Can private real estate make a bigger impact on housing affordability? Share your views.

 

Today I’ll be speaking at the NeighborWorks Symposium: Investing for Impact in Sustainable Communities and that provides a great opportunity for you to send in questions and thoughts on the topics they are covering.

I’ll add your questions to others I already have and will get the answers from speakers during the day — sharing them back on Twitter or via a blog post about the event later.

NeighborWorks has put together a unique event, with an agenda that sports quite a few sharp teeth.

Starting off with a keynote from Angela Blackwell, Founder and CEO of PolicyLink, the symposium dives deep into several interconnected aspects of housing affordability, with the goal of generating actionable ideas on next steps to improve the impact of investing in housing affordability and sustainable communities.

Symposium topics include:

• the proposition that greater investment in housing organizations is needed to assist the cause of affordability.
• the role of sustainable design in housing affordability.
• a look at our understanding of social returns from affordable housing and how can that knowledge stimulate greater private capital investment in the sector.

I am speaking on the last topic above, as part of a panel moderated by Nancy Andrews, of Low Income Investment Fund.  Since we are speaking in an open Q&A format, the specifics of our discussion on social returns will evolve from the input of all the speakers.

Tomorrow, I’ll speak about the tools from Galley Eco Capital’s work that non-profit housing groups can use to better engage private real estate investors on investing in rental housing and sustainable communities.

The graphic for today’s post is the title page of my talk, which will contain a good dose of material on triple bottom line metrics as well as the role of innovation within the discussion.

After the event, I’ll post a short except from the presentation, to continue the conversation on the role of  social returns within private real estate investment decision and if it is truly possible improve the way we invest in housing affordability and communities within the US.

Got any questions that you’d like answered on the above topics? If you send them to me, I’ll ask panelists and speakers during the day as time permits.

In any event, I look forward to hearing about your views on the topic.

I can post the answers either on Twitter or on a blog post for everyone later when the conference is over.

Stay tuned!

RFP Magazine Article: Green finance breaks barriers for global real estate

 

The following article, written by Lisa Michelle Galley, was published in RFP Magazine, on 3 March 2010. RFP stands for “Real Estate, Facilities, Projects”.

RFP Magazine focuses on investment real estate across Asia.

The article published under the title “The Financial Barriers to Real Estate Can Be Overcome, Explains Lisa Michelle Galley”.

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Community officials, property owners and citizens are changing the world – working hard to extend regional social, environmental and commercial vitality. This is driving exponential growth in energy efficient and environmentally-certified (collectively called “green”) buildings, since some people realize that green buildings are clearly better performing investments that release funds trapped in wasted resources back into the pockets of workers and local economies.

Yet, green building opportunities present major challenges for today’s financial sector. In Living Cities (2009), a collaborative of 21 global financial institutions, cities named a lack of funding as their number one challenge for developing large-scale green building programs. Commercial banks have difficulty with pricing energy savings as an asset. Investors are still getting comfortable with factoring water and energy performance into property pricing decisions.

To address these barriers, governments and private investors are combining green financial products with traditional ones, into systems of finance products and mechanisms, to introduce transparency about building performance into markets, and direct capital into and from green buildings.

These new financial solutions, organized at the district or community level, are implemented via public-private collaborations. Implementing these programs requires moving through a series of nested considerations from determining the interests of diverse stakeholders to structuring the right finance mechanisms for communities and investors as well as for reducing greenhouse gas emissions through day-to-day activities.

Understand the Interests of Stakeholders and their Markets

Financing green starts with understanding the real, often unspoken expectations of each stakeholder. Property investors need clear green investment cases. Home buyers seek to reduce their energy costs and ensure safe air quality for their children. City officials want to limit resource expenditure on public infrastructure.

Incorporating these expectations into any green finance assessment promises crucial insights.  Participants can increase the impact of initiatives, since finance options are simultaneously compared to everyone’s interests and available opportunities. They also provide an early warning system about potential roadblocks, saving the time and money associated with creating financial solutions which were doomed from the start.

