Future-proof your portfolio with this SB 375 update
A few weeks ago, we blogged about how real estate practitioners may inadvertently “penalize’ the green business case through understating the true costs and risks associated with continuing business as usual.
And the latest happenings related to California’s SB 375 underscore that message.
Here’s some specific download, courtesy of an excellent write-up by Jonathon Redding of Wendel Rosen (below ->details on getting the write-up), on how land use changes related to California’s landmark AB32 can increase the risks of doing business as usual for developers and investors in California who do not incorporate the new ways in which regional authorities are regulating environmental compliance, in fulfillment of their responsibilities under SB 375.
SB 375 is one of the keystones of California’s regulation of greenhouse gas emissions. From its mandate, regional authorities are required to adopt plans to limit greenhouse gas emissions by forcing projects through an “enhanced” environmental review process (read: tortuous) if the projected greenhouse gas emissions of their proposed projects exceed determined thresholds.
Redding lays out the landscape for practitioners planning projects in Northern California, where the Bay Area Air Quality Management District (BAAQMD) has just proposed the threshold of 1,100 metric tons per year of maximum greenhouse gas emissions for any project in its jurisdiction. This proposal, which will be finally reviewed for approval on 21 October 2009, is also the most sensitive threshold for GHG emissions proposed.
If the above thresholds are adopted by the BAAQMD in the next month or so, any projects which have not undergone environmental review will be subject to these thresholds.
You have four main options if your project exceeds the new GHG annual emissions thresholds:
(1) perform an expensive analysis to establish the project is below the adopted thresholds;
(2) apply technologies or best management practices to mitigate GHG emissions below significance thresholds;
(3) purchase verifiable offsets or reduction credits to the extent allowed by law; or,
(4) provide information to support the lead agency finding that it is impossible to mitigate the project’s impacts and adoption of a Statement of Overriding Considerations. In the fourth scenario, they will need to explain why the public benefits of the project outweigh the significant and unavoidable adverse impacts associated with the project.
The gist is this, if you have wholly overlooked this new regulation, or have designed a new project in BAAMQD’s jurisdiction that does not quite meet the threshold, compliance “after the fact” will cost you big: dollars and headaches.
Of course, you can spend time isolating SB 375-related costs and adding them to your cost of doing business as usual, to determine the “value-add” of sustainability via avoiding them with good green design that complies with the thresholds.
From our experience, the value of avoiding an unduly long, messy “enhanced” environmental review by itself is — to paraphrase a famous advertiser — priceless.
(Note: we couldn’t get a direct link to Jonathon Redding’s write-up for you, but will happily forward this great information if you request it.
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3 ways monitoring building performance can help you innovate
While some property owners may look upon increasing building energy performance requirements as a burden, we think that early adaptation of your portfolio to these new regulations opens up opportunities to innovate within your platform.
As reported by The Real Estate Development Law Blog, Washington State’s SB 5854, following the “lead” of USGBC’s Building Performance Initiative and California’s AB 1103, will (when passed) require the use of Energy Star Portfolio Manager as its benchmarking tool for calculation and reporting of building energy performance data to be provided to a prospective buyer, lessee or lender.
The promised benefit is more effective market transformation via reporting transparency on existing buildings. However, we also know about lots of frustration from owners, who find additional regulations for existing buildings to be burdensome.
But it doesn’t have to be that way.
In fact, early compliance with these new regulations might open up unique opportunities for property owners to get ahead of the pack in achieving competitive advantage for their firms.
How to create opportunities from compliance…
The September 2009 Harvard Business Review focuses on sustainability and innovation. In it, authors Nimudolu, Rangaswami and Prahalad lay out the typical phases companies go through to build a sustainability platform. Interestingly, that process begins at the place where many portfolio owners are at now today – compliance with new regulation.
They argue that early adaptation of a property portfolio to comply with anticipated sustainability regulation opens up the potential for innovation in several ways:
1. First mover advantage: First movers on compliance gain knowledge and time to experiment. Adopting emerging energy reporting compliance standards (whether binding or not) provides property owners critical time to develop solutions best suited to their portfolios and fosters genuine best practices.
