that an originator ask the borrower early in the process if they are aware of any tax liens against the business (or personally), as well as any other Uniform Commercial Code liens from prior lenders or contractors.

Although lenders tend to perform their own lien searches, these are often not done until later in the underwriting or closing phase of the transaction. Any information that can be obtained beforehand can be essential for faster funding.

With respect to real estate acquisitions and refinances, it is important to examine the preliminary title report provided by a title company. This will show whether there are any encumbrances or deed restrictions on the property that might cause trouble at closing, thereby preventing the borrower from acquiring a property with a clean title.

Another important aspect of SBA real estate lending is the property survey, which will show the legal boundaries of the property along with locations of easements, encroachments and other important information. Taking the time to confirm that a building is not encroaching on adjacent property lines, and verifying that the property being sold matches its legal description and survey, can save a lot of headaches down the road.

Agreements and forms

When it comes to purchase contracts, the most common problems arise when closing time frames are too short, purchase-price allocations between asset types are not clearly delineated, or the seller or borrower names are incorrect. It saves a lot of time in the long run to make sure these things are listed correctly in a purchase agreement and that the assets being purchased are clearly spelled out.

It is highly recommended to make sure that a purchase contract is agreed upon and fully executed before a loan goes into underwriting. Submitting a loan with only a signed letter of intent can often waste a lot of time if a seller winds up not signing the contract after a deal has been underwritten and approved.

Filling out SBA and lender forms can be a hassle, but these steps typically do not significantly slow down a transaction. What does cause a deal to bog down is when a borrower cannot produce up-to-date financial information — such as profit-and-loss statements, balance sheets, debt schedules, and reports on accounts receivable and payable.

The SBA requires that financial statements be no more than 120 days old. If a borrower is slow to produce timely financial statements, then their documents can go stale, so to speak, before a transaction closes. This will result in serious delays. Lastly, borrowers will need items such as legal-entity documents, business insurance policies, equipment lists and more, to close their SBA loan. The sooner these types of items are in place, the better.

Sustainable Apartments Aren’t a Fantasy

Ed Hussey — Thu, 28 Apr 2022 17:00:00 +0000

Climate change issues impact every industry, including commercial real estate. As an increasing focus is placed on the reduction of greenhouse gas emissions, the commercial mortgage sector needs to take notice of the fact that change is happening.

Buildings — both during construction and everyday use — have been identified as major sources of greenhouse gases. Mortgage brokers should be aware of loan programs, including those offered by the government-sponsored enterprises Fannie Mae and Freddie Mac, that are designed to help landlords pay for retrofits to existing multifamily properties. In turn, greenhouse gas emissions will be reduced as investors, tenants and governmental bodies advocate for greener buildings.

The vast majority of scientists agree that climate change is real. They also agree that it’s progressing at an alarming speed and that the primary source is the human-caused greenhouse effect (warming that occurs when the atmosphere traps heat radiating from Earth to space). Greenhouse gas emissions originating from human activity have increased since the pre-industrial era and are now higher than ever.

What may be surprising to many is the significant role that real estate plays in the production of greenhouse gases.

These emissions have led to atmospheric concentrations of carbon dioxide, methane and nitrous oxide that are unprecedented in at least the past 800,000 years. The warming of the earth is believed to have led to numerous catastrophic events and effects, including the increased frequency and intensity of hurricanes, tsunamis, droughts and fires, as well as ocean acidification and a significant decline in non-human species.

Real estate’s role

The scientific community has identified the primary cause of human-induced greenhouse gas emissions as the burning of fossil fuels, specifically for electricity, heat and transportation. What may be surprising to many is the significant role that real estate plays in the production of greenhouse gases.

A 2018 report from the George Washington University Law School, “Deep Decarbonization of New Buildings,” found that buildings use approximately 40% of the energy produced in the U.S. and are responsible for about 30% of the nation’s carbon dioxide emissions. And the United Nations’ Environment Programme 2021 Global Status Report for Buildings and Construction found that this sector accounted for 36% of global energy consumption and 37% of energy-related CO2 emissions.

The UN’s findings demonstrate a 10% reduction in emissions compared to 2015 figures, although much of the reduction in 2020 was presumably tied to physical lockdowns and economic slowdowns related to the COVID-19 pandemic. Despite this short-term reduction in emissions, both reports were adamant that reducing carbon emissions from buildings should be a priority.

