1. Eliminate the Loading Order. The loading order requires that the owner show that energy efficiency retrofits reduce power consumption by 10 percent to 20 percent in many cases before PACE can be used to pay for solar.

2. Skip Residential PACE for Now.

3. Limit the Types of Repairs. If cutting out homeowners is too politically risky, how about this tack? Limit the size of PACE loans — to say, $15,000 for homes measuring 2,000 square feet or less — and circumscribe the types of repairs that can be undertaken.

4. Make PACE Debt Junior.

5. Threaten Even More Stringent Financial Controls.

6. Change the Investment Tax Credit.

7. Advertise. In the three weeks that San Francisco’s PACE program was up and running, the city received 33 applications and rejected 13 for financial issues. Twenty were completed and one got approved, according to Rich Chien, who runs it.

One in three weeks. Surely some word of mouth could help.

via Seven Ways to Save PACE : Greentech Media.

Via A Student of the Real Estate Game

It’s well known that PACE is having trouble as the Federal Housing Finance Agency (FHFA) announces its concerns about properly underwriting properties (PDF link) with PACE. In the earlier entry, I wrote about the standard justification used by PACE advocates to liken a PACE bond to other property-based special assessments such as water or seismic improvements. The FHFA response merely takes the non-standard nature of PACE transactions as a given:

”First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers, and mortgage security investors.”

Note the use of “PACE loans” and mention of “mortgage security investors” among those affected. FHFA’s point of view could not be more clear: it does not consider PACE transactions to be any different from a traditional property-backed loan and feels that the popularity of PACE transactions threatens the attractiveness of GSE-backed securities to investors.

In my earlier post, I mentioned a couple of reasons why FHFA would not consider PACE transactions to be like traditional special assessments:

1. Tax levying authority does not design or complete the work directly.

1a. Contractors who actually design and complete the work may or may not be sufficiently licensed or inspected.

2. The improvements are speculative and the anticipated savings may or may not coincide with the period of repayment.

3. A property’s “share” of a water treatment plant is not due upon sale or foreclosure. In a PACE-related foreclosure, that cost can be accelerated and be payable upon foreclosure.

4. If a water treatment plant does not generate sufficient funds to repay the bond directly from user fees, the municipality is typically responsible for the shortfall. PACE bonds have no such mechanism.

One item that I failed to expand upon is the nature of collateral. When a loan is made, the first and usually only source of repayment is the property itself. When a special assessment is made to improve the seismic resistance or water quality, the presumption is that without these improvements, the collateral will no longer be inhabitable; the collateral is effectively worthless.

When a PACE transaction is made, it has no effect on the habitability. Therefore, the improvements are not essential to maintaining the value of the collateral, and FHFA sees them as optional.

Reasonable people can disagree about FHFA’s position and can effectively argue that climate change or even mere efficiency improvements are essential to maintaining or improving the value of collateral. Because efficiency is not currently evaluated by lenders or regulators in single family home transactions, FHFA will continue to consider it largely irrelevant to establishing value. Furthermore, although society accrues benefits from additional employment, improved air quality, and reduced energy use, society does not directly (or indirectly) provide a method of repayment. Unless and until municipalities incorporate energy efficiency into their tax, zoning, or other regulatory structure or until they make PACE bonds payable as a general obligation bond (see below), it will not be supporting the repayment of PACE obligations.

Indeed, FHFA might even see the presence of a PACE obligation as a factor in reducing the value of a property. Lawrence Berkeley National Lab cites the one (!) sale of a PACE-improved home in Boulder as a cautionary tale (PDF link):

In the PACE program of Boulder County, Colorado, one home with a PACE lien has sold to date. This assessment included a PV system. In this instance, the lien was paid off by the seller as a condition of the sale. The original homeowner received the full benefit of the residential investment tax credit for the PV system, which was apparently a factor in the negotiation process. While one example is not representative of what will occur across a broader collection of PACE programs, it does indicate that program administrators should be cognizant of this issue as they conduct their outreach efforts.

In this case, the seller received a 30% investment tax credit (or grant) for the installation of a solar array. It is suggested, but unclear, that the homeowner pocketed the 30% credit while the PACE funded 100% of the total installation cost. As a result, the buyer asked for the seller to essentially retroactively apply the 30% received plus the outstanding amount of the PACE obligation to pay off the total obligation early.

After much delay, here’s the question presented by FHFA: why does lien priority matter to PACE bondholders?


