Part 6: Starting A Green Real Estate Fund?

 

If commercial real estate has truly embraced going green, why bother with green real estate funds?

In Part 6 of our Special Series on the Green Building Finance & Investment Forum - New York, co-sponsored by Galley Eco Capital, we talked shop with established and emerging green real estate fund managers. We wanted to learn why investors and development partners want these funds, and the do’s and don’ts for building a green fund.

The panel, moderated by our own Lisa Michelle Galley, featured the perspectives of  industry pacesetters Deborah La Franchi of Strategic Development Solutions, John Hirschfeld of Class Green Capital Partners, Raymond McGaugh of Kiwanja Capital Partners, and Leanne Tobias of Malachite LLC.

Does commercial real estate need pure green real estate funds?

The panelists highlighted the following advantages of a green-specific fund strategy:

• Green real estate funds align capital more clearly with mission. Increasing numbers of  of institutional investors, especially pension funds, are adopting a double and/or triple bottom line (TBL) focus - meaning they measure economic, ecological and social returns on their investments. Green real estate funds allow them to allocate capital to sustainable investments at their targeted market rate of return. For Raymond McGaugh and Kiwanja Capital, a green, urban redevelopment investment strategy resonates better with their investor audience.

• JV development partners are seeking a green fund’s concentrated expertise. It’s not just investors that are looking for green real estate, potential JV partners are looking toward green capital sources. Strategic Development Solutions recently surveyed over 400 developers to gauge whether a green-specific fund would satisfy their equity needs. The response was very positive, even among the groups that had never worked with green before. The results make sense: there are many experienced, smart development groups that need to gain the organizational capacity to develop green properties cost effectively, or risk becoming obsolete. Partnering with capital sources committed to sustainability, that can also educate them is a cost-effective method of gaining this capacity.

“Developers would love to have a capital source to help them up the green learning curve.“-Debbie La Franchi, Strategic Development Solutions

• Green funds benefit from the superior financial performance of green assets. Green real estate assets benefit from lower operating costs and reduced performance risk. A “mixed” fund that invests in both green and conventional real estate assets dilutes the positive green impact on returns. For Leanne Tobias of Malachite LLC, this is the most important reason for an all-green fund: “If you are going to spend the time to create a new investment platform, why would you not build a vehicle that will maximize the benefit from green-specific performance enhancements?”

Best practices for building a green real estate fund

Already raising your own green fund or planning on contributing capital to one? Here’s first hand advice from the panelists:

• Your team must have sustainability expertise. The fund absolutely must have in-house staff that is knowledgeable of green construction and design, and is experienced working with both LEED and Energy Star rating systems. For John Hirschfeld of Class Green Capital Partners, this means staff that understands sustainable construction and can “get through the green clutter“, identifying the financial implications of green components for a potential investment, and bring these figures into the financial engineering of both the asset and the fund.

• Pay attention to both the leasing team and lease structure. Work with your JV partners to ensure that the leasing team for your investments understand the marketing benefits of green assets, and can adequately convey these benefits to the marketplace. (Our note: also make sure that their asset managers know and understand the value of green). It’s also crucial that your partners are using the right lease structure, so that the financial benefits of going green are accruing to the investors, not just the tenants.

• Establish the right partnerships. Seek partners that can help you maximize the returns from your green fund. As an example, Strategic Development Solutions has a partnership with Johnson Controls, who evaluates the green construction and design for each fund investment. Strategic partners look at the fund’s activities from a different lens, ensuring that no important details have been overlooked and that potential returns are not left on the table.

• Proper reporting is crucial. Reporting obligations are critical components of a successful green fund. Your triple-bottom line investors will require reports that show the environmental impacts of your investments- how much energy and carbon emissions is your investment portfolio actually saving? Your JV partners and their vendors will have to accurately track energy and water usage. In addition,  don’t forget about appraisers: there aren’t many green comps out there yet, and if you want to maximize the value of your assets, you need accurate and robust reporting of energy performance and green-leasing advantages to build the case for higher valuation.

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