Fact Sheet: Green Mortgages Are Good Mortgages

Research from Lawrence Berkeley National Lab and Berkeley’s Haas School of Business demonstrates that the more energy used per square foot in a commercial building, the higher the likelihood of mortgage default. Given this increase in default risk for high energy-consuming buildings, researchers say, lenders should finance energy efficiency measures along with other building improvements during renovation or rehabilitation, and these green mortgages should be preferentially priced. But multifamily mortgage lenders have been slow to pursue increased energy efficiency in buildings as a risk management approach.

One of the first questions that multifamily housing mortgage lenders interested in financing efficiency measures ask is: How do I know that those new efficiency measures will perform as expected? If the savings do not materialize, will the borrower be able to repay the mortgage, especially if I underwrite the loan based on projected savings from efficiency?

Of course, lenders should follow best practices to ensure that efficiency improvements are installed and maintained well, just like any other type of capital improvement work. But just like other capital improvements, the details of how a particular piece of technology performs is not the primary interest of the lender. Aside from mission-related goals, lenders are primarily concerned with being repaid in full and on time. A lot of things can delay repayments on a loan: personal issues with the property owner, sub par general operations and high vacancy due to poor maintenance, among many other things.

So we asked lenders with a track record of green mortgage lending: In your experience, does including efficiency measures in the scope of capital improvements covered by a mortgage make it more likely that payments on the loan will be delayed or that the loan will go into default? Does underwriting to projected savings from efficiency increase those chances?