Lien priority matters because it provides a measurable certainty of recovery. The higher the priority the greater likelihood that in a sales action (foreclosure or short sale, e.g.), the senior lienholder will be repaid first and in toto. Because certainty of repayment reduces risk, bondholders will accept lower returns in exchange for certainty of receiving those payments.

PACE bondholders, because they are financing a new and yet-unproven model with uncertain repayment prospects, require lien priority to keep rate manageable for borrowers. They should, but rarely receive, a credit enhancement from the sponsoring PACE issuer. In this case, a municipality that sponsors a PACE issuance might provide a ‘moral obligation’ clause to their bond documents suggesting that they will likely repay or provide assurance or repayment to bondholders, but it is rarely enough to provide truly ‘affordable’ interest rates to borrowers/homeowners.

FHFA has obligations to the bondholders of the GSEs; they also provide money with lower expectations of interest paid in exchange for lien priority. Because loans from the GSEs (Fannie and Freddie) are senior to all but property taxes, there is great comfort in the ability of the GSEs to recover their principal investment.

Regarding PACE obligations, FHFA in effect announces that you cannot have a functioning low-interest rate mortgage market if you have a functioning low-interest PACE market. One must be senior to the other, and FHFA claims its product should predominate.

Urban Planning Experiment Coming to 14th and U – Housing Complex – Washington City Paper:

“Here’s how it works: LCB puts in the ‘soft costs’ of bringing in property owners, studying the project area, and coordinating with local politicians and government agencies to integrate power, water, and waste systems. Since the businesses themselves need to put up the capital expenses, though, the initiative depends heavily on making the business case for things like solar panels, geothermal heat, energy efficient piping, and permeable sidewalks. It’s a very easy case for large structures, like the Empire State building. Smaller buildings need to work together to create economies of scale, but older buildings are especially worth saving, since they possess the kinds of walls built for an era before air conditioning. “

Energy efficiency and green building play a crucial role in housing affordability. Some are concerned that green building adds to the cost of housing. I do not subscribe to that view. I believe that we can’t afford not to build green. Research increasingly shows that all types of affordable housing can be built or rehabilitated to rigorous green standards at a minor additional cost, and often without the need for capital investment. As we dispel the notion that green building will mean higher costs for low income families we must recognize while everyone is hurt by high energy costs, no one is more vulnerable to rising energy prices than low- and moderate-income families. Higher energy costs often result in cutting back on other critical needs, such as medicine and food.

HUD, Money & Green Housing 2010 – via Greenlandlady.com

PACE bonds are issued by local governments, with proceeds used to improve the energy profile of buildings. The most politically popular use of these bonds is to retrofit homes and add renewable energy capacity. The building owner repays the funds through an additional assessment on the property tax.

Because property taxes are superior in lien position to the mortgage, the GSEs are anxious that there is now another lender that will be repaid before them in the event of foreclosure.

PACE advocates describe PACE bonds as a simple extension of a state or municipality’s existing right to issue bonds. Typical descriptive language usually reads like this:

Land secured financing districts – which are creatures of state law and are variously referred to as assessment districts, public improvement districts and community facilities districts, among other terms – are a building block of municipal finance and have been utilized for more than a century. They are used to finance projects which serve a public purpose, including street paving, parks, open space, water and sewer systems and street lighting, among others.
All land secured financing districts operate by placing a senior tax/assessment lien on properties which will receive a benefit from the financed improvement. The lien secures a tax/assessment payment that is levied on properties through the property tax bill. Tens of thousands of these districts already exist in this country and are a standard part of the property appraisal, underwriting and disclosure processes.

PACE bonds are usually statutorily approved under the auspices of existing bond creation legislation. They have the following commonalities with a water treatment bond:
1. Issued by an entity with tax levying authority.

2. Repayment sources are individual properties within the affected district.

Here are some differences:
1. Tax levying authority does not design or complete the work directly.

1a. Contractors who actually design and complete the work may or may not be sufficiently licensed or inspected.

2. The improvements are speculative and the anticipated savings may or may not coincide with the period of repayment.

3. A property’s “share” of a water treatment plant is not due upon sale or foreclosure. In a PACE-related foreclosure, that cost can be accelerated and be payable upon foreclosure.

4. If a water treatment plant does not generate sufficient funds to repay the bond directly from user fees, the municipality is typically responsible for the shortfall. PACE bonds have no such mechanism.

