Bioregionalism & Green Finance: “It’s the (sustainable) economy, stupid”
At least, that’s what Luke Lowings seems to be saying, in his review of Pooran Dersai’s new book, One Planet Communities. And he’s not making a bad point. It’s time that a solid discussion of finance accompany visionary development.
Dersai’s new book espouses “practical bioregionalism” — focusing on architectural principles for building a whole community — as opposed to just the sustainability of individual buildings. He argues for applying principles of bioregionalism to create sustainable communities (definition of bioregionalism here).
Lowings’ main complaint about One Planet Communities is that its heavy focus on building sustainable communities ignores the parallel task of creating a sustainable economy to support them. My brow furrowed as I realized that, if this was Lowings’ chief complaint, then he’s probably very depressed about everything he reads on sustainable buildings. To date, not many have been able to lay out a cohesive set of principles and practice for the kind of finance that truly supports sustainable communities at a regional level. So I feel Lowings’ unfairly picks on Dersai about a general problem in the market, not for any particular failing on Dersai’s part.
Financial Infrastructure Needs to Support Sustainable Communities
Nonetheless, Lowings still has a good point –> the current availability of financial tools and resources for green real estate developers and investors is more of a swap meet than a market. It does not offer the depth and breadth of organized infrastructure that bioregions can rely upon.
- Recently, there have been a glut of new studies and tools dealing with narrowly defined pieces of individual building-related financial problems — green lease clauses, detailing paybacks on specific retrofit measures, and the potential value-add of third party certification to individual green buildings.
- On the funding side, the owner’s discovery and selection process requires trudging through a a swamp of new incentives, stimulus funding plus the byzantine tax and regulatory requirements that accompany them. To come up with a green business case on their own, they have to hopscotch around, stitching together those new green funding sources with their traditional capital relationships. Repeat that whole process again, for every single building they intend to green.
- It’s no wonder that nearly 70% of the participants who attended one of our recent webinars, indicated that they were not applying for or using any sort of incentives whatsoever. Why not? Too confusing to figure out!
The final wrinkle relates back to our post last week on green building valuation. In order for finance to support sustainable communities, the investment real estate community will have to be able to assign a value to amenities such as community farms and more schools. There would have to be a cultural shift towards more long-term economic stability as opposed to above-inflation rental growth. From today’s standpoint, that is a very tall order.
Bioregions don’t fit neatly into industry accepted conventions of primary and secondary real estate markets. Real estate fundamentals are driven by global and national market forces, not just regional ones. Capital markets these days cannot exist exclusively within a fenced-off business territory.
So I think that the sustainability movement has to acknowledge a certain level of hype that is accompanying the bioregion vision and incorporate a sober view of global demographics and economics in their economic planning.
Case Study: The Preserve - an official candidate “One Planet Community”
Can bioregionalism completely address some of the ills we see within our communities? Hmmm…. maybe.
GlobeSt.com has put out the word on A.G. Spanos’ announcement of a $2 billion “environmentally and economically sustainable” community that will generate 12,000 jobs and over $15 million in annual revenue for Stockton, CA”.
This community, called ‘The Preserve’, is also endorsed under review for endorsement by the One Planet Community, which gave is considering the endorsement in exchange for the development subscribing to its ten principles that address public transit, economics,natural habitats, energy and water, jobs, education and well being.
Two things come to mind as I read this announcement:
#1: Stockton, California has a foreclosure rate of 15% vs California’s 9.5% and the US rate of 6.72%.
# 2: The Stockton, CA metropolitan statistical area posts unemployment of 15.5%. It is ranked 359 out of the total 372 MSA’s tracked by the Bureau of Labor Statistics.
Which leads to my main question:
Can installing a bioregion heal an ailing city?
Seriously. With stats like those above, can the City of Stockton truly afford to support a brand new 1,800 acre community — whose tax benefits won’t be fully evident for many years to come?
My long career of lending other people’s money into many MSA’s has taught me to be cautious when I hear about multi-billion-dollar new developments going into distressed communities — green or not. The US real estate industry is littered with tales of failed revitalization efforts tied to grand master-planned schemes, which absorbed huge amounts of a suffering town’s resources, but actually took a very long time to return relatively little to the residents who needed the relief.
The complete terms of the Preserve development are not yet known, so the jury’s out on the ways in which Stockton will be impacted. But real estate financing history suggests that these kinds of deals only make sense to the developer if they are getting the land at a very low price (or for free) and the city is contributing advantageous financing terms (big infrastructure bonds, etc).
