New Kid on the Mortgage Block

In Manhattan’s East Village, a co-op finds that green financing can pay for green
initiatives

Not long ago the board at 54 East First Street, a 16-unit Manhattan co-op (pictured, left), asked its managing agent to shop around for a new mortgage so they could refinance and take advantage of lower interest rates. But instead of the “plain vanilla mortgage,” it originally sought, the board found a way to get that lower interest rate, fund some necessary upgrades, and make the building greener at the same time.

“We were surprised at how little we had to spend to gain so much in savings,” says board member Paul Olliver. “It’s always nice to be green but unless it’s backed with real cost savings it’s a tough sell for a building such as ours to go forward.”

What 54 East First and the Plymouth Management Group found was the Community Preservation Corporation (CPC), a non-profit affordable housing lender that recently began the Green Initiative, a lending program that marries financing with energy-saving upgrades. Managing agent Pam Elgar had stumbled across the CPC at a green building presentation. In September 2009, the program was launched with $1 billion in funding to be used for construction and mortgage loans. Since the program’s inception, about 50 buildings statewide are in the process of applying for loans and about ten are on the brink of closing, says Andy Padian, vice president for energy initiatives with the CPC.

Over the next five years, the CPC hopes to provide loans for 1,500 to 2,000 buildings statewide. If the program is successful, the CPC hopes to get another round of funding. Says Padian: “What I like best is that we are addressing the environmental problems of a building when it is most logical to do it – when the building is restructuring its debt.”

The Green Initiative adds an energy-saving twist to refinancing. Along with assessing the building’s financial health, CPC loan officers provide an energy benchmark to see “whether you’re an energy pig or an energy gnat,” as Padian puts it. The benchmark compares your building’s energy usage per square foot with that of other buildings. If the building is approved for financing, it moves to the next step, an energy audit.

Padian or a private contractor will perform an energy audit to determine where, how, and why energy is being wasted. The CPC then goes back to the building and recommends specific energy upgrades. The building pays for the energy audit but Padian says the benchmarking process helps cut down on the audit’s cost. “Our goal is to reduce energy and water usage by 20 percent,” he explains.

The building is not required to make the specific energy upgrades in order to get the financing, though. At 54 East First, the building’s old 7.5 percent mortgage had $433,000 remaining. It took on a new 30-year fixed-rate $670,000 mortgage at 5.7 percent. The higher mortgage amount was offset by the lower interest rate, so no maintenance increases were needed, says Elgar. Because of the energy audit, the board decided to upgrade the building’s boiler, install more energy-efficient lighting in common areas and seal a dumbwaiter shaft. Other work included insulating hot water tanks and pipes and some roofing repairs. The building is also repointing brick on the north and east wall and renovating basement access stairs, says Elgar.

The higher loan will add about $237,000 to the building’s debt. All told, the upgrades are projected to cost at least $200,000. Any money needed beyond the amount netted in the refinancing will come from the building’s reserve funds. The energy audit projected that savings from the upgrades to be about $4,228 annually and that the return on investment for most of the work to come within five years. The return on investment on the most expensive improvements is longer – about 25 years for the boiler and 13 years for the lighting.

As part of the green mortgage program, the CPC works with utility providers and NYSERDA to take advantage of any incentive programs that a building might qualify for. For 54 East First, those incentives are expected to total about $40,000. The building expects to get a Con Edison incentive for the heat timer on the boiler that could cover up to 50 percent of the $6,000 in costs. But the property was motivated more by the idea of saving money in the long run than any incentives.

“We don’t really know what all the incentives will turn out to be, but we think it will be great whatever it is,” Elgar says. “It didn’t impact as much on the decisions we were making. We came to believe it was good to make our building more energy efficient.”

Sadie McKeown, senior vice president and director of the Green Initiative at CPC, says rates will be competitive. At the time when 54 East First secured its 5.7 percent loan, rates were generally hovering in the same neighborhood, around five-and-three-fourths percent, she says. If a building already has a loan through the CPC, it can add debt instead of refinancing to cut down on costs.

The refinancing fees (lawyers, engineering, title surveys, etc.) are similar to a traditional refi; about $10,000 to $12,000, McKeown says. The cost of the energy audit will range depending on the size and condition of the building, tallying up between $3,000 and $10,000. The CPC takes a one percent origination fee.

The money to fund the Green Initiative comes from a variety of sources, including $500 million from Freddie Mac, $300 million from the New York State and New York City public employee pension funds and $150 million from private lenders. Such private lenders as Deutsche Bank and HSBC (which each contributed more than $10 million) were eager to sign on with the green loan program for several reasons. Government at all levels is encouraging more greening and businesses want to respond. But even more importantly, green is a good investment. If the building makes environmental upgrades that save money, the building will be on a firmer financial footing.

The CPC expects that most of the properties that will seek green mortgages will be rental buildings, which are often quicker to sign up for green trends, but officials say they hope co-ops and condos consider the program. “The whole goal for the program is to have it not differ from the traditional mortgage process,” says McKeown. “What we are trying to do is to make the energy audit and the retrofit a routine part of the refinancing.”

Most of the public agencies or government programs that provide financial incentives for environmental upgrades have strict rules dictating what work must be done and what products qualify. The CPC program is different. A building could completely ignore the energy audit and simply use the extra money to upgrade the lobby, but Padian says most buildings are more forward-thinking.

“We don’t tell people what they have to do,” says Padian. “We might think you need to buy a more efficient boiler. If people want to buy a crap boiler, well, they can be stuck with a crap boiler. We think it’s better to buy a better piece of equipment, and people tend to agree with us.”