August 29, 2007
On July 20, 2007, HUD rolled out its Green Initiative and is starting with Mark-to-Market properties eligible for refinancing through the Office of Affordable Housing Preservation. This nationwide pilot program is encouraging owners in that program to use Green Building principles, including HUD’s Healthy Housing approach. Green Building is an approach to sustainable development designed to result in a property that reduces its impact on the environment, costs less to operate and improves the residents’ quality of life. Green rehabilitation practices are intended to result in lower utility costs that benefit HUD and residents, as well as producing other benefits, such as lower environmental impact. The Green Initiative is voluntary. All owners currently engaged in M2M who have not yet executed a Restructuring Commitment are eligible to participate in the Initiative. On a case-by-case basis, OAHP may allow owners to participate who have already executed Restructuring Commitments.
The Initiative provides for “modest incentives” to owners and purchasers to perform rehabilitation using Green alternatives and an opportunity to collect ongoing data to validate impacts on utility consumption and indoor air quality. If an owner elects to participate in the Green Initiative, the scope of the M2M Physical Condition Assessment will include an energy audit and a review of all possible Greening opportunities.
The main financial incentive from HUD will be to treat approved Green replacements as Significant Additions, reducing the owner’s required financial contribution to the rehabilitation costs from the traditional 20 percent to as little as 3 percent of total costs. Also, upon the owner’s assurance that the property management company has a Leadership in Energy and Environmental Design accredited professional on staff, OAHP may increase the Incentive Performance Fee to support the owner’s ongoing maintenance of the Green property. Owners are also encouraged to pursue all available grants from federal, state and local sources; utility companies; and appliance manufacturers that may be available to support the funding of the greening of the property by allowing for the possibility that these funds be incorporated into the restructuring as a transaction cost up of to 10 percent of the amount of the grant (up to a maximum amount yet to be determined), payable to the owner and/or PAE for securing the available grants.
Some underwriting considerations include a requirement that the owner commit to maintain the Green property beyond the 20-year schedule of repairs and replacements at least as long as the extended term of the use agreement. The Initiative also requires the preparation of a Green Operating and Maintenance Plan that includes a resident involvement, outreach and incentive plan; an integrated pest management plan (moving away from pest control through toxic pesticides); baseline green requirements for ongoing operations; and an agreement by the owner to cooperate with all monitoring, data-gathering, reporting and evaluation activities. OAHP also has the authority to use above-market rents (exception rents) if warranted by preservation needs, if the owners make a detailed case for doing so under the Green Initiative. OAHP may trim its funding contribution, however, or disallow certain Green elements to reduce or eliminate the need for exception rents. Also, owners participating in the Green Initiative must enter into a modified Rehabilitation Escrow Deposit Agreement for properties that have repairs to be completed in the first year after M2M restructuring, which will differ from the standard rehabilitation escrow in that it allows the owner to choose a more traditional alternative if a selected Green material or product is not available.
OAHP will continue to monitor all Green M2M properties after closing. As with other M2M restructurings, OAHP’s New York office will oversee the rehabilitation escrow administrator and the work to be completed in the M2M restructuring. The REMS will contain a designation noting the Green reserve for replacements accounts.
For additional information, please contact Richard Price at 202-585-8716, rprice@ nixonpeabody.com; Tatiana Gutierrez at 202-585-8860, [email protected]; or Jeff Lesk at 202-585-8707 (DC), 415-984-8200 (SF), or [email protected].
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.