The city hopes for larger tax revenues from the new businesses and residents in years to come after everything is built. Any rewards for the residents won’t be evident for years — after all, houses don’t make long-term jobs. It works the other way around.
Lots of cities forget that. They also forget that, in 15-20 years when the promised development is fully operational, the real estate cycle will be in a much different place than when they signed the deal.
Bioregionalism principles can certainly play a key role in stabilizing Stockton’s economic outlook, but I bet that the City of Stockton could probably accelerate healing of its distress with a large scale, pragmatic energy efficiency financing program for its existing building stock as well as existing businesses to reduce cost of operations, spur green collar jobs and prevent further bleeding of existing jobs. Stockton appears to have a deal in the works with utility, PG&E, but I’m talking about a bigger, farther reaching kind of program which would encompass other forms of green finance beyond that supplied by the public utility.
Long-term healthy jobs and an educated workforce are the DNA of every healthy real estate market — not to mention, sustainable communities. With all due respect to The Preserve, I don’t think that every city needs to necessarily go through the long, expensive process of building big new green communities to get there. And I always have lots of questions when ailing cities start agreeing to these projects, since they are usually in the worst position to really reap the benefits.
The good news is that, “swap meet” aside, there are great green finance options available that, when properly structured, can support cities like Stockton to implement either energy efficiency, new green development, or both. The key is to focus on these options very early in the process and, as Luke Lowings suggested, to make sure that sustainable finance doesn’t take a back seat to sustainable community building.
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Things you might want to know:
- We’d love to hear your comments and suggestions.
- You can get Our Green Journey by email.
- You can contact Galley Eco Capital to discuss or initiate a project here.
- Sometimes you can see what we’re doing on Twitter.
- Photo credit: Stockton, CA Boom Town by Joguldi (Flickr).
Don’t Build a Certified Gas Guzzler
Some investors narrowly focus on obtaining the LEED-plaque without doing sufficient analysis of whether they are approving the right kinds of energy-savings features for their investment dollars.
And that can cost them more than they assume — here’s a real cautionary tale:
The GSA’s Federal Building in Youngstown, Ohio is highlighted in today’s NY Times as a LEED-certified gas guzzler. The barebones fact is that, despite achieving LEED-certification, the building failed to qualify for Energy Star rating, when its utility bills were assessed last year.
What did they do wrong?
The GSA focused on things like daylighting, native landscaping and a white roof. They also paid for a “gas guzzling cooling system” and didn’t funding enough “structural energy-saving features”.
What’s at stake for the real estate industry is the enormous investment of time and capital into creating green and energy efficient buildings, in order to avoid the potential appraisal risk tied to obsolescence now facing many conventional buildings.
The USGBC’s own research indicates that “a quarter of the new buildings that have been certified do not save as much energy as their designs predicted and that most do not track energy consumption once in use.”
In addition to possibly leaving an owner open to reputation damage from accusations of greenwashing, failing to make the right decisions about structural energy and water saving design could harm the viability of the green building investment in a few ways:
a) Wasted money: in our opinion, an investor operating an underperforming certified green building is still open to the appraisal risk that they were trying to avoid in the first place,
b) Breach of duty to your shareholders: in the opinion of some attorneys, the investor is breaching his fiduciary responsibility to his shareholders for not taking sufficient steps to avert material risks to their investment.
b) An entre to litigation hell: in the opinion of some other attorneys, the green building’s subperformance can possibly leave the A/E/C partners possibly open to litigation related to the subperformance issues.
And on top of all of that, absolutely no one wants to be the operator who has to come up with a clever response for his investors because his firm is featured in the press as the owner/operator of a gas-guzzling green building. The damage from that sort of press is enough to outweigh any concerns about potential first cost fears on structural energy-saving features.
So if one of your partners or clients doesn’t see much value in paying for structural energy-savings features, hand them the story of Youngstown Ohio Federal Building.
Ask them if they’d like to see their name in the papers as the next owner of a LEED-certified asset that has been officially assessed as a gas-guzzler.
Thank you, Ted Kennedy
Ted Kennedy was a vigorous defender of “people, profit and planet” before any of us ever used the phrase “triple bottom line”.
Treehugger has compiled a series of tributes to this “progessive green champion” that is a worthwhile read and great history lesson for those who are new to the green finance and investment world.
Green real estate professionals owe Ted Kennedy a great debt of gratitude.
Our entire business would not even be imaginable, if he had not so persistently pushed for social and environmental justice over the many decades of his political career — long before the idea of a green economy existed.