Growing movement

Sustainability in real estate is not a novel concept. A movement to increase the environmental friendliness of commercial and residential properties has been growing for decades. During this time frame, methods and materials to create real estate assets that use less energy and emit less greenhouse gases have become increasingly accessible and affordable for use in new construction and retrofits alike.

Today, with climate change becoming a household concern, property owners across the country are more easily able to reduce the environmental impacts of their buildings. Mortgage brokers can help their existing clients — and possibly create more business — by helping them navigate through the various financing options to accomplish these tasks. In the multifamily housing sector, some property owners (with the prodding of governmental bodies, such as the state of New York) are initiating retrofits to reduce the environmental impacts of their buildings, lower their long-term energy bills and increase their marketability among renters who are concerned about their own environmental footprints.

Current data points to an increasing number of renters who seek sustainable housing. Notably, Generation Z and millennials are some of the most ardent supporters of sustainability. About 80% of all apartment residents, in fact, believe that living in a green multifamily community is good for their health, according to a 2021 report from ApartmentData.com. Additionally, 61% of the renters surveyed said that they were willing to pay more each month to live in an eco-friendly apartment.

Of course, there is always a cost to improvements, whether they are focused on sustainability or not. The good news for multifamily owners and the mortgage brokers who serve them is that loans for apartment upgrades are currently available at lower-than-market rates through Freddie Mac and Fannie Mae. Each agency offers a package of incentives specifically designed for owners engaged in sustainability-focused renovations, or those whose properties meet specific sustainability requirements, metrics or certifications.

Advantageous financing

The Freddie Mac Multifamily Green Advantage program provides incentives to owners who make efforts to reduce the consumption of energy and water within workforce-housing communities. Under this program, borrowers are offered two paths to finance: Green Up and Green Up Plus. When borrowers reduce energy and water usage by 30% or more, they are likely to qualify for better loan pricing as well as increased funding to enable sustainability enhancements.

To qualify for Freddie Mac’s Green Advantage loan options, borrowers must complete a property analysis that demonstrates how improvements will enable energy and water savings. The agency will reimburse up to $4,000 for the cost of the assessment. Additionally, borrowers must engage with a third-party data-collection company prior to the loan origination. In addition to the financing incentives that owners receive, tenants save an average of $129 per year on their utility bills, based on reported property data.

As of third-quarter 2021, the agency reported that improvements had been made to more than 2,300 properties through the Green Advantage program since its inception in 2016. Freddie Mac data indicates that Green Up multifamily loans totaled more than $64 billion and impacted nearly 630,000 apartment units in the U.S. during this time.

Financed properties are typically garden-style apartments with an average age of 36 years. Nearly nine in 10 of these units are classified as being affordable to households that earn 100% or less of the area median income. The reported annual cost savings for a property owner averages $48,900 per loan and $191 per unit.

Fannie Mae also offers green loan products for multifamily owners who invest in energy and water efficiencies for their properties. Fannie Mae’s programs specifically target affordable apartment assets. The benefits of these programs include preferential loan pricing, additional loan proceeds to cover the cost of energy and water retrofits, and a free energy and water audit report.

Under Fannie Mae’s offerings, borrowers whose properties already possess a green-building certification may qualify for a lower interest rate. Eligible green certifications come from organizations such as BREEAM USA, Build It Green, Enterprise Community Partners, Green Building Initiative, Home Innovation Research Labs, International Living Future Institute and Passive House Institute.

Additionally, the U.S. Department of Energy, U.S. Environmental Protection Agency and U.S. Green Building Council offer green certifications. Lastly, borrowers who invest in active design or resident services that Fannie Mae deems to be key components of its Healthy Housing Rewards program also may qualify for a lower rate.

● ● ●

Mortgage brokers who are looking to advise clients on Freddie Mac and Fannie Mae green loan programs may want to provide them with common examples of the types of sustainable property improvements that can qualify. Freddie reports that showerheads, along with kitchen and bath aerators, have been the top water-device selections due to their low costs and dual energy- and water-savings potential.

Freddie also notes that its top four energy-improvement projects include exterior and common-area LED lighting, interior LED lighting, thermostats and insulation. Alternatively, Fannie Mae provides borrowers with green-rewards guidance, and its High Performance Building Report offers suggestions for energy- and water-efficiency measures that are tailored to meet the needs of the property in question. ●

The post Sustainable Apartments Aren’t a Fantasy appeared first on Scotsman Guide.