Some quick math may illuminate the GSEs unease with the program:
$20,000 in efficiency improvements

6% rate of interest (the municipality may pay 5% to bondholders and keep 1% for overhead costs)

20 year term of repayment (supposed to be less than the lifespan of the improvements)

If you’re using Excel, it should look like this:

=PMT(6%, 20, 20000)

and the answer is = $1,744 (the amount paid for this improvement per year)

or $1,744/12 = $145 (the monthly amount your energy costs must fall to break even on your improvements).
From a lender’s perspective (because the improvements need to be either cost neutral or cost positive to the homeowner), that $145 in savings better be there each and every month or the borrower is not meeting the same income to debt ratio at the origination of the GSE-backed loan. From a lender’s perspective, there are a couple of ways to save money on utilities that don’t involve placing a $20,000 lien on the property. These include:
1. Reducing your energy use.

2. Reducing your energy use.

3. Reducing your energy use.

I’m not anti-PACE and I strongly believe that there is a method to integrate a program like this within a GSE framework. I don’t believe in headline hysteria like this, or this, or this, or this. When you write these types of articles and allow inflammatory link-bait headlines to summarize them, you come across as ill-informed, ill-tempered, and ill-suited to write something that actually advances the conversation toward the desired solution.

The count of US bank failures rose to eighty-three this past Friday when the Federal Deposit Insurance Corporation (FDIC) announced that the Nevada Financial Institutions Division had closed Nevada Security Bank (NSB).

At least 2/3rds of NSB’s loan pool (total of $330 million) was CRE ($204 million. When including construction loans, NSB had a real estate-related exposure of $275 million, which deteriorated as the underlying mortgages failed to perform. According to Globest’s analysis of the FDIC reports,  NSB’s default rate on its CRE loans was 10.6 percent in the first quarter, more than double the national average. Alarmingly, the default rate on its construction loans was 25.8 percent.

Dr. Chandan studied 56 bank failures since 2008 to place the failure of NSB and its CRE troubles in greater context:

Across the thirty-six bank failures where commercial real estate was cited the average default rate on commercial mortgages was 11.4 percent in the last quarter during which the bank was active – three times the average bank commercial real estate default rate of 3.8 percent in the fourth quarter 2009. Surpassing commercial defaults, the default rate for multifamily mortgages across the same subset of failed banks was 17.9 percent; the construction loan default rate, 29.7 percent.

The exceedingly high default rates in the commercial, multifamily, and construction loan pools weighed on the failing banks because these loan pools represented a large share of each bank’s total lending. On average, the sum of commercial, multifamily, and construction loans represented 75 percent of net loans and leases at failed banks cited for commercial real estate exposures. 45 percent of the combined balances were in commercial real estate specifically. By way of comparison, the average commercial real estate concentration across all active banks at year-end 2009 was 15 percent. Default rates were generally lower at failed institutions with larger concentrations, suggesting that the absolute count and volume of defaults may be an equally important metric in assessing bank health.

7,721 banks – roughly 97 percent of all active banks in the first quarter – have at least some exposure to commercial real estate. Of these, 565 currently report commercial real estate default rates of at least 10 percent. Even when employing the higher benchmark of an 11.4 percent default rate (the average commercial real estate default rate for failed banks), 440 banks report higher default rates in their legacy commercial portfolios. These banks represent more than 5 percent of all FDIC-insured institutions and 3 percent of the system’s total assets.

via GlobeSt.com – The Latest Bank Failure Fits An Emerging Pattern – Chief Economist Article.

via Banks Embrace ‘Extend and Pretend’ as U.S. Hotels Await Rebound – BusinessWeek.

There’s a touch more nuance here with the comments that banks don’t really want to own real estate (special servicers are less averse) and that a performing loan is one that is paying principal and interest, even if it otherwise fails to meet other requirements such as LTV (Loan to Value) or DSCR (Debt Service Coverage Ratio).

Per the previous post, the receivership and foreclosure laws differ for each state and the District. If you want to see an REO asset manager explode, ask them how the foreclosure process is shaping up in Florida.

Or Alabama.

Or Ohio.

Or Illinois.

Or Connecticut.

Or our bete noire, New York.

After typing this entry, the NYT kindly provided an article about homeowners creating their own version of extend and pretend:

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high.

The full article, “Owners Stop Paying Mortgages, and Stop Fretting” is well worth a read.

