commercial mortgages: an underutilized channel …...commercial mortgages: an underutilized channel...
TRANSCRIPT
Commercial mortgages: An underutilized channel for scaling energy efficiency investments? Paul Mathew Lawrence Berkeley National Laboratory Nancy Wallace University of California Berkeley Elena Alschuler U.S. Department of Energy Leonard Kolstad Institute for Market Transformation Presenter: Jeff Deason, Lawrence Berkeley National Laboratory ACEEE Summer Study on Buildings, 2016
Outline
• Premise and context: why commercial mortgages?
• Current practice
• Impacts of energy factors
• Potential interventions
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Premise and Context: Why Commercial Mortgages?
3
Wide array of EE financing instruments
Green Bonds Energy Performance Contracts Capital Leases On-bill Financing
Revolving funds
…. 4
What about commercial mortgages?
• Commercial mortgages currently do not fully account for energy factors in underwriting and valuation…
• …energy efficiency is not properly valued and energy risks are not properly assessed and mitigated.
• Commercial mortgages are a large lever and could be a significant channel for scaling energy efficiency.
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$ 2.5 trillion market
6
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
$ B
illio
n
Commercial Banks Insurance Companies CMBS Other
Key CMBS sectors: Office, Retail, Hotel, Multi-family
7
Current Practices
8
Current Practice
9
Evalua&onofUnderwri&ng
Criteria:LTV,DSCR,OE
Ra&o,etc
Appraisal:Verifica&onof
Price
Borrowerinput:ProFormatoestablishnet
opera&ngincomeandbuildingprice.
PropertyCondi&onAssessment(PCA)forReserves
FundingDecision
CurrentUnderwri,ngSequence
Appraiser LoanUnderwri/ng
EngineeringFirm
CreditCommi6ee
Energy Factors in Current Practice
• Appraisal typically includes little/no information on energy efficiency of assets – Although there are current efforts to address this
• Energy costs may not be properly represented in NOI – Usually based on historical data, if available – Does not account for energy consumption and price volatility
during mortgage term
• PCAs do not normally include information on energy efficiency
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Green features and property value: DOE ‘meta analysis’ of > 50 studies
Higher rental rates LEED: 15-17%
ENERGY STAR: 7-9%
Higher occupancy rates LEED: 16-18%
ENERGY STAR: 10-11%
Increased sales price LEED: 10-31%
ENERGY STAR: 6-10%
Lower utility costs ENERGY STAR: 13%
http://www.imt.org/finance-and-real-estate/green-building-and-value
Impact of Energy Factors on NOI and Valuation
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Energy factors that directly affect NOI
• Energy use volume – Electricity kWh/kW, fuel therms – Driven building features, operations, weather
• Energy use volatility (+/- %) – Driven by operations, weather
• Energy price – $/kWh, $/kW, $/therm
• Energy price volatility – e.g. forward curves
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Year-to-year weather impacts
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-12.00%
-8.00%
-4.00%
0.00%
4.00%
8.00%
12.00%
annu
alsiteene
rgycompa
rison
toTMYda
ta
Weatherimpactonsiteenergy
Largeoffice Mediumoffice Smalloffice
San Francisco, CA (Warm-marine)
Atlanta, GA (Warm-humid)
Chicago, IL (Cool-humid)
Baltimore, MD (Mixed-humid)
A host of operational factors
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Occupant behavior Lighting controls Window operation Thermostat setpoints/setback Local heating/cooling equipment Plug in equipment
Facilities management Economizer settings VAV box minimum flow setting Supply air temperature reset Static pressure reset Chilled water/Hot water supply
temperature reset Condenser water temperature
reset Chiller /boiler sequencing …
Maintenance Damper/ valve check Filter change Coil cleaning …
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-25%
0%
25%
50%
75%
100% s
ite e
nerg
y %
cha
nge
from
avg
pra
ctic
e San Francisco
-25%
0%
25%
50%
75%
100%
HVAC
com
bined
(L)
All c
ombin
ed (L
)
HVAC
com
bined
(M)
All c
ombin
ed (M
)
All c
ombin
ed (S
) site
ene
rgy
% c
hang
e fr
om a
vg p
ract
ice
Baltimore
PoorPrac'ce GoodPrac'ce
Energy price risk and valuation
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Wholesale (Energy-Hub) Pricing Augmented Valuation Model
Traditional Commercial Mortgage Valuation Model (CMVM)
MarketFundamentals
OptionPayouts
CashFlows
MortgagePrices
Interest RatesBuilding Prices
Vol. RatesVol. Build-
ing Price
Default andPrepayment
ProjectedCash Flow
ExpectedValue
• 5% reduction in mortgage value in due to energy price risk. • Higher initial loan-to-value and larger loans are more mispriced. • Greater mispricing in hot-humid climates or hot-humid-cold climates. • Reducing energy use increased mortgage value
MarketFundamentals
OptionPayouts
CashFlows
MortgagePrices
Drift Dynamics:
Interest Rates,
Rent, Elect.
Forwards, Nat.
Gas Futures.
Vol. Dynamics:
Interest Rates,
Rent, Elect.
Forwards, Nat.
Gas Futures.
Default andPrepayment
ProjectedCash Flow
ExpectedValue
Source: Jaffee, et al. Energy Efficiency and Commercial-Mortgage Valuation, Fisher Center for Real Estate, UC Berkeley
Potential Interventions: Results from a Scoping Study
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Challenges and opportunities…1
● Energy efficiency is generally not a motivating factor for lenders.
● Very limited awareness and analysis of energy cost impacts in underwriting.
● Underwriting is not standardized across the industry.
● The Property Condition Assessment (PCA) generally does not include information on energy efficiency.
● Most appraisals do not consider existing or planned energy efficiency features in property valuation.
Challenges and opportunities…2
● Many owners have not been able to see impact of energy factors on building value in their own portfolios.
● Context matters: all real estate is local. The impact of energy factors on valuation varies significantly by location, building type, quality, and market conditions.
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Potential interventions and outcomes
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Rentalincome
Vacancyrates
U1litycostvola1lity
U1litycosts
Energy/“Green”ImpactsonMortgageValua8on
Appraisals
Underwri1ngmethods&requirements
PropertyCondi1on
Assessments
Poten8alInterven8onPoints
PropertyValua1on
Interestrates
DebtServiceCoveragelimit
Loan-to-Valuelimit
Poten8alOutcomes
Efforts currently underway
1. Demonstrate to lenders why, where, and how much energy factors “move the needle” - Initial results in September 2016
2. Incorporate energy efficiency information in Property Condition Assessments (PCAs)
3. Incorporate energy efficiency routinely in appraisals - DOE working group – see poster session
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Acknowledgements
Holly Carr (U.S. DOE)
Cindy Zhu (U.S. DOE)
Philip Coleman (LBNL)
Paulo Issler (UCB)
Bob Sahadi (IMT)
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