German funds step up sustainability screening for decision making

If you only read about US real estate investors, you might have the opinion that the real estate community is still undecided on the topic of embracing green building.

One stack of articles will quote investors talking up their green building programs.

In an equally thick stack of quotes, they complain about green building or energy efficiency costs.

In Germany, however, investors are more outspoken — favoring increased green and energy efficiency screening and investment criteria.

According to Germany’s Handelsblatt, European real estate investors are quoted as increasing their screening procedures and criteria for green buildings and energy efficiency. Per the Handelsblatt (our translation):

German open-end real estate funds are increasingly applying social and environmental criteria to their investment decision making. These criteria are also playing a growing role in portfolio management procedures.

Five funds are quoted as discussing their use of green and energy efficient criteria within their investment decision making: Pramerica, UBS, Union Investment Real Estate, Axa Real Estate and Commerz Real.

What are the funds reported activities?

• Union Real Estate utilizes a sustainability screen at acquisition. Existing buildings which do not meet their minimum energy efficiency criteria are rejected.
• UBS uses different checklists for suppliers, tenants, project acquisition, leases and building performance to monitor and enforce sustainability standards.
• Pramerica Real Estate’s investment policy within its TMW World Funds has been adjusted so that sustainability screening is conducted for all new investments as well as on the existing portfolio. Due to the fact that there really aren’t enough green buildings in existence for investment, they also check non-green investments at acquisition to make sure that they can be greened once they are in ownership.
• Axa Real Estate had its own sustainability ratings system developed and is currently testing its portfolio.
• Commerz Real reports that sustainability criteria has an increasing influence on investment decisions, since they notice that more tenants desire renting within green buildings.

While you might encounter US investors without a firm sustainability policy, it appears that if you wish to do business with German investors, you had better have your (or their) green investment checklist ready.

This is particularly interesting because several of these funds have had successful capital raises. With US real estate (and the dollar) getting cheaper, it will be interesting to see what happens when these foreign investors start looking to the US for good deals — with their sustainability criteria in hand.

*   *   *

On-Bill vs Tax-lien Financing 2: Which is better for you?

In the last post, we put out a free resource, that walks you through an energy efficiency financing case study. Here we compare financing options more in depth, so you can see some of the critical questions when considering which form of financing would be best for your retrofit projects.

Prevalence of on-bill financing: Roughly 10 states offer on-bill financing programs. A number of  gas and electric utilities currently offer (or have conducted pilot testing of) on-bill financing programs, which are oftentimes referred to as meter loans or TIPs (”Tariff Improvement Programs”). When structured and funded correctly, and with the appropriate marketing, these programs have been successful. Take a look at San Diego Gas & Electric’s website detailing their program for an example of how this works.

Emerging tax-lien financing market: So far, only a handful of municipalities and counties have executed tax-lien programs (The City of Berkeley, Sonoma County, and City of Palm Desert have operational programs). Despite the model’s infancy, more than 15 states have amended state laws to allow for local improvement districts, paving the way for local government to enact tax-lien programs.

When thinking about which mechanism works best for your circumstances, its better to frame the analysis in terms of trade-offs involved. In other words, nothing’s perfect, but in the right circumstances, each option can be more than good enough. So let’s focus on the comparative advantages of each.

Tax-Lien Advantages

• Longer loan terms: The typical loan payback period for tax-lien loans is 20 years, minimizing the annual principal costs. This helps to keep these programs competitive with on-bill financing, which can feature an interest rate as low as 0%, but typically require loan repayment in 2-5 years.

• Wide range of acceptable investment: Tax-lien programs can focus on both renewable energy and energy efficiency, giving property owners greater flexibility in how they deploy capital. Current on-bill programs largely limit the use of capital to energy efficiency measures, and typically for measures that are covered under incentive programs offered by the utility provider.

• Broader financial network: There is strong interest from the private market to provide capital (via the purchase of municipal bonds, which are used to fund these loan programs) and program administration support for municipalities and counties looking to implement tax lien programs. This lowers the implementation cost for local government, increasing the likelihood of widespread adoption. On-bill programs may require expensive upgrades to the utility’s billing system, precluding utility providers from offering on-bill programs (and opting to contribute dollars to other energy efficiency programs).

On-Bill Advantages

• Available to both property owners and tenants in leased space. On-bill programs typically fund on a per-meter basis, which means that each tenant with an individual meter is eligible for on-bill. Low-to-no cost financing is attractive to tenants, who can execute energy efficiency improvements and benefit from a lower utility bill while they are in the space; if structured correctly, the monthly loan payment is less than the energy savings.  If the on-bill financing is structured under a tariff agreement, the improvements are based “on the meter”, and the financial obligation stays with the meter. Therefore, repayment obligation transfers to the new beneficiary of the upgrades. On-bill financing is a work-around to the principal-agent issues in the tenant-landlord relationship; those that pay the utility bill are now incentivized to improve their energy-efficiency.

• Program coupling. On-bill financing is combined with other energy efficiency programs offered by the utility provider, such as upgrade incentives, which reduce the cost of equipment upgrades/system improvements. Additionally, many utility providers offer no-cost design and engineering assistance to help their customers maximize the performance of their energy efficiency measures. These services both reduce the improvement costs, make the whole process much easier and ensure maximum energy savings for customers.

• Reduces barriers to high impact improvements. On-bill is designed to reduce implementation costs for the borrower. No-cost financing means that capital constrained building owners and tenants can execute upgrades that have maximum impact upon energy performance. This is especially relevant for low-income households, who can now undertake energy efficiency measures in their homes which reduce their utility costs.

While the widespread availability of these programs is still limited, portfolio owners should track their development and consider them as a financing option for sustainable retrofits.

Coordinating Your Approach to Energy Efficiency Financing

As you consider how the newer options can work for you, keep the following tips in mind for y our overall program initiatives:

• Determine your portfolio retrofit strategy. Are you undertaking a wholesale repositioning of your assets, or simply ensuring long-term competitiveness via gradual improvement, or a little bit of both? In making this determination, it helps to consider both the market and regulatory risks of your assets within the areas they are located. Separate your portfolio properties into “buckets” by these criteria.

• Evaluate local financing options. Even if your portfolio covers a national or regional geographic area, it pays to evaluate the state, local, and utility provider incentives for sustainable retrofits. The availability of certain incentive and financing programs may impact which properties, and which specific upgrades, get prioritized.

• Examine your existing leases, and adapt all future leases. Do you know what retrofit costs, if any, you can pass on to your tenants? Make sure you understand how both your and your tenant’s bottom line will be impacted by performance improvements. Structure all future leases to allow for appropriate cost pass-throughs for measures that will significantly and positively impact your tenants total cost of occupancy.

« Previous Page