If you are reading this post on the website (as opposed to by email), you can check out what might possibly be Ted Kennedy’s last great act for the sustainability movement — his endorsement of Barack Obama for president.
Photo credit: Flickr - diggersf
New Paper Highlights Decision Approach on Green Property Valuation
How can professionals approach valuing green buildings, when there is still a lack of performance data?
Lots of folks accuse appraisers of being roadblocks to advancing green real estate because many still don’t provide any recognition for the higher value of sustainably designed projects in their valuations.
Check out a new report, “High Performance Building: What’s It Worth?” by the Cascadia Green Building Council, Vancouver Valuation Accord and Cushman Wakefield.
Co-authored by appraiser and thought leader Theddi Wright Chappell of Cushman Wakefield (covered previously here), this paper provides leadership on this problem via an appraiser’s professional insight into three sustainably built projects.
The authors acknowledge hurdles to green property appraisal up front: modern valuation methodology, like investment and lending as a whole, is solely focused on “economic considerations”.
In their words, “neither the methodology that is practiced by the valuation profession nor the methodology that is typically used by the investment community or major lending institutions includes specific considerations of social or environmental factors. It is largely assumed these are reflected in the price or rent paid in the market”.
They reviewed three LEED-certified buildings in detail, pointing out areas on each project where sustainable design strengthened the property’s marketability and operations, with strong connections to positive valuation support.
The connection between design and its possible value-add was highlighted via comments like the following:
- “experienced a comparatively quick absorption period”
- “high or moderately high” tenant satisfaction feedback
- “higher than average level of occupancy”
- “achieved competitive rents”
Particularly useful, is their presentation of questions that can accompany a particular valuation approach (cost, sale or income), designed to help the valuer incorporate a deeper analysis of sustainable design impacts on the project. These questions will be useful to anyone underwriting a potential investment into a green building. One example:
[For the Income Approach]: Was the building commissioned? Commissioning could impact assumptions relative to both operational and performance risk.
This particular paper’s value (excuse the pun) is in showing the many deciders out there that the lack of long years of economic performance data on green buildings need not be an impediment to increasing financing, investing and appraising green buildings.
By adopting the right review approach, anyone underwriting a project can learn to uncover and analyse the pertinent issues, which can lead to a more accurate investment decision.
Take a look at the paper and let us know your thoughts.
Friday Photo: National Clean Energy Summit + Post Scripts
Recently on 11 August, political and economic leaders gathered at CityCenter, Las Vegas for the National Clean Energy Summit. CityCenter is a multi-billion dollar, LEED-registered, mixed-use development still under construction and recently narrowly avoided being named the biggest foreclosure of the year (search: “citycenter+las vegas+foreclosure”).
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Post Scripts
On the guaranteeing of LEED certification … “over my dead body” vs. “who’s to stop it?”
Yesterday’s post about consultants guaranteeing LEED certification generated comments from two adjacent, but distinct philosophical camps: a) The Indignant and b) The Resigned.
Here’s the sampling of sentiments (note: when people comment to me directly, I withhold their names for all kinds of obviously decent reasons).
Camp 1: The Indignant aka “Over my dead body…”
From D.C.:
We would absolutely not ever guarantee LEED certification. We feel confident we can achieve the desired level of certification with cooperation from the owner and its consultants. BUT this is a third party certification program over which we have no control. I recently exchanged emails with another small, start-up consulting firm making similar claims. I asked how they could do so – I think they basically hadn’t thought it out much and were small enough that if they were sued, they could probably just go under. I think this is a symptom of new companies that lack experience and are trying to win business. I am not sure our owners would take this seriously – but our owners are pretty savvy about the process too.
From San Francisco:
We’ll never guarantee…with the reviewers producing very different reviews even for similar buildings in the same city we haven’t a hope of knowing where the building will finally end up in the LEED process..it’s not in our hands.
Camp 2: The Resigned aka “Can we really stop it?”
Grant Roden, who posted to comments wrote:
Yes, I think that LEED consultants will be forced to ‘guarantee’ LEED certification. Due to the marketing potential from investors / lenders and occupants, owners will go with a company that claims they can guarantee certification. However, this will not reduce the cost associated with getting certified, if anything, I think that it will be possible for consultants to increase their fees. Now with V.3 requirements there are more ‘after-market’ and post-occupancy monitoring necessary to get certified. The consultants need to be associated with the project for years after completion.
This is where the lawyers will need to come in and develop contracts to ensure that the owner, consultants, contractors and occupants understand their roles in ensuring certification.
Thanks for all the comments, everyone and have a good weekend!
