In case you’re just tuning in and missed part one, Will Clark has been involved in the multifamily sector in various capacities for twelve years, having started as a developer in New York. He then joined KSI/Kettler in Washington, D.C. as an asset manager. This experience awakened his interest in the built ‘environment’. In his current position, REO Asset Manager for a special servicer, he manages a rotating portfolio of 15 to 35 REO properties for CMBS trusts – often needing to assess properties within 30 days and move them in as little as 90 days. This vantage point has given him a comprehensive view into the operations, management and sale of a great number of commercial multifamily properties.
Our Editor-in-chief, Kimberly Madrigal, recently had the pleasure of interviewing Will with regard to sustainability and profitability. Together they endeavored to explore one question: Can the two actually co-exist?
GreenLandlady: Right now multifamily sustainability improvements are still in the voluntary mode, but you do think mandates or legislation requiring better efficiencies will work?
Clark: A carbon tax or a building-efficiency score is one way to have owners make the required upgrades. You can see that there is a penalty you’ll be facing if your property isn’t utility efficient. That penalty may come from the regulator or from the rental market. So I think it’s one way to bridge that gap and I think not having clarity here has been holding a lot of people back. They don’t really understand how to value it. Instead it is more like, “What difference does it make?” “Why should I replace all the windows if I’m not going to see the benefit because the benefit goes to my residents in lower utility bills?” However, I think there are many ways to bridge that gap. Motivation may also come in the form of financing or insurance being harder or more expensive to secure for inefficient buildings.
GLL: What about tax credits as a sustainability incentive?
Clark: I would say that on the tax credit side, it’s very obvious why you would do that if you are speaking of tax credits an owner can receive for improving sustainability; you need something to bridge the gap between current costs and projected lifetime savings. Moving into a different area of tax credits, I don’t know how much you know about the low income housing tax credit program [on affordable housing], but essentially there’s a maximum rent that you’re allowed to charge. If you’re a 60% property that means that your residents can make no more than 60% of the area median income and of that no more than 30% of the area median income can be charged for rent. Furthermore, there is a deduction for utilities expenses, if it is resident-paid utilities. So, if let’s say, $500 is your maximum rent and the local public housing authority determines that utility costs for a family of four is $100, your utility credit should be $100. So if I was the landlord I could collect no more than $400 per month from a unit. Well, if I make improvements to my building systems and show that my utility bills per unit are not $100 but $25, then I can charge $75 more in rent – which obviously has a direct bearing on my NOI [net operating income]. The total paid by the resident is the same, but the allocation moves $75 from the utility company to me. Rents for affordable housing only increase by the amount of the MSA’s CPI [Consumer Price Index], so most rents have not increased in several years, which make this a likely area of improvement. Prior to the collapse of the tax credit system (which is a completely separate issue), the state housing authorities were strongly pushing sustainability in project applications. Enterprises’ Green Community Initiative, which started a little slowly and amorphously, has really become a leader in best practices for sustainable affordable housing. Along with the equally impressive LISC, Enterprise takes a more practical, and honestly, less expensive approach than pioneers like Jonathan Rose. These groups are much more focused on the challenge of improving existing stock, not just building new. Because these financial incentives motivate owners to improve energy efficiency, we should continue to see a lot of the interest in building ratings and carbon taxes on the affordable housing side.
Clark: If you’re in market-rate rentals, it doesn’t really matter or most owners don’t see this as relevant. The affordable housing maximum rent calculation doesn’t apply as their rental amounts are not restricted by the utility company expenses. It’s much more a function of the local market and how an owner feels about a split incentive; if the residents pay for utilities, saving money on your electric bill can be a bit nebulous. Where owners pay part or all of the utilities, your motivation to improve efficiency rapidly increases. Properly understood and implemented, it becomes a differentiator, but only if sustainability is deeper than using CFLs and using bamboo flooring in your leasing office.
GLL: What do you think is important for the future of multifamily housing management?
