Green MIP Reduction Program: HUD’s Multifamily Game-Changer
Before being approved for a U. S. Department of Housing and Urban Development (HUD) multifamily loan, such as the HUD 223(f) loan, a borrower must have mortgage insurance (which protects a mortgage lender if the borrower defaults on payments).
HUD multifamily loans are backed by mortgage insurance from the U.S. Federal Housing Administration (FHA). For any FHA-insured loan, HUD requires a borrower to pay a mortgage insurance premium (MIP). For HUD 223(f) borrowers, the MIP is paid as follows:
One-time MIP: 1% of the total loan amount is paid at closing. This constitutes the first year’s MIP.
Annual MIP: After the first year of the loan, the annual MIP is 0.60% of the loan amount.
Although the cost of MIP can be quite significant, certain types of multifamily loans can qualify for a discounted 0.25% annual mortgage insurance premium as long as the property demonstrates sufficient energy performance and achieves an acceptable outcome through an approved green building standard or certification.
HUD Green MIP Reduction Program
Published in the Federal Register (81 FR 18473) on January 28, 2016, HUD instituted an MIP rate reduction for green housing. Through this voluntary “Green MIP Reduction” program, annual MIPs will be reduced (from current rates generally between 45 and 70 basis points) to 25 basis points (or 0.25%) for all multifamily FHA-insured loan types on project that commit to two goals:
1. Meet certification through an approved green building standard/rating system.
2. Achieve and maintain an ENERGY STAR score of 75 or higher. This score shall be initially assessed through a Statement of Energy Design Intent (SEDI), developed by a Qualified Energy Professional.
Reporting performance data can be a challenge
One major caveat for the Green MIP Reduction to stay in place is the ongoing energy performance requirement. Utilizing this measured data, of which gathering can often come with financial and legal challenges, a Verifying Professional may produce a statement of energy performance (SEP). No more than 15 months after completion, the SEP shall be produced and delivered to HUD. A new SEP will need to be produced and submitted every year thereafter. A Verifying Professional should sign and stamp the SEP to verify its validity. Owners should seek clarity from HUD regarding the latest reporting requirements as this appears to be a fluid and uncertain aspect of the Green MIP Reduction program.
SEDI vs SEP
SEDI: Statement of Energy Design Intent
The Statement of Energy Design Intent (SEDI) is a multiple page summary in PDF format of the design energy inputs and results metrics generated from either Portfolio Manager or Target Finder. The SEDI also includes signature blocks for the professional verifier, architect of record (AOR) and building owner/developer of the property. (Source: ENERGY STAR)
SEP: Statement of Energy Performance
The Statement of Energy Performance (SEP) is a one-page report summarizing the energy consumption for a property. A Verifying Professional can sign and stamp it to verify the validity of the data, if needed. (Source: ENERGY STAR)
The idea behind Green MIP Reduction is simple
A housing provider may use the savings generated to cover costs associated with achieving the two “green” goals. Through the program, HUD is incentivizing developers to spend a premium for certified high-performance green building by providing a financial incentive to make the investment financially advantageous. In markets with a tepid demand for green multifamily housing options, the Green MIP Reduction program has the potential of cultivating sustainable, high-performance development where it might otherwise not make financial sense to developers.
A critical incentive
The Green MIP Reduction program is a critically important tool to advance high-performance, certified green building work in a market sector that has less financial incentive to pursue strategies that have an economic return beyond the first couple of years. Policies like this can leverage the natural mechanisms of the open market to promote green building in sectors where it may otherwise languish. However, there are some very real challenges with collecting and reporting tenant utility data that still need to be resolved.
To learn more about the Green MIP Reduction program, please reach out to us at browningday.com/contact