“The idea of turning failed condos into affordable homes has ignited New Yorkers’ imaginations, and not just at the radical margins. Ardent supporters include property owners who bought pricey real-estate in the boom, only to find themselves living next door to inactive construction sites. Last June, with elections on the horizon, City Council Speaker Christine Quinn laid out a vision for turning empty condos into living quarters for the middle class. Vacant new buildings, she said, ‘now represent our best asset in the fight for affordable housing.’

The council committed $10 million and asked Bloomberg to do the same. In July his administration agreed, funding a test of what it dubbed the Housing Asset Renewal Program. In exchange for making half of the apartments affordable, developers of struggling condos receive payments of $50,000 for each of them, $75,000 if they become rentals.”

Gentrification Hangover | The American Prospect

Really? $10mm? Think that will get it done in New York? I disagree. If all of the money is spent on condos, the plan saves 200 units, assuming condo fees are waived. If the money is spent on rentals, it saves 133 units. That would be noticed in a council member’s district, but would hardly rate a mention at the Borough level, much less for the City.

Still, here’s one property where it might make sense: a 6-unit (all 1BR) property in Bed Stuy, Brooklyn:

According to the listing at Massey-Knakal, this 6-unit building is offered for $995,000 or $165,000 per unit. Under the NYC plan, the property could receive up to $75,000/unit ($450,000) for conversion to affordable rental housing. If the property were with a special servicer, the unpaid principal balance (UPB) could actually be $995,000. If this were my deal, I’d probably let it go for $600,000. It’s a 66% recovery on a loan that would otherwise be stuck in foreclosure purgatory. Better to push it out than try to find a manager for a deal this small.

All of that assumes that as a lender I can get control of the title. Right now it takes anywhere from 16-24 months to foreclose on a commercial property in New York. Indeed, statutes anticipate a 445 period. As a lender, I cannot stipulate a receiver (who collects rents and operates the property on behalf of the court and remits funds to the mortgagee) which means that it typically falls to the fishing buddy or in-law of the judge. Consequently, there is no guarantee that a person with experience in the operation of real estate will manage a property. During the time between appointment of a receiver and a foreclosure sale, the property can fall further into disrepair, value can be eroded through poor operation, or the borrower can continue to interfere with the process.

Why aren’t banks selling these properties? Because they don’t own them, they can’t force out delinquent borrowers, and no one else has the patience to wait out the process either.

There’s absolutely extend and pretend, even in CMBS, but there’s also a huge logjam in the foreclosure process. Until New York state and others examine their processes, they will continue to be annoyed by see-through buildings they can do nothing about.

All property types suffered an occupancy decline in the fourth quarter. The occupancy dip came with a slowdown in demand. Some 950 units were absorbed in the quarter, about average for the sector. But in the third quarter, 3,978 units were absorbed. The big number could be due to pent-up demand from seniors who no longer could put off a move… but [that] doesn’t explain why demand dropped in the fourth quarter and it’s up for debate how strong demand will be in the months ahead.

The construction pipeline is emptying, however, which should help boost occupancies going forward. There are about 8,700 new units under way, equal to about 1.8% of the existing inventory. By comparison, in the first quarter of 2008, there were 20,000 units under way or 4.2% of the existing inventory.

But some markets will struggle with too much seniors housing, including Denver, Atlanta, Dallas, Boston and Portland, Ore. Developers typically target cities with high population growth rates and few barriers to entry.

Looking at the $33.3 billion universe of loans that have had at least one appraisal reduction through the end of February, [Trepp's] analysis indicates a potential loss rate of just over 40%, or $13.4 billion. This is 22% higher than the current year-to-date loss rate of 33%.

Busy year for me? My 2010 multifamily and mobile home portfolio includes Ohio, Michigan, New York, and Illinois.

Trepp: CMBS Loan Losses to Deepen in 2010.

Housingpolicy.org, an initiative of the Center for Housing Policy is doing yeoman’s work in spurring ongoing conversations amongst professionals in affordable house. At their nascent forums, Ed Kaminski shares his frustration with the deal above, and its inability to make financial sense.

[Pennsylvania's] low rent levels do speed up the intersection of operating expense with operating income. We even avoid hard debt on tax credit deals whenever possible because at some point, costs will exceed income. This is certainly true in hindsite with taxes, utilities, insurance and maintenance all rising at a greater rent than rents.

We are being offered – free of charge – a 17 year old 44 unit tax credit property that losses $25,000 per year. It has no hard debt payments, but soft debt exceeds the appraised value. [We] have come to the conclusion that the only way to preserve this is to find a source that will subsidize operations. We are willing to enter into a 15 year restrictive use agreement in exchange for a 15 year commitment of $25,000 per year.