2. Lower overall costs of compliance: Conforming to the highest compliance standards allows for scale benefits across markets and better insulates diversified portfolios from changing legal regimes. Attempting to create and manage different compliance approaches based on lowest local thresholds is costly and inefficient.
3. Critical stakeholder development: Early adoption of the tougher building performance reporting standards sets the stage for better relationship building with city officials in the markets where the company operates. Property owners with building performance data in hand will become preferred partners of city officials because they are able to prove that they are the better partner than their competitors. This creates meaningful advantages in terms of future permitting and entitlement actions, as well as allowing those owners preferred status in helping the city adopt other emerging standards.
Embracing building energy reporting early across your portfolio can be a catalyst for innovation that spurs market leadership, enhancing asset value sooner and better than your competitors. Early adopters to emerging building performance measurement requirements will position their businesses to outpace the competition and secure deeper relationships with capital sources and policy makers.
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- Photo credit: istockphoto.com: Dave Bolton/”Blue Glass”.
Avoid the threat behind lower emissions
You might hear that 2009 carbon emissions are down over 2008 and think that means you have more time to get started with your portfolio’s sustainability initiatives.
In reality, you should do just the opposite– because there is a real estate story buried here that isn’t as benign.
The DOE Energy Information Administration (EIA) projects that 2009 U.S. carbon emissions are projected to be 6.5% lower than in 2008, due to
weak economic conditions and declines in the consumption of most fossil fuels.
The EIA also projects 2010 emissions growth at +0.9% over 2009. For reference, the EIA’s 2009 Annual Energy Outlook, projects U.S. emissions growth of 0.3% p.a. through 2030.
We became curious about the level of economic activity accompanying these projected changes in emissions, looking particularly at economic indicators most closely tied to real estate fundamentals.
So we dug in to the EIA’s super handy table of of macroeconomic indicators, where you can derive a snapshot of the “economy-buildings-sustainability-finance” trends that shape green finance:
2009 vs 2010 Macroeconomic Snippets
According to EIA projections, in 2010:
- real GDP growth will be be +1.07%
- real personal income, non-farm and commercial employment will shrink 0.31%-0.6%
- the number of housing units will remain flat with nearly no new construction
- vehicle miles traveled will increase .4%
- the change in the producer price index for petroleum reflects 20% year-over-year growth (ouch!).
Essentially, the 2010 picture picture is one of continued high unemployment and shrinking incomes, even as the economy begins to recover. And at the same time, petroleum prices are projected to grow at nearly 19 times the rate of GDP growth.
This basically lays out the risk of a continuing deterioration of real estate market fundamentals and investment portfolios even while the official news may be reporting an economic recovery.
Moreover, these projections highlight the immediate value of energy efficiency retrofit programs on property portfolios, as a real defense against escalating petroleum-driven operating expenses. It also highlights the benefits of sustainable district-level and regional strategies for communities.
The threat of increased petroleum prices against shrinking incomes also supports the need for green finance programs, since these enable powerful, immediate responses to portfolio-wide and regional sustainability problems.
So don’t let stories of low carbon emissions slow down your firm’s energy efficiency and sustainability initiatives. Your efforts will help you to avoid some the other risks buried in the same story.
How are you moving sustainability forward in a weak economy?
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Things you might want to know:
- Do you like this post? We’d love to hear your comments and suggestions.
- You can contact us to discuss or initiate a project here.
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- Photo credit: U.S. Department of Energy, Energy Information Agency
Markets and know-how block greening foreclosed homes
Many communities have become quite passionate about the greening of foreclosed homes as a part of revitalization.
Especially since its an area that received lots of funding attention in the American Recovery and Reinvestment Act, via Neighborhood Stabilization Programs, Weatherization and other programs.
We have been following the efforts of community groups here in the San Franciso Bay Area throughout this year, as they have been applying for ARRA funding in order to purchase and retrofit foreclosed homes to green standards. Afterwards, these homes would be sold to low-to-moderate income residents, preserving housing opportunities for residents in those income groups.
