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How are some apartment firms approaching ESG?

With a greater focus on investments that meet Environmental Social Governance (ESG) standards, it is becoming easier to secure financing to buy or build apartment buildings if rents in apartments are relatively affordable or if the buildings are designed to be environmentally sound. Has gone .

“You get more capital sources interested in growth than you get from ESG,” says Rob Hinkley, senior managing director at the New York office of JLL Capital Markets, Americas.

This is because many capital sources have made bold promises to their stakeholders to make investments that not only deliver a reliable return on investment but also meet high ESG standards. This includes large institutional investors such as state pension funds, which are often responsible for their pension holders. Publicly held companies such as commercial banks are often eager to show stock investors that they have made investments that meet their own ESG standards.

Kelly Carhartt, Head of Multifamily Debt Production for CBRE, says, “We all believe that achieving and adhering to ESG standards will bring greater attention and more benefits and incentives by the entire industry.”

Equity partners come forward for ESG development

These ESG norms can now help developers to attract equity partners for their projects to build new apartments.

For example, JLL is now helping a developer gather financing to build a new apartment tower in Downtown Brooklyn. New apartments must sustainably design and benchmark their utility use in order to comply with all New York City regulations. Those green features help the project attract a joint venture partner who now plans to contribute enough equity to the project to cover 20 percent of its development costs. Partners is an insurance fund that supports investments that meet its new standards.

The specific conditions that capital providers offer for assets that meet their ESG requirements can vary widely.

“ESG has yet to be standardized, particularly in the “social” and “governance” categories,” Carhartt says. “The measurement of ESG within industry is a bit more subjective in its evolving nature.”

Workforce housing gets better deals for permanent loans

Apartment buildings on permanent loans from some lenders may get lower interest rates if they meet ESG standards. This is especially true for properties that qualify as “workforce housing.”

Freddie Mac and Fannie Mae lenders offer permanent loans for these workforce housing properties with low interest rates—often dozens of basis points lower than their normal fixed interest rates. Other lenders are also keen on taking out permanent loans that will help them fulfill their promises of being more socially responsible. But these lenders often do not offer better interest rates for these loans… still.

Carhartt of CBRE says, “While life companies are tracking ESG and trying to find ways to measure it in their portfolios, there is no value differential for loans with ESG criteria.

Officials from the Federal Housing Finance Agency (FHFA), which oversees Freddie Mac and Fannie Mae, now demand that at least half of the loans for apartment properties purchased by Freddie Mac and Fannie Mae in 2022 be for those properties. Those with rents that will be affordable to medium- and low-income households.

Apartment communities can get even lower interest rates from agency lenders if their rents are high enough to earn government subsidies such as the federal low-income housing tax credit.

Maria Barry, Bank of America’s national executive of community development banking, says, “The current focus on ESG and social impact investing has generated significant interest from the private sector in looking at creative ways to help create and preserve affordable and workforce housing. “

Freddie Mac and Fannie Mae should ensure that at least a quarter of the apartment loans they buy in 2022 will be for affordable rentable properties for families earning up to 60% of the sector average income.

Freddie Mac and Fannie Mae also continue to offer premium interest rates for apartment properties that use fewer utilities such as electricity and water.

“The ‘environment’ of ESG requirements has been encouraged by agencies through their green programs over the years,” says CBRE’s Carhartt.

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