That is $568 per unit per year ($8520 per unit for 15 years) and a total of $375,000 of subsidy for 15 years. Producing 44 new units will cost $6-8,000,000 or more.

The ability of a State Housing Agency to exchange tax credits for cash does nothing if the money goes simply to the construction of affordable housing and not to its operations. Financial stability, much less sustainability, will not occur until states and more importantly, counties, become more serious about providing and supporting affordable housing.

LIHTC cannot solve this problem.

Direct HUD subsidies, HOPE VI, vouchers, all are powerless to solve the long term danger to affordable housing: incomes (and thereby rents) do not rise in concert with expenses.

Insurance, by popular understanding, hedges against the risk of contingent loss. By varying pricing based on operations, materials, and design, insurance serves as a nudge to encourage lower risk profiles. In theory at least. We’ll leave unresolved questions about whether this risk reduction is always well reasoned or if you really get better pricing through these changes.

So it was unsurprising to read in Ceres’ new report “Risk to Opportunity” that insurers are moving from superficial PR “towards [thinking] more deeply and strategically institutionalized and embedded in the operations of companies.”

Climate change is becoming recognized as an issue of Enterprise Risk Management, spanning underwriting, asset management, and corporate governance.

One of the most constructive developments is more products and services focused on ensuring the quality of the customer’s energy or carbon savings efforts. These include performance insurance for renewable energy systems, coverage for green buildings that don’t deliver promised performance, and products that apply to carbon offset and trading activities. In all cases, loss-prevention takes the form of due-diligence, scrutiny of engineering assumptions, preventive maintenance, commissioning, measurement and verification, and other constructive interventions to help ensure project integrity and success.

Although released in April 2009, the report covers products existing or introduced in 2008. In many ways, the finding that some insurers were moving much faster than others led to the March 2009 action by state insurance commissioners to require that insurers reveal exposures and responses to climate change. How this will be enforced and what the ‘right’ answers are will be revealed when the responses are provided in March 2010.

[Note: The quote above was taken from an interview with study author Evan Mills with Climate and Insurance.org, an arm of industry advocate NAMIC, which does not like (really doesn't like) the new climate exposure mandate. Ceres retorts that "Insurance trade organizations remain relatively disengaged on climate change." Plus ça change, I suppose.]

Why does this matter? Because outside of government and its multiple layers, insurers and financial firms are best positioned to promote the systemic change in the built environment needed to achieve goals like Net Zero Energy, Architecture 2030, or multi-family specific programs like Greener Communities.

Insurers are perfectly placed to make the case for unifying “green” and “disaster-resilient”
practices across many domains (construction, energy, agriculture, land use), yet scant effort has
been exerted in this regard. It will become increasingly incumbent on insurers to demonstrate
the loss-reducing benefits of the green technologies and services that they reward. Loss-prone
infrastructure cannot be truly “sustainable”.

It’s worth recalling this recommendation from “Resilient Coasts”:

“Wise investing will involve asset managers understanding the impacts of climate change on their investments and managing that risk, especially in real estate, infrastructure and other financial instruments. Responsible banks will need to understand the levels of exposure within their investment and lending portfolios by incorporating climate risks into their due diligence.”

Change is coming in a thousand different ways from code changes, insurance, finance, builders, housing agencies, governments, and most importantly, residents. We’ll start addressing the financial world in short order.

Eighteen months makes a big difference as both data and awareness have increased as all participants recognize the necessity of accurate and actionable information. States like California require energy labeling, LEED now requires multi-year access to building performance, and the Federal government is getting into it, either through GSA’s Sustainable Design Program or through better use of existing resources such as HUD financial data.

Just as the brewmaster proclaims that Red Tick Beer “needs more dog“, I say that we need ever more data on building performance. We need building scientists, architects, builders, and engineers to better understand things like whole building design and sustainable construction (and waste) methods. In multifamily, we must understand not only the initial efforts of sustainability, but the ongoing need to consistently review the physical plant, operate sensibly, and dispose correctly.

Most importantly, however, we will need the financial world to come around. That means more information on operating expenses, projections for increased costs and an understanding that building sustainably means building differently. If underwriters and credit officers do not make the effort to understand how the regulation, construction, and operation of buildings have changed, then we cannot move forward with needed haste.

