5 Proven Policies to Bail Out Mother Nature and Boost Green Building

Even as the Federal government invests in energy efficiency and conservation, by announcing the award of $3.2 billion in block grants (including $1.9 billion to cities and counties) last Friday, environmental leaders are looking ahead and pushing for more sweeping action — calling on a “climate bailout” in today’s NYTimes Op-Ed.

You heard it — a climate bailout.

Friedman’s op-ed shares the perspective of Hal Harvey, head of ClimateWorks, about his five top policy picks that would help the US to decisively address the energy-climate challenge that we’re only just starting to collectively understand.

The main point about all of these suggestions is that they already are in place somewhere, so they’re proven. No need to reinvent the wheel.

We like thinking about how commercial real estate capital markets would view real estate risk and returns of green buildings if these policy recommendations actually became national laws.

But first, here they are:

1. Building codes: California’s Title 24 saves Californians $6 billion per year via higher standards for building energy efficiency.
2. Vehicle fuel efficiency: The European Union’s fuel efficiency standard averages 41  miles per gallon.
3. Nationwide renewable portfolio standard: He favors a mandate that utilities be required to buy 15 to 20 percent of their energy from renewables by 2020.
4. Decoupling: Already working in California, power utilities make money by helping people to save energy rather than by encouraging them to consume it.
5. Charge for carbon: People should not be allowed to pollute for free.

Of course, the article enjoys the luxury of an op-ed; it does not map out how anyone will pay for any of these policies’ upfront costs. Or how long it would really take for any of these ideas to be adopted nationally.

Nonetheless, for the commercial real estate community, the fact that most of these policies are already being implemented in some form already, should mean that they can spread a bit easier than many might think.

And if a real estate investor has not prepared by adjusting their overall strategy and retrofitting their existing buildings to as good a standard as possible, more forces are very hard at work to eventually make their existing property business obsolete.

Photo credit: Flickr/Lolliepop

Green Banks Enter — and Exit — The Fray

March 25 has turned out to be a day of beginnings and endings for green banks.

US Green Bank Act aka The Green Bank that “Might Be”

Today US representative Chris Van Hollen introduced the US Green Bank Act of 2009, which — if passed in its proposed form — would result in the federal government establishing and owning a tax-exempt bank that would operate solely for the purpose of providing clean energy and energy efficiency financing, plus some related, unspecified green finance products.

Bill sponsors proposed that the US government capitalize the bank with $10 billion in “Green Bonds”, which would grow to $50 billion.

Frankly I’m torn: between supporting the US Government (potentially) putting its money where its mouth is with green energy, energy efficiency and quietly worried about whether Uncle Sam is really any better at running a bank than the rest of us finance professionals.

Side note: We were shocked to see that, given the national media’s spotlight on banks and the federal government’s many actions on funding green initiatives, this particular announcement received virtually no national press whatsoever. It did receive some attention in the renewable energy and green business camps, however.

One Earth Bank aka The Green Bank that “Might Have Been”

And fortunes hit the wall for Austin-based One Earth Bank. The Bank’s ownership, which included several Texas heavy hitters, decided to call it quits on their efforts to obtain FDIC approval for their proposed $23 million dollar bank, due to (in their words) a bad market for starting banks. [No kidding...]

The story puts the FDIC approval problem down to the investors characterizing the bank as a “green bank” in their FDIC discussions. They eventually understood over time that FDIC officials were more interested in a plain vanilla bank structure and were not as excited about approving any type of special green bank in today’s tough banking climate that might potentially veer off the path of typical banking. The article information does not provide details on any specific products or services One Earth proposed to offer that would have been different from any other bank.

I’m not sure whether this particular green bank’s demise represents a lesson for green finance as a whole. There are a few green shoots within the banking market, trying to tweak their plain vanilla banking services with green touches, leaving us unsure about the real impact that they are accomplishing. I’m sure that, as the economy turns around, we will see more attempts to reshape traditional finance into providing greater support for sustainability.

You can read more on green banks in these related posts:

ShoreBank Pacific Leads with Green Building Loan Program

Bankers Call for More Green Banks

$100 Million Energy Efficiency & Water Conservation Loan Program for Sonoma County

The Sonoma County Board of Supervisors and Water Agency will kick off a new $100 million energy efficiency and water conservation loan program, called the “Sonoma County Energy Independence Program”.

The program is one of the early fruits of the innovative AB 811, which provide green finance via the creation of energy efficiency financing districts - something that we’re quite passionate about.

FACT: Sonoma County is the very first public body in California using AB 811 to create an energy efficiency and water conservation financing program for the entire county.

AB 811 plays a key role here (we’ve posted about it before, here and here) because it allows California counties and cities to form “contractual assessment programs” to provide loans for the installation of solar panels and other energy efficiency improvements to property owners. The loans are repaid via an assessment on the owner’s property tax bills over time — up to 20 years.

Since these loans facilitate energy reduction and with that greenhouse gas reductions across the entire jurisdiction, AB 811 is a key policy tool that cities and counties can use to comply with climate change commitments required of them.

Add to that the green jobs bonus –> they also hope that funding $100 million in loans over the next few years will translate into a big economic boost to Sonoma County’s green building industry.