Clark: I think it’s vital to understand your costs and where you can reduce them or pick up additional revenues. This sounds like general business advice, but what we’re seeing in special servicing is that there are a lot of properties unable to get off their loans when they mature. It’s very hard to get good financing right now and it’s especially hard to sell a developer’s dream. Now more than ever owners need to be able to state that expenses have been reduced over the last twelve months by implementing whatever steps they took. They will also need to document that the improvements include upgrades made to the physical structure, building envelope, systems, management and regular operations. Then they can state to potential buyers and lenders, “Here’s what I did and here’s the effect that it has had.”
GLL: Have you seen this process happening anywhere?
Clark: I think we’re seeing piecemeal effects across the country. Obviously California, as usual, is at the forefront. We’re all seeing much more attention being paid to the concept of sustainability and we’re finally getting to the point where building scientists, managers and financiers are discussing what it means on a day-to-day level for a property. Of course, a lot of it is being driven by the big question, “How do we improve revenues?”
GLL: How would you suggest multifamily try to answer that question?
Clark: Well, there are things you can do. If you can’t raise rents, you’ve got to cut expenses. You look at the four things that are essentially fixed: taxes, insurance, personnel and utilities. Utilities are the only one that I can positively affect right now, so that’s an obvious place to start. For instance, cutting marketing by one ‘For Rent’ magazine a month can save me about $800 a month: it’s measurable, but doesn’t change my valuation all that much. When I’m paying thirty, forty or fifty grand a year in utilities, that’s where I really need to focus my attention. By necessity, smart owners are going to be looking at everything on their profit and loss statement, but they’re going to be looking at utilities in particular. Again, it’s usually a big number you can actually do something about.
GLL: I couldn’t agree more, but what’s taking owners so long to get there?
Clark: This is absolutely anecdotal, but although there seems to be a desire to be more sustainable, people just don’t know how. Very few of the green certification programs address multifamily in a meaningful way so there’s long been a dearth of good research. That is changing as organizations like LISC, Enterprise, Green Building Advisor, DOE/EnergyStar, national labs like Berkeley or Oak Ridge, and others release longitudinal analyses and best practice guidelines. Some things can be adopted from the single family or commercial worlds, but many things are unique to multifamily. At the same time, I remind my management companies that changes they make in my portfolio can be multiplied across all of their properties. I have about 15,000 units in my portfolio, but the companies I work with own or manage about 150,000. All of a sudden, you realize you can make a substantial improvement far beyond your own portfolio. Over the next couple of years, those who understand and successfully sell sustainability to their financiers and residents will do particularly well. Anybody who doesn’t will be lagging behind, but eventually they’ll get with the program. In the interim, of course, they’ll certainly be disadvantaged.
GLL: There’s a lot of talk about Fannie Mae and Freddie Mac since their government take-over and their role with regard to multifamily housing. What are your thoughts?
Clark: I think there are enormous ways to influence the multifamily lending world through Fannie and Freddie. Nothing gets built if you can’t pay for it and Fannie and Freddie are the only ones lending right now. If you look at the things that are in the works between the capital markets and Freddie to create a sustainable multifamily fund, it looks promising. I don’t know when that’s going to be rolling out, if it’s active or if it’s waiting for sufficient volume, but the initial one was going to be about $500 million. But the idea here is let’s support the refinancing and construction of multifamily buildings that adhere to some kind of sustainable framework. If Fannie and Freddie push sustainability in their lending requirements, you’ll get sustainability everywhere. The ability of finance and insurance to influence building practices cannot be understated.
GLL: Is there any kind of leadership on the horizon that you find inspiring?
Clark: The FreddieMac /Capital Markets Partnership is an effort spearheaded Mike Italiano of MTS who was one of the founders of the U.S. Green Building Council (USGBC). He understands the sustainability world but more importantly he understands the business world and the economics of finance. I believe he was one of the original instigators for including Phase 1 Environmental Site Assessments as a standard due diligence item for loans, so he understands how effectively lenders can reshape behavior. We have a groundswell of public opinion, but the actual effects are not going to be realized until finance and insurance are pushing the borrowers and property owners to act more sustainably.
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