Planning for HUD’s Green MIP
HUD’s new MAP Guide went into effect March 2021. The MAP Guide outlines the underwriting rules for the HUD/FHA multifamily programs, so new editions are always a big even to us in the HUD world. This new edition, which replaced the 2016 edition, had few changes from a Borrower’s perspective – except for the Green MIP rules. Overall, the Green MIP program (which drops the initial and annual MIPs to 0.25% for all mortgage types) became much more burdensome. Whereas before, in order to qualify for the Green MIP, projects only needed to obtain a score of 75 on the ENERGY STAR® for Existing Buildings Certification – now, projects must not only pass the ENERGY STAR® for Existing Buildings Certification but also be certified under one of a variety of green programs (e.g. LEED, National Green Building Standard, etc.) This means that if a project does not have one of these green program certifications already – the Green MIP program is largely out of reach unless the Borrower completes repairs that would allow for it to obtain one of those green program certifications, which is often costlier than the benefit of the Green MIP.
That said, for projects being designed now, proper planning can help ensure that the project will easily obtain the new Green MIP once the project is in lease up and can start the 223(f) refinance process. (As a part of the recently enacted “3-Year Rule” – projects can now take on a 223(f) refinance mortgage while in last stages of lease up). Our team at Colliers Mortgage is currently advising many developers on how to build their new project with the Green MIP being a future goal and share our expert knowledge on the requirements and key factors below.
When designing the project, ensure that the architect and/or energy consultant know that the project must obtain certification from one of the programs listed below:
Enterprise Green Communities Criteria; LEED-Home, LEED Home Midrise and LEED-New Construction; ENERGY STAR® New Construction Single Family (covers 1 and 2 family structures and townhouses); ENERGY STAR® New Construction Multifamily; ENERGY STAR® Multifamily Hi-Rise; EarthCraft House and EarthCraft Multifamily; Earth Advantage New Homes; Greenpoint Rated New Home; National Green Building Standard; Passive Building Certification from Passive House Institute US or International Passive Housing Association; and Living Building Challenge from the International Living Future Institute.
Though this would almost certainly be a part of the green program you choose, HUD also requires the following of the project:
…applications for green MIP rates must specify installation of ENERGY STAR® appliances and central air conditioning systems (if applicable). Other electrical and mechanical equipment (motors, fans, pumps, etc.) should be high performing, energy efficient products. For water-consuming appliances and components, EPA WaterSense labeled products must be specified.
Once the project is built according to the requirements listed above and Colliers starts the 223(f) refinance underwriting, Colliers will need a HUD Custom Statement of Energy Design Intent (SEDI). This SEDI would generally be developed by the firm that Colliers hires to perform the Property Capital Needs Assessment (PCNA). The SEDI is based on as-built drawings and specifications and any energy consumption data received so far during lease up. This SEDI is establishing an estimated ENERGY STAR® for Existing Buildings Certification score that would be normally required for a fully leased project where 12 months of energy consumption data could be provided. This estimated ENERGY STAR® for Existing Buildings Certification must be at least 75.
After HUD awards the Green MIP, developers should know that after the loan closes, the HUD mortgage would be forced into additional regulatory requirements: After HUD awards the Green MIP, developers should know that after the loan closes, the HUD mortgage would be forced into additional regulatory requirements:
All Borrowers with loans endorsed at green MIP rates and secured by properties of 20 or more units must annually demonstrate continuing performance by delivering to HUD an ENERGY STAR® Statement of Energy Performance (SEP) showing an ENERGY STAR® Score of not less than 75. (See Section 6.4.5 on planning for future data collection for purposes of demonstrating continuing performance.) It is the property owner’s obligation to maintain, repair, and replace components as necessary to retain this minimum performance score for the life of the insured mortgage.
Know that PCNA provider develops this “data collection plan” for the Borrower, however, it should be noted that this will require that the Borrower is able to gather all energy consumption data for all of the units on a monthly basis. So we recommend figuring out how to accomplish this now before finalizing how the project is metered and/or starting to write your lease’s language. Many existing projects run into a roadblock because the utility companies will not release this data to the owner due to the utility company believing the data is private to the tenant. According to HUD, the best solutions are to “obtain 100% whole building data (both owner and tenant paid) from the utility providers or to install energy consumption monitoring technology that collects monthly data from all meters on the property.” Another solution, albeit sloppier, is to write language into the leases that allows the Owner to gather the data. We don’t recommend that Owners should rely completely on this, however, since it can still cause delays in proving that language with the utility provider.
Further, this data collection plan also determines how the Borrower would create and deliver the ENERGY STAR SEP every year. This is an annual cost (a few thousand dollars), but is pretty straight forward if the Owner has received all the energy data. Generally, owners just hire the PCNA company to create this SEP annually.
All that said, there is a grace period (ending in December 2022) where Borrowers do not need obtain one of the green program certifications (Enterprise Green Communities Criteria; LEED-Home, etc.) listed at the first part of this email. If one decides to go this route, there are caveats:
…the ENERGY STAR® for Existing Buildings Certification will qualify for green MIP…within two years after publication of this MAP Guide provided the application is consistent with the general provisions of Section 6.4 as well as the following additional conditions:
The Certificate of Occupancy must be issued within three years of the date of mortgage application.
Properties that have achieved at least 12 months of occupancy meeting the minimum occupancy for the ENERGY STAR® for Existing Buildings Certification must deliver the Certification with the application for firm commitment.
If a property lacks the 12 consecutive months of minimum occupancy, a Statement of Energy Design Intent (SEDI) based on the as-built drawings and specifications of the property and signed by the Project Architect may qualify provided that the owner commits to deliver the ENERGY STAR® for Existing Building Certification within three months after the 12 consecutive months at or above the minimum occupancy is achieved. Repairs or alterations are not permitted as a means of achieving a prospective Certification.
The minimum ENERGY STAR® Score required for use of the ENERGY STAR® for Existing Building Certification is 90.
Baseline data will be recorded by attaching the HUD Custom SEP, or SEDI as applicable, to the Capital Needs Assessment prepared for the property.
