Come to the Green Building Finance & Investment Forum
I’m spreading the word about the Green Building Finance & Investment Forum, 20-22 February here in San Francisco. Its tailored especially for green real estate investors, developers and their capital sources. (Full disclosure:My firm, Galley Eco Capital, is a leading conference sponsor.) Registrations are coming in at a pretty good pace and we are expecting a great crowd.
There’s a great lineup of Industry Pacesetters — that’s Green Journey talk for the early adopters within institutional real estate — those who are already committed to building and operating green real estate. They’ll be talking about how they’re making good returns by building and retrofitting green.
I’ll be teaching a class, moderating a panel on triple bottom line investing as well as on another panel talking away about, guess what — green finance. There will be a diverse group on that panel, covering emerging topics such as renewable energy finance, green real estate securitization as well as the role of incentives in underwriting green deals.
Participants will also get to hear from well known social investors who are active in investment real estate. They’ll get a dialogue going with the real estate crowd about why we see so little action from socially responsible investors in investment real estate — and what we can all do to change that.
Last but not least, topics like risk management, legal and valuation issues will be talked about as well.
Hopefully this forum will extend and deepen the network of committed green investors and developers, with more capital to follow.
Follow the link to check out the details.
Green Building Incentives Spread Sustainability & Save You Money
Monetary and regulatory incentives from utilities, federal, state and municipal agencies can do much to increase the green building market. Yet, the existence of incentives alone does not necessarily mean that developers will build green. Only when you identify and puzzle together the right incentives from a dynamic menu of choices and deploy them appropriately, can your project realize the maximum benefits incentives offer.
And, come to think of it, many of the monetary incentives available appear like small slivers compared to the rest of the capital stack. Why spend any time on them at all?
Yudelson Associates recently completed a thought-provoking study for the National Association of Industrial and Office Properties, titled “Green Building Incentives that Work: A Look at How Local Governments Are Incentivizing Green Development” – available for download from Yudelson’s homepage. The study covers the types of state and local incentives available along with survey participants’ judgments about which incentive types are compelling and to what extent.
Catch Encourage More Bees Green Building With Honey Incentives
Green building incentives are utility- or government-sponsored honeybees that carry dollars and valuable city agreements to investors in exchange for specific property improvements or complete green projects. These funds and targeted agreements literally fertilize the growth of more sustainable projects in a city. They have not received much attention in the capital markets to date, but they are a potent source of finance for a project - the relatively small amounts of incentive dollars influence decisions about what gets built at all,where and how soon. After the project is built in compliance with the incentive terms, the investor’s return has been structurally lifted by the permanent injection of upfront capital and a lifetime of reduced operating costs. Even with non-monetary incentives, an investor can enjoy a bigger project and reduced time to market.
The beauty and complexity of working with incentives is that they can appear in several forms, a few of the most common being:
- Incentive payments from a public utility energy efficiency program
- Grant, rebate or reimbursement from a city or county
- Expedited permit processing
- State income tax credit
- Density bonuses
It’s not hard to guess that the monetary payments are the most popular form of incentive. According to NAIOP’s study, “two thirds [of nine most common incentives] represent some form of monetary inducement”. So cities see ‘putting their money where their mouth is’ as a key requirement to stimulating green building in their jurisdictions.
The Green Journey Perspective
State and local incentives fit within a larger system of mechanisms aimed at increasing sustainability; but I’ll underscore my point about their unique power and value as a capital source. When we think about the honeybee, we don’t just look at its size compared to much larger animals, we understand that the pollination that they alone provide is a powerful ecological service — our food supply could be disrupted if it did not occur. Similarly with green building incentives, small dollar amounts earmarked for individual projects can stimulate disproportionately greater change within a market area.
Financiers naturally judge the importance of a capital source by its dollar amount for all sorts of good reasons. But we often have to point them to the honeybee analogy to get them to understand that they can not discount the role of incentives within the emerging green real estate financial landscape. For example, when institutional investors think about their market investment strategy, knowing a target market’s incentive environment should become part of their underwriting. Municipalities offering more incentives may spur more green building. I’ve posted before about owners of brown buildings in those same markets needing to do a more aggressive analysis of their assets’ competitiveness since - all other conditions being acceptable - they could see more pressure from green building competition than in other regions where incentives are not as prominent (yet).
