This is the second of a two part discussion of FHA’s decision to lower the market rate Mortgage Insurance Premium (MIP) for energy efficient new and existing properties. The standard in both cases is for the property seeking a new FHA multifamily loan to score in the top 25% of energy efficiency.
The first post discusses why you should seek the top 25% if you are obtaining an FHA loan. This post emphasizes how to obtain that goal.
Here is the operative language:
“For energy-efficient properties (those committed to industry-recognized green building standards, AND committed to energy performance in the top 25 percent of multifamily buildings nationwide), FHA is lowering annual rates to 25 basis points, a reduction of 20 to 45 basis points. Qualification for the top 25% will be determined using EPA’s Portfolio Manager 1-100 score.”
For most market rate new construction, the savings will be 40 basis points. For some existing properties with a 45 bp MIP, the savings will be 20 basis points. Either way, this is something that should be done.
How do you get there?
Figuring your present standing differs for existing and new construction/sub rehab properties.
Existing properties: The determination for an existing property revolves around the Statement of Energy Performance (SEP). If you have a pending 223(f) transaction and if your SEP is equal to or greater than 75, then you qualify for the reduced MIP. But if the score is less than 75 there are other ways to qualify for the reduction. At this point (if not before) you should hire an energy auditor to model how to reach the coveted score. For example, say you are at a 63 right now. An energy auditor might suggest higher SEER HVAC. This might get you 12 points. Perhaps new windows might raise the score by 8 points. At this level, you should reach 83, but at what cost per unit? The auditor should be able to estimate how much the costs will be. Say it is $2,000 per unit.
Well, in most instances, that $2,000 could arguably increase the net income by $25 per month, either in energy savings or in rent increases. Capitalizing that additional $300 per unit on say, an 8% cap, should increase the value of the unit by nearly $4,000, making the $2,000 easily absorbed in the loan. I doubt FHA will challenge such logic.
New Construction/Sub Rehabilitation: The determination for a new or to be rehabbed property revolves around the Statement of Energy Design Intent (SEDI). This process involves the energy auditor modeling based upon many factors including your plans and specifications.
The SEDI covers 6 areas: Property and Contact Information; Estimated Use Details; Results Table (which includes the ENERGY STAR Score); the Application checklist and the Profession Verification Area, where an Architect or Professional Engineer verifies the data when seeking Designed to Earn the ENERGY STAR recognition
Once again, the used of certified professionals to obtain the designation is critical, and indeed, required.
If the property qualifies as presented, then great. If not, perhaps upgrades are in order-more insulation, better windows, Energy Star appliances. The good thing is that the loan will likely absorb all of the items necessary to bring your property to the top 25%.
Being in the top 25% will be an increasingly important characteristic for market rate properties going forward.
The loan will be submitted with the certification that the plans will result in a top 25% finding, allowing the lender to submit at the lower MIP. The important work is the periodic (if needed) inspections during construction and the all-important final inspection and certification at permanent loan closing. Delivering what was promised and having an energy professional who has access to the property during construction so as to represent the qualifying of the property is critical for the lower MIP.
FHA is talking in terms of setting requirements for maintaining the top quartile going forward. This remains to be seen as to how this will be implemented. At some point, the top 25% will get crowded.
All told, this is a wonderful way to lower the MIP, which has needed to be lowered for years. Everyone wins with this approach. As an owner, you really need to make this happen for your property.
I am thinking the costs of the modeling will be around $10,000, with the certifications running between $30,000-$40,000. In most cases there will be room in the loan to cover these costs. Over time, as the market gets more competitive, these prices will likely come down.
The costs of reaching the top 25% will vary by projects. Some believe older properties will likely require a retrofit, changing the loan to a 221(d)(4) Sub Rehab. Newer properties that were designed to the 2012 International Energy Conservation Code (IECC), might already qualify for a top quartile score.
Finally, while there are many great companies who do engineering work for FHA properties, you need to get one that is licensed to do this work. If they are qualified as Lender Construction Analysts, BPI-MFBA, RESNET-HERS, CEA, and CEM, those are the designations you want doing your work on this MIP reduction.
Let us know if we can help.