I’ll have more on the best bets to move forward in the next posts.

Eligibility for the NSP program is limited to CDBG recipients and 1st round funding must be disbursed within 18 months of April 2009. It’s not clear when 2nd round money must be disbursed by recipients. Given the very tight cycle of rule writing, allocation, and disbursement, this lengthy research document is both well done and a welcome discussion piece.

[Note: HUD has lots of resources including a 1.5hr kickoff video.]

Enterprise’s report reviews the proposed uses of 87 of the 306 NSP funding recipients (58% of total 1st round funding) and identified 7 “promising approaches”:

1. Acquisition and discount strategies
2. Disposition strategies
3. Geographic targeting
4. Green building and rehabilitation strategies
5. Income targeting and long-term affordability
6. Leveraging NSP funds
7. Partnerships and management

Cherry picked areas of interest:

Acquisition strategies reflect the diversity of local experiences and the dispersed nature of the foreclosed properties, and include both individual property purchases and bulk asset purchases. The likelihood of one strategy or another depends not only on the pattern of foreclosure but also on the preference of the funding recipient to focus on specific neighborhoods or to make select investments in relatively stable neighborhoods to prevent further deterioration. Funds from NSP can be used for acquisition and rehab, but not for operating expenses or maintenance. This limitation highlights the need to either dispose of these assets upon rehab completion or to use secondary financing (or rental proceeds) to meet ongoing financial obligations.

Disposition seems to reflect a traditional bias in favor of ownership, and provide for homeownership counseling and DPA. I’ll note my objection to DPA, but the full case is amply made at Calculated Risk. In short, DPA increases costs to borrowers (someone has to recover the DPA), and psychologically reduces the ‘at risk’ component of home equity. What looks more promising is a loan guarantee or reserve use, such as that pursued by Chicago and Atlanta. This allows NSP recipients to maximize the utility of their funding because they can provide a guarantee of a portion of the purchase price rather than devote the full amount to the purchase. There are some lease-purchase and rental programs that do acknowledge the likelihood of depressed pricing or inability of some people to afford the obligations of ownership.

Top 100 Foreclosure Markets by MSA, 2008

Geographic targeting is a mixed bag. Enterprise notes that the funds must be disbursed within 18 months, which is far faster than the HUD’s HOZ program, which has shown the importance of extended funding horizons. Furthermore, geographic targeting could be politically difficult if results are not quickly seen or if funding is concentrated in a limited number of areas. Nevertheless, a variety of data sources, including HUD census tract data, postal service vacant address records, and locally generated data have helped reduce the amount of study required for geographic targeting.

A variety of sustainable building strategies are identified. Reducing ongoing costs are essential for stabilizing these properties in the short and long term. Any efforts to meet third party criteria are welcomed.

I think the income targeting components are the most questionable and will be the hardest to implement. I would recommend additional (or substitute) qualifications that aid qualified government workers (teachers, emergency workers, e.g.), supportive housing/co-housing (which can call upon additional public and private funding), or use of an existing mechanism to identify potential renters or owners. The 18 month deadline just makes it too tight to invent a new process.

Leverage of NSP funds should produce the greatest amount of benefit and allow lenders to recoup some of their tarnished reputations. Again, the short time period in which to identify spending or property purchases will limit the spread of this technique, I believe that multiplying NSP funds through leverage is the best way to provide the greatest good. Through the use of credit enhancements, revolving loans, loss reserves, or additional HOME or CDBG funding, leverage will allow NSP recipients to achieve more for their efforts.

I’ll have to better understand the legislation and the guidance, but proper use of leverage could also support the creation of ongoing community oriented enterprises such as non-profit ESCOs or state-backed enterprises.

Crafted and implemented within a short period, the NSP represents a substantial source of funding and innovation for communities with foreclosure risks. The Enterprise report provides an excellent summation of the legislation and a welcome starting point for implementation.

[Update: Here’s HUD’s FAQ on expenditure timelines:
TIMELINESS OF USE & EXPENDITURE OF NSP FUNDS

How long do States and local communities have to spend this money?

Grantees have 18 months to obligate these funds, and four years to expend funds. Congress was very clear that this money be put to work quickly. In some areas, this level of federal funding will be unprecedented. Thus, HUD expects that grantees will have contracts signed or, at minimum, made written offers for properties within 18 months. Options or other non-binding instruments are not acceptable.

Congress was very clear that there is an urgency to deal with a national housing crisis.