And let’s not forget that the federal government has also been in on the incentive bandwagon for some time now, offering its own menu of choices, such as the energy efficiency and renewable energy tax credits. However, I’m sticking with my previous recommendation that you visit the US Conference of Mayors website to see the real leaders in incentivizing green building - local officials - cuttin’ the rug to prove their commitment to sustainability.
Barriers to Using Incentive Dollars Effectively
So with all that good news about so much money, what’s preventing incentives from being utilized more often? NAIOP’s argument is simple and true: “There’s not enough of them. Give developer’s more money and they’ll build more green buildings“.
In our work with real estate companies and strategic partners, we see mundane phenomena which unfortunately create problems for identifying and getting the most out of all the incentive dollars
available. Two issues:
- Dynamic Regulatory Environment: States and municipalities are coming up with new green building regulations at a quick pace. It is hard – and risky - for developers with long planning and building cycles to keep second guessing what the planning department might do next. So they proceed with their projects without the benefit of the incentives.
- Silo Decisionmaking: Imagine you attended a symphony concert where the conductor allowed only one instrument section to play their parts of the song at any one time. All the other instruments had to sit and wait silently until they were called. Would that sound funny?
Many cash incentives, such as those energy efficiency upgrades, are tied to discrete technologies, components or particular outcomes such as, say, a 25% reduction in energy output. But its up to the developer to do the hard work of figuring out how to tie the various specific technologies
and their attached incentives together.
Equipment vendors often sell their systems priced with the incentive dollars for that exclusive component already embedded in the calculation. And imagine each vendor focusing the investor’s attention on only their particular specialty components, to the isolation of the others. That happens a lot these days. The over narrow focus on specific purchasing decisions to the exclusion of others results in cherry picking – and causes the inadvertent sacrifice of other valuable incentive dollars.
Just as integrated design is a foundation principle of green building, best practice in underwriting incentives dollars is to identify and integrate ALL the financing sources and decisions, including the incentive dollars up front, before making specific commitments in order assure the biggest return on investment.
The Takeaway
Incentives are here to stay. They will grow in volume, variety and importance within the capital stack – since construction costs will not be decreasing anytime in the near future. Like any type of government “help”, they probably won’t be made very simple to implement – so its time to become familiar with them, since they are becoming the accepted way for cities and states to design a flexible “pro-green” interaction with the real estate community.
The NAIOP Study is a good fact basis for becoming informed about the current state of incentives in the US today. And it’s hard to miss NAIOP’s clear call for public officials to increase incentive dollars. Your projects can lose out on this valuable financing source, if decisions about specific systems and technologies are being made in isolation or based on outdated information.
And by the way, we help investors understand these and related questions regarding optimizing the financial performance of their green real estate projects. Feel free to contact us if you would like to know how we can help.
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Please let us know your thoughts about this post. Our Green Journey is a forum for sharing and your perspective would be valuable for us and the rest of our readers.
Photo Credit: Flickr/Tamed Blossom - Honey bee
The Carbon March Visits Moosehead Lake, Maine
A few posts back, I depicted climate change concerns within urban planning as becoming the ‘new civil rights movement’. It was a stark metaphor, illustrating the degree to which greenhouse gas emissions within real estate development has become a defining issue for our industry.
The Christian Science Monitor has just devoted lengthy column space to a development dispute in Moosehead Lake, Maine, where environmental groups raised concerns over the potential negative carbon impacts from the proposed 2,300 housing and apartment units. By their calculations, the development would produce 9,500 tons of carbon dioxide annually – putting an additional 1,850 vehicles on the road. A representative from one of the groups cites their concerns as several and interrelated – not only are they unhappy with the the size of the development, but also with its location being far from town and only accessible by car, encouraging lots of driving.
Particularly timely for the Green Journey was the article’s update on states’ efforts to formally tie real estate development activities to climate impacts and state emissions reductions targets.
“Climate change has kind of permeated everything with regard to land use”.
-Scott Morgan, senior planner with the California Governor’s Office, as quoted in the Christian Science Monitor.
Carbon March Status: Regions That Formally Connect Real Estate Development to Climate Impacts
- 35 states have climate action plans or are in the process of developing them.