Unfortunately, my latest information is that this market niche only limps along at best, despite having access to better funding than many other types of real estate these days.
A mission-based capital source active in this sector indicates that the problems plaguing these programs are the misfires of painfully basic assumptions overlooked at all governmental levels and community groups alike, during the rush for ARRA funding:
a) Banks not motivated to deal: Most folks assumed that banks would be so injured by the credit crisis, that they would just dump foreclosed homes to community groups at very deep discounts. In reality, realtors are reporting that foreclosed homes sell pretty quickly here in the Bay Area, removing bank motivation to discount their prices. The problem with that is that many groups of homes in the hardest hit areas are actually lumped into portfolios with faster selling homes — and the banks don’t differentiate. The sad result? In some communities, foreclosed homes resell relatively quickly. In lower income, more distressed neighborhoods, the foreclosed homes sit vacant and deteriorating, since the bank does not differentiate their sales practices within pools of homes straddling multiple communities.
b) Lack of experience with scale green home retrofitting: Most groups and their municipal partners overlooked the actual operational process of purchase and green retrofitting. My investor colleagues report frustrating conversations with municipalities, community groups and their partners, as it has become evident that none of these groups have actually ever run any type of scalable existing home purchase/retrofit program — let alone incorporate green remodeling within their training and operational planning. Groups such as Build it Green offer training assistance on the remodeling of existing homes to the GreenPoint Rated standards, however there is a significant business coordination aspect of operating and incorporating these processes within the larger purchase and resale platform that just gets overlooked. Many community groups simply underestimate the level of staff training and time which needs to accompany these type of programs.
For now, the aquisition purchase problem looms (much!) larger than the operational issues for foreclosed homes. Hopefully we can learn from this and not get caught by surprise when needing to adopt scale green retrofit initiatives within our own property portfolios.
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Things you might want to know:
- Do you like this post? We’d love to hear your comments and suggestions.
- You can contact us to discuss or initiate a project here.
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- Sometimes you can see what we’re doing on Twitter.
- Photo credit: Webking on istockphoto.com
How misleading electricity price info can cost you
Despite electricity price trends indicating that electricity prices have been rising significantly, misleading information and a short-term perspective can still cause investors to undervalue purchasing solar power. Recent press highlights a couple of the common traps you can avoid in your own solar finance planning.
In a recent interview, a Safeway executive announced that they currently are not pursuing any more solar power purchase agreements for its stores, due to poor economics from volatile electricity prices, rising finance costs and decreasing state incentives.
The problem?
Safeway talks about currently volatile electricity prices, indicating that cheaper electricity prices extend the payback on solar projects — possibly 2 to 5 years — contributing to their view that solar financing is currently not economical.
This assessment, in my opinion, unfortunately reflects an incomplete assessment of the company’s mid-long term energy prognosis. There’s plenty of available information from respected, third-party sources that clearly show that electricity prices will continue to rise well above the rate of inflation.
Still, as Environmental Leader reports, there has been a spate of inaccurate press about lower electricity prices, causing solar power buyers to think that deferring solar financing is a better course of action.
Essentially, energy prices this October are set to be 6.5% higher than in January this year. You can review a complete set of stats on the short-term energy outlook of the Energy Information Agency here.
One solar financier confirmed in the article that PG&E electricity prices are up 10 percent over 2007, instead of the 5%-6% annual price increases they’d projected in their customers’ PPA agreements. The result? Quicker paybacks on solar for those customers.
Understanding energy price trends is essential to establishing your company’s green business case. The general message within the “real” data is that, if solar power is an option for your properties, purchase and leasing delays caused by relying on ‘cheap electricity’ pricing misinformation will cost you. Electricity costs have been increasing and continue to rise at rates that are multiples over the current rate of inflation.
Things you might want to know:
- Do you like this post? We’d love to hear your comments and suggestions.
- You can contact us to discuss or initiate a project here.
- You can get Our Green Journey by email or via RSS.
- Sometimes you can see what we’re doing on Twitter.
- Photo credit: Alexsl on istockphoto.com