Climate Change Is an Investment Risk

Anthony Romano — Sat, 29 Jan 2022 00:34:11 +0000

Laurence Fink, CEO of the major investment management corporation BlackRock, had it right when he proclaimed in an open letter to other executives in 2020 that “climate risk is investment risk.” There’s little doubt that climate change has led to an increase in the frequency and severity of extreme weather events.

In the past six months alone, the country has seen historic flash flooding in the Greater New York City metro area and a “bomb cyclone” that hit parts of Northern California, some of which had been scorched by wildfires only a few months before. Meanwhile, the cleanup continues in Louisiana following the destruction left by Hurricane Ida. Climate change is getting more attention in the commercial real estate and mortgage industries, where environmental issues are beginning to drive a profound reassessment of how risks and values are analyzed in relation to assets.

If sea levels continue to rise and storms become more frequent as predicted, many communities will need to adapt or face the abandonment of certain properties.

Assessing the dangers

A major component of these changes is the use of the environmental, social and governance (ESG) concept as a framework for socially responsible investing. This movement calls for investors to consider environmental issues, social issues and the governance of a company — i.e., how executives attend to the interests of company stakeholders. The result is that commercial mortgage originators, brokers, investors and corporations that hold or trade assets are beginning to consider climate change in their allocations, investment strategies, risk analyses and site selections.

When discussing climate change, there are two main categories of climate-related risks that should be considered: physical risk and transitional risk. Physical risk can be defined as the likelihood of tangible property damage caused by climate change. It can be either acute or chronic. Acute risks are caused by extreme weather events such as fires, floods and hurricanes. Chronic risks are the result of long-term, global climate patterns such as extreme heat, drought or flooding from rising sea levels.

Transitional risks (or regulatory risks) involve disruptions to an asset or sector due to new or changing government policies, changes to technology or changes to markets in response to climate change. An example is the Biden administration’s executive order issued this past May that calls for building a climate-resilient economy.

For commercial mortgage brokers and their investor clients, physical property damage resulting from severe weather is a significant threat. For many years, the dangers of flood and fire damage have been offset by insurance programs and federal assistance that support post-disaster rebuilding efforts. These programs and others are being evaluated and rewritten under a new lens — and the commercial real estate finance industry must prepare for transitional risks on the horizon.

Rising property costs

When it comes to physical risk, the economic burdens are significant for properties that are subjected to climate change. These threats are expected to increase insurance premiums, operational costs for real estate, capital expenditures for mitigation measures and property taxes for protective infrastructure.

If sea levels continue to rise and storms become more frequent as predicted, many communities will need to adapt or face the abandonment of certain properties. Investors could be stuck with assets that have little or no value. Those that hold assets — such as real estate investment trusts, life insurance companies, and private and institutional investors — will need to consider climate-risk factors as part of their strategies.

With a movement to a low-carbon economy, investors can expect significant transitional risks. Many real estate professionals have already signed onto efforts such as the Net Zero Asset Managers Initiative, which supports the lowering of greenhouse gas emissions. Groups such as this are already incorporating efforts to lower emissions into their investment strategies.

Push for change

Transitional risk is anything associated with a change in government or corporate policy. Along with a focus on climate issues, other elements of the ESG movement are requiring the public and private sectors to review policies, procedures and strategies through the lens of ESG. Those that don’t face reputational risk in addition to any transitional risk.

In May 2021, the Biden administration issued executive order 14030, known as “A Roadmap to Build a Climate-Resilient Economy.” It charts a governmentwide strategy to prepare for climate risk and involves big changes to infrastructure, supply chains, energy and financial markets. Some of the most impactful elements of the executive order and related proposals involve major policy changes within various government departments.

More than 20 federal agencies have released adaptation and resilience plans to help safeguard federal investments from climate change. This includes proposed updates to the National Flood Insurance Program standards to help communities reduce flood risk through construction and land-use practices.

Each of these initiatives represents significant transitional risk. Many have overlapping implications, and anyone lending on commercial assets, or investors holding these assets, will need to be agile and swift to minimize transitional risks.

New investment rules

Among the agencies that are making policy changes is the Securities and Exchange Commission, which has started the process of implementing rules to require private issuers to evaluate and disclose the risks of climate change for their assets. This is expected to drive change within the secondary market for commercial mortgage-backed securities and rating agencies.

