Sustainability Series: Green Loans in the Real Estate Sector

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In response to developers in the Real Estate sector looking towards environmentally friendly and sustainable building practices, lenders are increasingly offering loans for projects that meet the criteria for “Green Projects”. Read our note on Green Projects here.

For developers considering obtaining funding through a “Green Loan”, we set out the main principles of Green Loans below.

What is a Green Loan and what are the Green Loan Principles?

Green Loans are defined by the Loan Market Association (LMA) as loan instruments made available exclusively to finance or re-finance, in whole or in part, new or existing eligible Green Projects. Green Projects are projects that fall into the non-exhaustive list of categories of eligibility set out by the LMA; for instance, renewable energy, pollution prevention and control, and clean transportation projects.

In addition, the LMA in its guide on Green Loan Principles provides a framework setting out four principles that need to be fulfilled for a loan instrument to qualify as a Green Loan:

  1. Use of Proceeds: Funds can only be used for designated Green Projects and these should provide clear environmental benefits. A developer with a Green Loan will usually be required to provide evidence to its lender to verify how any advances from a Green Loan have been applied.  If you have a mix of “green” and other loans under a facility the tranches advanced as Green Loans will need to be clearly designated with the proceeds either advanced to a separate account or tracked by the developer in an appropriate manner.
  2. Process for Project Evaluation and Selection: Developers must communicate the sustainability objectives and the process by which they determine the eligibility of the Green Project. It is in this context developer borrowers should disclose the standards or certifications they seek to rely on. As discussed before, certain standards and certificates may even be a requirement of the lender.  Lenders may also require a separate report from a professional to assess the developer’s compliance with these requirements.
  3. Management of Proceeds: The proceeds of a Green Loan should be designated to a separate account or otherwise tracked by the developer to ensure transparency and to promote and maintain the integrity of the project. This applies also if a Green Loan is paid in tranches so developers will need to establish internal procedures to track, evidence and maintain records to show that that Green Loan monies have been applied towards the relevant Green Project.
  4. Reporting: Borrowers should also keep records on the use of proceeds and, if applicable, the allocation of proceeds to different Green Projects. If there are confidentiality agreements in place, records must still be kept and made available but the information may be presented in generic terms. The information must only be provided to the institutions participating in the loan.

As stated above Green Loans are an attractive proposition for developers who have the staff with the required expertise, can put internal processes in place to manage the process and, most importantly, are willing to be transparent in communicating the expected beneficial impact of their projects and assessing, on an ongoing basis, how their projects are meeting these goals.  There is plenty to learn but we expect Green Loans to become more common, whether by choice or necessity.

How can we help?

If you require any further information or assistance in relation to Green Loans or any other real estate finance or banking matter, please contact Redmond Byrne.

Please click on the link to view our first Sustainability Series article on; Future Proofing your Commercial Property Portfolio – EPCs

This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.