- Of the above, 17 states have set emissions targets for greenhouse gases. However, far fewer have laws that presently allow direct action on the basis of greenhouse gas emissions.
- California is seen the nation’s leader in pushing towards the inclusion of greenhouse gas assessments within local development plans and taking legal action against municipalities and/or companies, which it believes are not taking sufficient action to reduce their greenhouse gas emissions.
- Across the US, only California, Massachusetts and King County, Washington have established climate change analysis into the state environmental review process that applies to land development.
In previous posts, we recommended that real estate investors learn about a) any climate change plan in effect in jurisdictions where they develop and operate investments and b) proactively managing the carbon footprint of their assets as the regulatory environment evolves.
So far, there is no need to change that suggestion.
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Please let us know your thoughts. Our Green Journey is a forum for sharing and your perspective is valuable.
Photo credit: Flicker/Jonathon Brennecke - Moose
LEEDing Change
Now that you’ve got LEED all figured out, get ready to change — quickly. And if you haven’t got LEED all figured out, congratulations there is even more to catch up on.
Last night, the Northern California USGBC Chapter put on a presentation of upcoming changes to the LEED rating system. The event was so oversubscribed that the Chapter put up the webcast and slides for dowloading. Here are also a couple of highlights discussed, that are more pertinent to the financial underwriting of green investment properties.
LEED for Existing Buildings: Operations and Maintenance
- First of all, the above title is the new name for the old “LEED-EB” — stressing now the ongoing O&M best practices, not just a series of one-off projects to green an existing building once in its lifetime.
- The USGBC has partnered with BOMA to create some forthcoming green lease language. This language will hopefully align landlords and tenants on minimum expectations about environmentally friendly operating behaviors such as: recycling, mandatory lighting and HVAC shut down and using green cleaning products without VOCs. Green lease language can also deal with submetering, an interesting point for us San Franciscans, since the California Public Utilities Commission now permits submetering of tenant spaces here. The presenters said that this is a great plus for green building because now tenants will be able to directly see the utility costs that their use of their suite is creating — theoretically giving them a vested interest in agreeing to comply with environmentally friendly building practices. This may be true. I also quietly reminded myself of some conversations with landlords who were angling to pick up any utility savings as additional net rent, boosting the property’s net operating income. That may also be true in jurisdictions where submetering is not permitted. We’ll see how that shakes out in reality.
LEED Core and Shell Update: “The End of the Glass Office Tower in San Francisco”
This is the rating to watch if you deal with spec office development.
- The Energy & Atmosphere Credit, “EA”, has been tightened up a bit, with a particular San Francisco impact. Basically, the combination of achieving EA credits under the LEED-CS, achieving the LEED Gold rating needed to obtain accelerated permitting here in San Francisco and having to design the building to perform 40% better than Title 24 (the California Building Code) results in, as the presenter put it, “the end of the glass office tower in San Francisco”. In short, the energy efficiency of the building has to be improved to such a high standard, that a glass building shell may not be feasible any longer.
- Anecdotal LEED market acceptance info: the presenter, an architect, reported that his firm is working on approximately 60 office projects here in San Francisco and around the Bay Area. He says that on nearly every single one, developers are requesting some level of LEED certification for the project; underscoring his view that LEED is firmly embedded here in the Bay Area as the market standard for new office construction.
Future of LEED: Carbon Footprint Reconciliation + More
Not only are there a) more ratings and b) changes within the various ratings underway, but there will be an overall system revamp of how all the systems fit together plus more — possibly before the end of 2008.
One of the big upcoming changes will involve embedding a carbon footprint analysis within the LEED rating work towards certification. Last week, I recommended that lenders and investors should reconcile any LEED certification achieved with a carbon footprint analysis of the project. Apparently, this issue has been quietly evolving within the USGBC as well. It was announced last night that in the future, perhaps as soon as Greenbuild in November 2008, the USGBC will adopt some form of carbon footprint calculation in conjunction with the various LEED updates, so that users can see how their green building design and construction choices actually play out on a project’s carbon footprint. No additional details are available as of yet, but we’ll be birddogging this one quite closely.
Please let us know your thoughts. Our Green Journey is a forum for sharing and your perspective is valuable.