The U.S. Department of the Treasury has an initiative to address climate-related risks in the investment sector. This effort will focus on assessing the availability and affordability of insurance coverage in traditionally underserved communities and high-risk areas.

Proposed amendments to the Employee Retirement Income Security Act of 1974 are aimed at safeguarding savings and pension accounts from climate risk. The proposal calls for more recognition of climate change and other ESG factors by fiduciaries. These changes could ultimately affect the way that these entities allocate and invest funds, as many hold commercial real estate assets as part of their investment strategies.

The U.S. Department of Housing and Urban Development (HUD) is incorporating climate considerations into the origination and underwriting of mortgages for single-family homes to better address these risks within HUD loan portfolios. The Department of Veterans Affairs and the Department of Agriculture are similarly reevaluating their loan programs.

Measuring the impact

Advancements in data aggregation, analytical modeling and artificial intelligence are making it easier to understand the long-term impacts of climate on commercial real estate. The industry has lacked a national standard for measuring climate-related risks, but that may be about to change. This past May, ASTM International (which develops standards for a wide range of products, systems and services) formed a climate change subcommittee that is tasked with developing a framework for the creation of industry standards.

Other ESG-driven standards have been developed recently. In 2019, ASTM issued guidelines for measuring a building’s energy consumption in an effort to drive efficiency and reduce greenhouse gas emissions. While this standard is only starting to be applied, it is an example of the increased focus on climate-driven initiatives.

The private sector has partnered with technology companies to address issues and bring new modeling tools to market. An example is the company ClimateCheck, which works with property buyers, owners and brokers around the country to deliver climate-risk rating reports for specific properties or entire portfolios. The rating system addresses climate-related hazards (such as floods, fires, droughts, storms and warmer temperatures) and projects how they will change over time.

● ● ●

Building climate resilience into commercial real estate investment strategies and lending practices can help avoid or limit exposure to both physical and transitional risks. While it is difficult to completely separate a commercial real estate portfolio from climate risk, mortgage brokers should know that investors and lenders are beginning to look at available data and reports in an attempt to understand and limit their exposure to vulnerable markets. They also are implementing mitigation options for their investments and watching legislative matters more closely. ●

The post Climate Change Is an Investment Risk appeared first on Scotsman Guide.

A Decisive Decade To Go Green

Dennis Firestone — Sat, 29 Jan 2022 00:33:37 +0000

Wildfires, hurricanes and flooding are among the extreme weather events putting the commercial real estate industry under pressure to ensure that properties can cope with the effects of climate change and further reduce their carbon footprints. In recent years, many global frameworks and standards that focus on net-zero carbon emissions and green-building concepts have been introduced and are gaining momentum in the commercial real estate community.

Existing buildings and construction of new structures are responsible for about 36% of global energy consumption and 39% of emissions, according to the United Nations. Such statistics have led commercial real estate leaders to look for ways to convert their sustainability agendas into action.

A JLL client survey found that 88% of respondents anticipate that carbon emissions reduction will be part of their corporate sustainability strategy by 2025. Although many of these firms have ambitious goals to keep pace with the industry at large, most are starting with a blank slate. In fact, only 19% of those polled have a strategic path to the finish line. The other 81% find themselves within a “sustainable action gap,” a discrepancy between their stated green objectives and what’s needed to reach them.

It’s going to cost a considerable amount of money to reach these goals and to finance the required investments in infrastructure.

Costly process

Commercial mortgage lenders will need to be part of this process. It’s going to cost a considerable amount of money to reach these goals and to finance the required investments in infrastructure. This process will come with an inherent sticker shock, but the idea is that organizations need to look longer term to hit these targets.

Estimates on how much it will cost to reach net-zero emissions vary greatly. According to a 2020 report from the Energy Transitions Commission — a global coalition of energy producers, financial institutions and industrial companies — reaching worldwide net-zero emissions by 2050 will require $1 trillion to $2 trillion per year in new spending.

Judging by the fact that commercial real estate is responsible for nearly 40% of global carbon emissions, a considerable amount of these costs would be spent to redesign and retrofit buildings. Such a move would require the buildings of the future to be constructed with different materials and to use clean electricity where possible to power, heat and cool these structures.