How does HUD determine when NSP funds have been obligated?

As stated in the NSP Federal Register Notice page 58332, “Funds are obligated for an activity when orders are placed, contracts are awarded, services are received, and similar transactions have occurred that require payment by the state, unit of general local government, or subrecipient during the same or a future period.”

What will happen if grantees don’t obligate their funding within 18 months?

HUD will recapture the funds.

As a longtime “Simpsons” watcher, I can find something from their 20+ years to apply in nearly every situation. In Trash of the Titans, Homer runs for Sanitation Commissioner by promising personalized trash handling, including in-house ‘cram downs’ by sanitation personnel. As you would expect, the whole enterprise ends in disaster with the town moving several miles away by the end of the episode.

But the lament that started Homer’s quest, “Can’t Someone Else Do It?” naturally contains a bit of truth.

[Note: Let's not pretend this is an original thought. Both "The Tao of Pooh" and "The Gospel According to Peanuts" applied children's characters or cartoons to weighty philosophical matters.]

Since the layoff I’ve been working on several ventures, consulting on others, and generally trying to promote sustainability in affordable housing. Many of these ideas include making use of stimulus funds for weatherization, community-based ESCOs, or enforcement of green building laws.

These conversations with people in DC and around the country have shown me that much of the work is repetitive. Everyone is so eager to solve foreclosures, propose stimulus funding, require sustainable building codes, that the work is inherently duplicative. As an antidote, I’ve pushed the belief that someone else can do this. Someone else can (or has) created a weatherization program, a foreclosure response protocol, or a useful residential green building code.

Thinking indirectly, there are already ways to verify or enforce programs. for weatherization, affordable housing, and green building by working with state and local housing agencies, utility companies, and tax assessors. Want to make sure that weatherization or modernization funds were spent correctly? Make it part of the annual filing to the state housing agency. Concerned about the energy efficiency of a new building (regardless of LEED status)? Use remote meter reading or create a review template as part of the annual assessment process.

Can’t someone else do it? Yes they can.

The product of over 18 months’ work, and developed using ANSI-standards, the heavy lifting was done by (among others) Dan Winters at Evolution Partners, Mario Silvestri at Wachovia, and Steve Hoffman of Hoffman & Associates. Their work was backed by a blue ribbon collection of banks (if there is such a thing), NGOs, institutional investors, and governments. The project’s goal was to provide a financial context for various green and sustainable building initiatives. Designed to recognize increasing utility costs, tenant preference, and potential regulatory pitfalls, the Capital Markets Partnership “Green Score” should be used as an overlay within the existing underwriting framework.

More information is available in the actual standards and via Dan’s summary of the project, which appears in the 3Q 2008 Korpacz Real Estate Investor Report.

With college football taking a brief hiatus, I’ll try and read up on the standards and provide some additional feedback.

Regular readers may recall that this site discussed weatherstripping just a few weeks ago as part of an ongoing discussion of complexity-free solutions.

The current incentive structure, while it has the added benefit of promoting R&D and other desirable benefits, typically sells short more reliable and well-known solutions that could be installed by soon to be displaced skilled but non-professional tradespeople. Single family home energy audits cost several hundred dollars ($400-700 seems to be the going rate in the DC area) but per unit costs would be significantly less and could actually be performed by on-site service teams. So long as there is a difference between interior and exterior temperatures, using an infra-red imager will allow you to see cold spots and intrusions without a blower door. I can do it and I’m about the most unskilled person allowed on sites.

My firm has investments in about 230,000 units nationwide in a little over 2,100 apartment communities. Because most of our projects participate in the LIHTC program, we are subject to the QAP process, in which states mandate certain minimums to receive tax credits for affordable housing. If these requirements (occasionally incentives) could be included in market-rate housing, the impact would be both immediate and widespread. To put that 230,000 unit number into perspective, there are 5 states with fewer than 260,000 households (2000 Census).

The way to improve efficiency is to educate owners and lenders, and use effective policy tools to promote the best comprise of timing, cost, and achievement. Eventually, home inspections will automatically include an energy audit. It is up to policy makers and lenders to speed that date.

Without providing a timeframe, GEC says simply ‘soon’. Given the hellacious market conditions, most GPs or LPs are probably just trying to keep above water (or no more than 3″ below the surface). Certainly I’ve become much more skeptical of GP claims about pending payments and improved performance. Until we finish triaging portfolios, I’m not sure we will see an increase in portfolio reporting requirements. Once that process is complete, probably by 2Q 2009, we’ll need to start working on financial stabilization or exit strategies for properties. At that point, I think there is a tremendous role for sustainable analysis to play.