Photo credit: Flickr/hoveringdog - The Park, Nottingham, UK (2005)
So What Makes a Commercial Real Estate Loan Green?
This is PART 1 of a 2-part series on green real estate lending.
This is an actual question from a lender that I received recently, and quite timely, since even though there are many of us championing green real estate financing, there has not been enough of it happening to help the commercial real estate industry identify exactly what it is.
Green Real Estate Loans Today: “I know it when I see it!”
We are seeing more banks offering green financial products or making public announcements of multi-billion dollar commitments to investing and financing green business across many sectors. This increased activity as well as the subjectivity of defining green products creates fertile ground to focus anew on what green loans should look like and the issues banks and investors will deal with as they do green finance deals together in the future.
Good Green Loan Design: Agree on a Clear Definition
The big deal about green building is that a green property represents a change in our expectations about how buildings are embedded into the neighborhood plan, greater energy and water efficiency, being built using more sustainable materials and resources, creating healthy living and working environments, not to mention operating the property to standards which maintain those benefits.
Defining “green” up front gets lenders and investors on the same page about those expectations in order to assure that each party gets what they paid for. In the integrated design process, the project team conducts charrettes with designers, the owner and community representatives to reduce the risk of stakeholders not having their expectations addressed. However, at this stage of the process, the mortgage lender is no where in sight. Often regarded as the ‘boring’ part of a deal, defining is critical because the particular risks of the green project stem from the failure of the finished property to perform to stakeholder expectations – i.e. green components and systems not delivering the promised savings and performance enhancements that the lender, investor, tenant or city official was anticipating.
The Green Journey take on this is that the definition of green for a real estate transaction contains specifics about 1) the rating system to be used, 2) the certification level within that rating system to be achieved and 3) quantifying certain performance thresholds that are to be achieved either during construction or upon stabilization.
Talk in Shorthand, but Don’t Take Shortcuts in Defining Green Performance
So what’s happening today? Most of my conversations with lenders and investors involve defining a property’s greenness in terms of a specific LEED certification level. LEED provides the shorthand that is supposed to cover the specific performance concerns that each party has about the asset. And since it is currently the most widely acknowledged third-party rating system for green buildings in the United States, using it helps assure the continued marketability of the property as being green – helping to reduce lenders and investors exit risk at the end of their hold period.
Keep in mind, however, that while LEED prescribes design and construction processes that are considered best practice and higher certification levels are tied to better energy performance, it does not guarantee a particular performance result. Moreover, not properly reconciling the building performance specified by the certification level with other stakeholder-defined thresholds can result in a less than optimal business case.
- Reconcile LEED certification requirements with actual performance targets. The LEED point system allows for certain tradeoffs among the categories. Though some categories have fixed prerequisites, which must be fulfilled no matter what, the rating system offers the opportunity to make up points not achieved in one category with achieving more points in other categories. So lenders and investors still have to define minimum expectations about energy and water efficiency thresholds, for example, regardless of the project’s certification level, and reconcile their minimum expectations with the LEED points that their target threshold intends to achieve and the financial impact of those choices on the green project’s business case.
- Don’t underwrite financial incentives out of the deal. Secondly, many of the rebates and incentives being offered by governments and utilities require utilizing specific technologies as well as achieving stipulated thresholds of energy and water efficiency. Simply looking to a LEED certification level, without reconciling the design and construction choices against the requirements of rebates and incentive programs might result in the property missing out on a valuable source of capital to pay for those green components – and loss of a great boost to net project value.
- Target a smaller carbon footprint. The third consideration in establishing the green definition is that local, state and even the federal agencies are mandating greenhouse gas reduction targets for many industries within their jurisdiction. In order to ‘sell’ their project to officials, the real estate investor will increasingly have to demonstrate that the green project has a carbon footprint that helps the region to achieve their climate change goals. In these regions, a green definition which integrates a carbon footprint reduction target goes a long way to addressing the concerns of this important stakeholder group and is a way for the real estate investor to show that their partners and lenders they have taken reasonable initial steps to shield the project from any future carbon tax regulation.
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This is Part 1 of a 2 part series on green real estate lending. In coming posts, we’ll deal with related questions about due diligence and underwriting green real estate deals.
Please let us know your thoughts. Our Green Journey is a forum for sharing and your perspective is valuable.