A recent JLL survey of 647 C-suite organizations found that building owners and investors, as well as companies leasing space, may have similar outlooks on environmental issues, but the dynamics are a bit different. Tenants are not only driven by investor demand but also by employee attraction and retention through climate change issues, especially among younger workers. For Class A real estate investors seeking to attract top-tier tenants, sustainability will increasingly be a deciding factor for these prospective occupants.

Investors are creating plans to reduce risk and increase the value of going green while minimizing the “green premium,” which is the additional cost of sustainable action above industry norms. A newly emerging discussion involves the “brown discount,” which refers to a reduction in value for assets that lag behind their peers in the implementation of sustainable actions.

Federal moves

The Biden administration has made the climate change fight a priority from its first day in office. On Jan. 20, 2021, President Joe Biden issued Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” which put the climate change debate at the forefront of the regulatory agenda for all federal agencies.

This past October, the Biden administration doubled down on this commitment by issuing “A Roadmap to Build a Climate-Resilient Economy.” This report states that the U.S. government is using all of its tools to properly account for and mitigate climate change-related financial and economic risks, which are already affecting jobs, homes, savings and businesses across the country.

The report identified four specific climate change-related financial risks, and a forthcoming report from the Financial Stability Oversight Council will kick off a robust process for U.S. financial regulators in developing the capacity and analytical tools to mitigate climate-related financial risks. In addition, the U.S. Department of the Treasury launched a process to address climate-related risks for the insurance sector.

Decisive decade

More recently, President Biden addressed the U.N. Climate Change Conference in Glasgow, Scotland. He stated that “in an age where this pandemic has made so painfully clear that no nation can wall itself off from borderless threats, we know that none of us can escape the worst that’s yet to come if we fail to seize this moment” while adding that this is a “decisive decade.”

The White House also has released plans that outline the administration’s long-term strategy for cutting domestic greenhouse gas pollution in half by 2030 and its goal to reach net-zero emissions by 2050. As a result of these orders, the Securities and Exchange Commission (SEC) will require publicly traded companies to expand upon the impacts and/or compliance costs associated with climate change in their SEC 10-K and 10-Q filings — bringing sustainability, environmental and social governance issues into the climate change debate.

Although there are no definitive federal guidelines on climate change, there are a wide range of measures that commercial real estate owners can take now to meet the challenge. At the local level, many cities are taking it upon themselves (in the absence of definitive federal regulations) to take aggressive positions on climate goals through similar compliance regulations, which will make investment decisions much more difficult.

As an example, New York City in 2019 passed Local Law 97, which requires buildings of more than 25,000 square feet to meet new energy-efficiency and greenhouse gas emissions limits by 2024, with stricter ceilings coming in 2030. Washington, D.C., and Boston have passed their own versions of legislation aimed at reducing emissions from buildings. The question for commercial building owners becomes, how do they comply with multiple tiers of guidelines in an efficient manner?

● ● ●

Much of the commercial real estate industry understands the need to focus on sustainability, and there is less fear about it than in the past. There also is a broad consensus among industry leaders that steps must be taken to reduce the effects of climate change.

It is anticipated that there will be much more consolidation around what it means to be sustainable in commercial real estate. More organizations will trend toward a variety of voluntary compliance mechanisms and invest in achieving these net-zero goals. It is important to note that there will most likely be more political action ahead as it relates to climate change, which could dramatically alter what today’s sustainability plans will look like in the future. ●

The post A Decisive Decade To Go Green appeared first on Scotsman Guide.

Environmental Archives - Scotsman Guide

Author Showcase: Brian Decker, Modern Lending

Come to the Rescue after Disaster Strikes

Rebuilding communities

Understandable hardships

Flexible guidelines

A Storm Brews in Florida, Even After Hurricane Ian

Coastal allure

Costly insurance

Unaffordable rebuild

Leasing the Green Way

Green-leasing basics

Carrot and stick

Financial incentives

Solutions to challenges

Lease alternative

Sustainability for Success

ESG defined

Gaining popularity

Creating value

Reducing risk

Seeking A Safe Haven

Housing impact

Rising costs

Slowing demand

ESG momentum

Avoiding SBA Dangers

Loan qualifications

Liens and encumbrances

Agreements and forms

Other potential problems

Sustainable Apartments Aren’t a Fantasy

Real estate’s role

Growing movement

Advantageous financing

Climate Change Is an Investment Risk

Assessing the dangers

Rising property costs

Push for change

New investment rules

Measuring the impact

A Decisive Decade To Go Green

Costly process

Federal moves

Decisive decade