For many seniors housing and care borrowers, 2022 has been the year of rising interest rates. The 10-Year Treasury, a key benchmark for tracking general market movements, has risen by 2.32 percent during the first nine months of the year. Borrowers seeking relief from higher rates may find reduced borrowing costs through the Green Mortgage Insurance Premium (MIP) initiative from the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). It was recently introduced under the Section 232 mortgage insurance program for residential care facilities.

The program, implemented on October 1, 2022, offers significantly reduced MIP rates for communities that meet certain green certifications and achieve meaningful energy and water efficiency improvements in conjunction with a loan. An earlier initiative that HUD/FHA established for its multifamily programs has been highly successful, thus its availability in the seniors housing and care sector is an exciting development for borrowers and lenders alike.    

Program Benefits

The potential benefits of qualifying for the Green MIP program include:

  • Reduced upfront MIPs from 100 basis points (bps) to 25 bps
  • Reduced ongoing MIPs from 65 bps to 25 bps (for 223(f) refinance)
  • Reduced ongoing utility expenses as a result of energy efficient updates

These changes can result in substantial reductions in upfront loan fees and ongoing borrowing and operating expenses. In considering a hypothetical transaction Section 232/223(f) loan of $12 million (the approximate average loan amount for the program historically). Although the expected average cost of obtaining additional third-party reports, including energy audit and energy star rating, would be $50,000, the borrower would benefit from the following savings:

  • Upfront savings of $90,000 from the 75 bp reduction in initial MIP
  • $48,000 in annual savings from the 40 bp reduction in annual MIP (decreases with amortization)
  • Lower operating expenses due to the energy efficiency improvements

The Qualification Process

The reduced Green MIP is available for the following 232 programs: Section 232 for new construction, Section 241(a) supplemental loans for borrowers with existing HUD/FHA debt, Section 232/223(a)(7) refinances for borrowers with existing HUD/FHA debt, and Section 232/223(f) refinances for projects new to HUD/FHA.

In order to qualify for the program, borrowers must complete the following steps:

  1. Commit to achieving a green building certification (or next-level green certification for properties that are already green certified) from one of four approved certification programs (Enterprise Green Communities, EarthCraft Multifamily, National Green Building Standard, EnerPHit Standard). These certification programs predominantly measure building improvement through renovations to qualify for the standard, unlike a LEED certification that is utilized for new construction and requires a building to be built to certain energy efficient specifications.
  2. Benchmark existing energy usage with an upfront energy audit completed by a third-party engineering firm. 
  3. Identify qualifying energy efficient repairs and improvements (more efficient appliances, plumbing fixture replacement, lighting upgrades, automatic thermostats, etc.) to be completed as part of the refinance process as non-critical repairs.
  4. Once the refinance is closed and the repairs are completed, obtain a new energy audit documenting the successful implementation of the energy saving measures. The specific measures include a reduction in total energy consumption of 15 percent or greater and reduction in water usage by 10 percent or more. It is important to note that these are aggregate consumption measures, not cost. Therefore, a 10 percent reduction in your water bill will not suffice as it must instead be based on audited usage savings.
  5. Obtain an ENERGY STAR score of 75 or higher. As opposed to the green building certification that measures improvement, the ENERGY STAR score strictly measures the actual energy efficiency of the building against a database of similar buildings. For instance, an assisted living facility would be compared to a national set of other assisted living facilities not against suburban office buildings.

Potential Program Challenges

Unfortunately, not all HUD/FHA loan applications are expected to quality for this program. Due to the need to show efficiency improvements, new facilities already built with energy efficient components may not be a good fit. Although these facilities could already achieve an ENERGY STAR rating of 75 or better, achieving the needed energy and water usage reductions could prove challenging due to the already efficient levels of output.

On the other end of the spectrum, old and inefficient facilities may easily be able to make minimal improvements to qualify for an improvement certification and achieve requisite energy savings. However, the facility may never be able to achieve an ENERGY STAR rating of 75 or better given the inherent inefficiency of the structure. Alternatively, the repairs needed to meet improved energy efficiencies could be cost prohibitive if the physical plant cannot be easily retrofitted. 

Lastly, the current approved certification programs do not include benchmarks for skilled nursing facilities (SNFs). It should be noted, however, that industry partners and HUD/FHA share the common goal of incorporating SNFs into the program so ongoing work to find solutions is expected.

Next Steps

Because the program was only recently implemented and the first applications are only now being reviewed, it is too early to understand all the nuances of the program. Additionally, considering the vast differences in physical plants across the industry, the cost-benefit analysis of implementing the program will vary. However, the potential savings for borrowers make it a program worth considering. For those interested in seeing if the program may fit their needs, discussing the project with your lender and a third-party energy audit provider would be a good first step. Hopefully, substantial savings can be achieved to help soften the sting of the rapid rise in interest rates.