Should commercial mortgage lenders care about energy efficiency? Lessons from a pilot study

Paul Mathew, Paulo Issler and Nancy Wallace

Energy Policy, 2021, vol. 150, issue C

Abstract: Commercial mortgage underwriting practices currently do not fully account for energy risks to net operating income (NOI), especially changes in energy costs over the course of a mortgage term. This paper first introduces two metrics that can be used to characterize the increase in default risk due to increases in energy costs during a mortgage term: decrease in debt service coverage ratio (ΔDSCR); and increase in probability of default (ΔDP). Both these metrics were designed to be simple to calculate, utilizing data that are already being collected in loan applications. Next, we present results from a pilot study on the application of these metrics to five loans from three lenders. The results show that energy risks can vary between different properties and across different years within a given property, due to variations in energy usage. All three lenders concurred that these results suggest energy risks can in fact be material, and affirmed the metrics are a viable approach to incorporate energy risk analysis into mortgage underwriting. The policy implications include energy cost disclosure in loan applications; and incentives such as lower interest rates for energy efficient buildings and additional loan proceeds to improve efficiency and lower energy costs.

Keywords: Commercial building mortgages; Energy efficiency; Energy risk; Mortgage default risk (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:150:y:2021:i:c:s0301421521000069

DOI: 10.1016/j.enpol.2021.112137

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