In that vein, here are a couple of articles inspired by recent postings at Globest.com. Globe Street is terrible about their paywall, so I’ll link directly to the source material where possible. CalPERs announced on November 30th that its real estate partners reduced energy consumption in 2007 by 13%, partway toward their goal of a 20% reduction in energy use by 2009. The primary vehicle is the Hines Green Development fund, which currently has $725mm for promotion of sustainable real estate holdings. The methods identified by CalPERs are standard steps any responsible owner should be taking such as low-flow and sensor-operated fixtures, recycling programs, and preemptive, onsite water treatment.

The more important (and actually reported) article discusses a new CA law mandating utilities to maintain an Energy Star Portfolio Management Database for all non-residential properties in CA. Contained in Assembly Bill 1103:
1) Requires electric utilities, beginning January 1, 2009 and upon the written request of the owner or operator of a nonresidential building, to provide the owner or operator monthly energy consumption data for the building in a format that is compatible for uploading to the US Environmental Protection Agency’s (EPA) Energy Star Portfolio Manager.
2) Requires electric utilities, beginning January 1, 2009 and upon the written authorization of a nonresidential building owner or operator, to upload monthly energy consumption data for the building to ESPM.
3) Requires an owner or operator of a nonresidential building, on and after January 1, 2010, to disclose to a prospective buyer, lessee, or lender the ESPM benchmarking data and scores for the building.

Writes Globest’s Brian K. Miller:

One year from January, anyone looking to buy, finance or lease an entire building will be entitled to obtain the building’s Energy Star Portfolio Manager benchmarking data and ratings. The Energy Star program rates buildings on a scale from 1 to 100 against other buildings within its class. Buildings within the top quartile will be eligible to be recognized as an EPA Energy Star Building and can use the “Energy Star Label” to communicate its energy efficiency to tenants, lenders, and other stakeholders.

Obviously buyers and owners do this kind of comparison already, but with the addition of the Energy Star scoring, all parties will be in a position to both analyze and act upon energy efficiency opportunities rather than passively accept the consumption rates.

My East Coast bias won’t allow me to say that most initiatives begin in California, but by sheer market size, these requirements or requests for information are likely to start moving east in the next 18-36 months.

Equity and debt availability (or its perception thereof) was at the lowest confidence in over 10 years. Unable to read this in table form, I threw together this quick graph for further analysis. Looking at the history of the survey (50 is neutral) sentiment for debt and market tightness moved inversely until October 2006 when everything fell of a cliff.

The survey measures investor sentiment so it imperfectly reflects debt and equity availability. The Q2 MBA survey of commercial and multifamily originations has more quantifiable data. In that survey, commercial and multifamily originations were down 63% over Q2 2007 and fell to their lowest level since Q1 2004.

Quarterly reports from Q3 2004 onward.

Echoing this falloff was an item I saw in MBA Newslink on October 30th providing this summary of an RBC report:

“Fannie Mae and Freddie Mac continue to finance 80 percent to 90 percent of multifamily transactions across different regions of the country, supplemented mostly by local and regional banks, RBC reported.”

I’ll guess that any non-conforming deals simply cannot be done at any reasonable LTV these days. I’m still looking or the RBC report but please send it along if you have a link.

HT: Multifamily Executive

Enterprise describes one of the problems thusly: “In many areas, the utility allowance estimates for tax credit developments are based on older properties with much higher energy costs due to less efficient design and construction than is possible and increasingly common today. This results in higher than necessary utility allowances for many tax credit properties and reduces the incentive for developers to incorporate energy- and water-efficient features into their developments. Owners generally are not able to use alternative sources or methodologies.”

In bullet point form, Enterprise recommends:
• Building capacity to implement low-cost improvements
• Expanding and leveraging funding for weatherization
• Ensuring climate change legislation supports low-income home energy efficiency
• Funding the Energy Efficiency Block Grant and prioritizing very low-income homes
• Investing in green jobs and prioritizing homebuilding and rehabilitation
• Strengthening HUD’s commitment to energy efficiency
• Greening the revitalization of distressed public housing communities
• Improving and expanding federal tax credits for residential energy efficiency and solar power
• Incentivizing major financial institutions to finance energy efficient very low-income homes
• Supporting research and driving innovation