Energy Efficiency Financing Districts - Pro’s & “Issues to Watch”

Pro’s

• Helps cities and counties directly reduce greenhouse gas emissions in their jurisdictions.
• Low capital, relatively “painless” way for property owners to pay for upgrades to obtain desired energy reductions and water conservation on their properties.
• Very competitive source of capital: Sonoma County, for example, may charge 400 bps over like term US Treasuries + 50 bps. A full 20 year term would result in an all-in interest rate of 7.5-8 percent, which is not bad compared to typical commercial banking rates for the similar improvements.
• Actual credit terms for property owners are easier than traditional bank debt: no credit checks or income requirements are needed to qualify for the loans.
• Green jobs bonus –> Sonoma County hopes that $100 million in loans over the next few years will translate into a big economic boost to Sonoma County’s green building industry.

Issues to Watch

• No one knows for sure what the true loan volume will be. Sonoma County and water agency officials are reporting that earlier surveys of property owners indicated a high level of interest in this program, so they are expecting brisk business.
• “Warehousing” and bond market risk: Sonoma County is funding initial loans and costs out of pocket. It is relying on the bond market to become the eventual source of capital for follow on loans. The success of their program is tied to achieving bond market at rates that are feasible given the lending rates to the property owners. The bond market has no experience with these types of loans, so their eventual pricing remains “open”. If the bond market demands much higher pricing for these loans than projected when original loans were funded (meaning that it doesn’t like these deals), that would make a bond offering unsuccessful, forcing the County to hold these loans on its own books and restricting capital meant for other obligations.
• Already overleveraged property owners can possibly get further into debt, due to the easy credit terms of these loans.
• No one knows if the total amount of these programs is really enough to achieve the required emissions reduction targets.

Despite some of the open issues, this type of program is still, in our view, quite innovative. Given the a) generally tough state of traditional finance markets, b) the need to use financial tools to reduce energy, water and greenhouse gas emissions as well as c) the easier credit terms the property owner could obtain with county and water district funds anyway — this type of green financing is not only timely but compelling.

Congratulations and good luck, Sonoma County!

The New DOT/HUD Partnership That Will Influence Your Green Investments

Uncle Sam is drilling down on the hidden costs of poor transportation options, high transportation costs and lack of access to affordable housing — which means that (sooner or later) real estate investors who want to stay relevant in their communities will be doing the same thing, if they haven’t started already.

Case in point:

The US Department of Transportation and US Department of Housing and Urban Development announced a new task force on community sustainability that will attack the interrelated problems of energy costs, transportation options and housing affordability.

We’ve posted before about the fact that most of us real estate professionals, despite being consumers ourselves, are not aware of the extent to which fuel prices, long commutes, lack of transportation options and lack of access to affordable housing erode the finances of tenants in our properties, their employees, not to mention community viability.

The announcement points out that the average working American family spends nearly 60 percent of its budget on housing and transportation costs.

And we posted awhile back about Ken Rosen’s comments on these topics:  US consumers have been “importing” higher inflation than domestic US levels. Low income individuals are particularly affected, paying 7%-10% inflation rates due to their exposure to fuel and food price increases combined.

Interesting is a snippet within the announcement, which deals directly with the “business case” argument for American families:

[The HUD/DOT task force will]…redefine affordability and make it transparent. The task force will develop Federal housing affordability measures that include housing, and transportation costs and other costs that affect location choices. Although transportation costs now approach or exceed housing costs for many working families, Federal definitions of housing affordability don’t recognize the strain of soaring transportation costs on homeowners and renters who live in areas isolated from work opportunities and transportation choices.

When we’re working with clients on their green investment strategies, we tell them to make sure they understand how project siting and design decisions affect the business case of tenants and other stakeholders. Even if the clients are not directly involved with HUD housing, the federal government’s influence (and stimulus funding) on these issues will help state and local governments highlight the same areas within their own jurisdictions.

So the task force’s scope, in so many words, becomes the new scope of real estate development when interacting with local officials. We think that the best way real estate investors can manage that enlarged scope is to make sure the interrelationship between transportation costs, access to housing affordability and community viability figure just as prominently in any sustainable project’s business case as their own.

Photo credit: Flickr/Cocoi-Urban Sprawl, Las Vegas

Social Investors Join Cities to Finance Neighborhood Green Initiatives

Municipal financing authorities are teaming up with mission-driven investors to create bond programs, which pay for green building initiatives.

Typically, the cities issue the bonds in order to help pay for upgrades to homes and buildings, which will make them more energy efficient.

Socially responsible investors are buying these bonds because they pay fixed returns while simultaneously funding the investors’ real estate sustainability goals.

Case in point:

The New Mexico Mortgage Finance Authority and  Community Capital Management have created one of the latest of these financing programs, also designated for funding neighborhood scale green initiatives. The article highlights the use of the Home Energy Rating System in order to determine the kinds of energy efficiency improvements which will result in upgraded homes qualifying for Energy Star ratings.

What’s interesting here is that the article reflects how local governments are able to be significant green finance players by combining stimulus funding available to them with innovative fixed income financing programs — backed by the powerful SRI market, which has not been as affected by the economic downturn as  many traditional private market capital providers.

The benefits? As one investor put it:

“When urban areas have good schools, job opportunities, an adequate supply of housing, safe and reliable transportation, and low crime rates, they become attractive places for families to live and businesses to set up shop. Robust communities reduce the pressure on the environment associated with sprawl.”

Be on the lookout for more growth in this form of capital to pay for the of our neighborhoods. Over the next few years, it will be interesting to follow these financing initiatives to see which programs and cities do the best job of achieving the energy efficiency increase and carbon emissions reductions that they now seek.

Photo credit: Greenforall.org/Flickr

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