|Title||Energy Factors in Commercial Mortgages: Gaps and Opportunities|
|Year of Publication||2016|
|Authors||Paul A Mathew, Philip Coleman, Nancy Wallace, Paulo Issler, Lenny Kolstad, Robert Sahadi|
The commercial real estate mortgage market is enormous, with almost half a trillion dollars in deals originated in 2015. Relative to other energy efficiency financing mechanisms, very little attention has been paid to the potential of commercial mortgages as a channel for promoting energy efficiency investments. The valuation and underwriting elements of the business are largely driven by the “net operating income” (NOI) metric – essentially, rents minus expenses. While NOI ostensibly includes all expenses, energy factors are in several ways given short shrift in the underwriting process. This is particularly interesting when juxtaposed upon a not insignificant body of research revealing that there are in fact tangible benefits (such as higher valuations and lower vacancy and default rates) for energy-efficient and “green” commercial buildings.
This scoping report characterizes the current status and potential interventions to promote greater inclusion of energy factors in the commercial mortgage process. It includes the results of a literature review and extensive stakeholder discussions with 40 lenders, owners, service providers, advocacy organizations and others.
We present the following key findings related to current status of energy factors in the mortgage process:
Overall, current commercial mortgage practices do not fully account for the risks and opportunities that may be associated with the energy-use of buildings. As a consequence, 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 2 scaling energy efficiency investments. We present seven potential interventions to properly account for energy factors in the commercial mortgage lending process:
These interventions are technically feasible and could have significant impacts, with benefits to lenders and owners. However, it is also true that the nature of the mortgage lending process – with multiple stakeholders, high stakes and risk aversion – does not lend itself easily to changes. Therefore, these interventions will need to be piloted carefully and modestly with highly motivated early adopters. Wider deployment will likely require aggressive education/awareness efforts and stakeholder engagement and support through relevant industry organizations.
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