Question

How can CDFIs leverage key metrics to support funding requests and assess the impact of projects during the underwriting process?

Answer

By integrating energy metrics into the underwriting process, CDFIs can evaluate project feasibility and risk as well as social and environmental impact. This can support funding requests for investors looking for double-bottom line metrics. CDFIs can use several strategic approaches to leverage green metrics in their lending practices: 

  • Create tiered loan products: CDFIs can develop tiered loan products that offer better terms to projects meeting higher performance standards. This tiered approach directly supports the path to net zero by incentivizing deeper green improvements. 
    • Example: A project achieving full electrification and incorporating renewable energy might qualify for more favorable interest rates compared to one that only implements high-efficiency equipment. 
  • Underwriting flexibility to offset increased costs of sustainability: Flexibility in underwriting becomes a powerful tool for CDFIs to offset the increased costs of high-performance building features. These underwriting strategies are particularly effective when aligned with specific funding programs like the Inflation Reduction Act (IRA) qualified project criteria, which often provide additional resources for projects meeting certain environmental standards through strategies such as: 
    • Automatic qualification for better terms – CDFIs can establish specific policies that automatically qualify projects for green loan products or better terms if they meet predetermined sustainability standards. 
    • Boost Net Operating Income (NOI) – Integration of energy savings into NOI calculations can allow projects to leverage more debt due to improved cash flow from reduced utility costs and address the common challenges of high-performance projects having higher upfront costs but lower operating expenses. 
    • Higher Loan-to-Value (LTV) Ratios – Projects meeting advanced sustainability standards can qualify for higher LTV ratios or expanded loan amounts, which require appropriate capital sources to support these terms.