Solar panels, sustainable construction: Is it time to explore “green” lending?

The growth in sustainable real estate construction, renewable-energy installations and other environmentally friendly projects could make green lending opportunities worth exploring.

By Beth Mattson-Teig

Many commercial lenders, including some community banks, are hopping on the “green” bandwagon. They’re offering expertise and products for borrowers looking to finance everything from sustainable products and business concepts to green building and alternative energy projects.

But green commercial lending is more than just a business line for some banks. Providing capital and support to help sustainable businesses and the environment is also a core part of the mission for banks such as New Resource Bank in San Francisco. “All of our loans have a sustainability component to [them],” says Vince Siciliano, CEO and president of the $350 million-asset community bank. New Resource operates in four areas of impact: environmental protection, health and wellness, communities and sustainable commerce. Specifically, that means it lends to a wide variety of businesses, including organic food companies, environmentally responsible real estate development and clean energy projects.

Other banks have been pulled into green lending by their customers or by a desire to tap into the growing green lending market. Centinel Bank of Taos, a $220 million-asset community bank in Taos, N.M., has been financing alternative energy for more than 30 years. At less than 5 percent, however, it still represents a fraction of the bank’s overall lending volume. “For the most part, we have entertained those loans under our traditional offerings, whether it is a consumer or a commercial product line,” says Angel Reyes, president of Centinel Bank.

But Centinel Bank sees growth opportunities ahead after it heard its local electric cooperative plans to significantly increase its solar energy capacity. That expansion will likely result in $6 million to $10 million in new investments over the next three years on megawatt arrays sprinkled throughout the county. Reyes sees that as a chance for Centinel Bank to provide debt financing for contractors doing the excavation and installation work, as well as to finance parts of these arrays over a longer period.

“Where we are at today is trying to figure out how we incent builders, developers and owners with financing to take that step with LEED or green technologies.”
—Angel Reyes,
Centinel Bank of Taos

Starting from scratch
The way most community banks dip their toes in the widening pool of green commercial lending is by financing alternative energy projects, such as solar and wind, as well as energy-efficient commercial real estate projects. On both fronts, banks are developing expertise and, in some cases, commercial loan products or incentives to grow that business line.

First Green Bank, a $570 million-asset community bank, based in Orlando, Fla., was founded in late 2008 with a mission of social responsibility and promoting environmental sustainability. “It has truly been a journey from the first day that I hatched the idea of being environmentally focused,” says Kenneth LaRoe, founder, board chairman and CEO of the holding company First Green Bancorp. Nearly a decade ago, there weren’t many formal green loan products, so the bank sat down and created its own.

First Green Bank provides an interest rate discount of 25 basis points on commercial real estate and construction loans for projects that are environmentally sustainable, as measured by Leadership in Energy and Environmental Design (LEED) certification. It also developed solar loans for both residential and commercial customers, with the commercial loans providing a 10-year fixed-rate loan with a 20-year amortization.

The borrower can get a loan for 100 percent of the cost of having solar panels installed, with no money out of pocket. LaRoe notes that for some borrowers, depending on the efficiency of their new solar power systems, the energy savings offset the loan payment. He also says First Green Bank has completed hundreds of solar loans, with a current portfolio of $6.6 million outstanding, and has never had a default.

Centinel Bank is also seeing an uptick in LEED and energy-efficient building projects in its commercial and multifamily real estate lending. “There is an expectation to utilize these new technologies and obtain these certifications for a whole host of reasons,” says Reyes. “Where we are at today is trying to figure out how we incent builders, developers and owners with financing to take that step with LEED or green technologies.” Centinel Bank is currently discussing options such as a lower interest rate or a discount on loan cost for LEED-certified projects.

Fannie Mae and Freddie Mac have both introduced green lending programs for multifamily borrowers to incentivize energy-efficient buildings. Community banks can certainly use those programs as a model. However, banks are generally looking to create their own commercial and multifamily loan products for their balance sheet lending. “At the end of the day, I think it is the commitment from that bank to be a partner within its community [by] promoting activities that support longer-term sustainable buildings,” says Reyes.

Specialized expertise
One of the keys to growing green commercial lending is developing in-house expertise. “There is more and more interest, but it really is a specialized type of construction finance,” says Randell Leach, president of commercial banking at the $665 million-asset Beneficial State Bank in Oakland, Calif.

Beneficial State Bank currently has just over $50 million in renewable energy and environmental-based loans, both consumer and commercial. On the commercial side, the bank has lent to a wide variety of projects, including solar, wind and hydro power. Leach says one of the challenges is that the loans tend to be difficult to put together and have complex credit profiles, which demands more time. “We have specialized underwriting, guidelines, practices and policies that go after that market, and it certainly is not for everybody,” he says.

Beneficial State Bank uses different programs to mitigate the risk of financing those projects, such as the USDA Rural Energy for America Program, which provides guaranteed loan financing and grant funding to agricultural producers and rural small businesses to purchase or install renewable energy systems or make energy-efficiency improvements. In other cases, regional programs are available, or banks can work with other bank participants to share the risk, adds Leach.

So far, green lending has been slow to gain traction in the broader community banking industry, but that may change as more borrowers look for green lending products. Green building is one area that’s seen significant growth over the past decade. In 2016, 4,920 commercial projects received LEED certification in the US, up from 337 in 2006, according to the U.S. Green Building Council. And green building that has become standard in large commercial projects is trickling down to the smaller commercial projects that are more in the wheelhouse for community banks.

Another future driver for green projects and green financing to support those projects could come from the millennial generation, now the largest segment of the American workforce. Millennials tend to place a high value on social impact.

Siciliano says, “I think the millennials will drag the bigger banks into the 21st century.”

Beth Mattson-Teig is a writer in Minnesota.