New Tools for Green Finance

Accelerating green buildings requires that communities and investors obtain capital for their projects. Below are a few new, popular and innovative green finance products that assist with both individual projects and large-scale transformation.

Green bonds: Socially responsible and ethical investors are a potent source of capital, but have traditionally shied away from investing in real estate, since it does not clearly align with their mission requirements. However, as a US$2.71 trillion market “on a mission”, socially responsible investors (SRI) are increasingly stepping up to partner with communities by buying green bonds issued by local governments that fund large-scale retrofitting of low income housing or regeneration of blighted urban areas. Recent examples include the EU-issued EUR1 billion in “Climate Awareness Bonds” in 2007. In the United States, bonds for ‘tax-lien’ financing, such as those issued by Sonoma County in spring 2009 and the upcoming GreenFinanceSF are growing in popularity, with more than 95 Californian cities either operating or in the process of establishing similar programs.

Commercial bank green loans and investment products: When a municipality implements sustainability initiatives, the continued access of businesses and consumers to credit services is often taken for granted. However, this as well as an adaptation of those products to better fit with the municipality’s sustainability objectives for buildings, is a critical area of analysis which often goes overlooked. As a result, many communities watch as sustainability initiatives falter, since they do not see sufficient private market credit and investment taking place. Often times, they fail to understand exactly how much credit for buildings actually comes from local banks.

When the South Korean government announced a national “low carbon, green growth initiative”, several of the nation’s largest lenders, including Kookmin Bank, also announced their roll-out of many types of green financial services and products. The products not only cover residential and commercial green building loans, but also extend to industry with asset management, project finance and insurance.

Climate Benefiting Finance: Some communities and investors are even requesting green finance solutions that are sophisticated and scalable enough to transform the national economy. Introduced in June 2009 by the winning ‘c_life’ team in Sitra’s Low2No competition in Helsinki, Finland, climate benefiting finance is a replicable set of economic frameworks that will help to assure a private finance market that values green buildings. The frameworks consist of many interrelated systems of green financing mechanisms, all designed to price and deliver finance in a way that rewards carbon savings within businesses, real estate projects and the carbon-related behavior of private individuals. Here, the goal is to use finance to ignite profound change and diffuse new ways of thinking about sustainability.

Designing Green Finance Mechanisms for Impact

Molding green and traditional finance products together into a customized program sets the stage for finance that is truly aligned with driving sustainability.

First, stakeholders jointly analyze their situations and cross-educate each other about their individual risks of continuing business-as-usual. Second, the government will comprehensively assess the availability of incentives available to the building owner, to understand which ones most closely complement their objectives and those that conflict. Third, the initiatives’ attractiveness to private sector capital sources will be researched. Fourth, they will focus on needed partnerships with private financial institutions to assist the development of the loan products, that work best with program funds that public agencies may provide for green buildings.

From those evaluations, officials, investors, financial institutions and citizens can obtain a common understanding not only of their individual green business case, but also of the interrelationship of their success within the green initiative and the success of others.

Market-tailored tools such as investment and credit underwriting protocols for green buildings, benchmarking and metrics to measure property performance, as well as new monitoring and reporting regimes to assure feedback, will strengthen the initiatives’ success.

The gains of incorporating green finance mechanisms into sustainability initiatives are transparency and clarity. When everyone at the table is able to actively benefit, barriers fall and the complex dialogue becomes much clearer and simpler.

How Green Multifamily Helps Bank CRA Ratings

 

(that’s “New Orleans” for  non-Southerners).

I am conducting workshops on Underwriting Green Multifamily Development this week at the 2010 National Community Development Lending School (”NCDLS”), hosted by the San Francisco Federal Reserve Bank.

NCDLS takes place within the National Interagency Community Reinvestment Conference, a big national event for community development professionals, Community Reinvestment Act (CRA) officers, lenders, investors, non-profits and intermediaries.

This is the first time that the topic of underwriting green multifamily developments is part of the NCDLS curriculum. We’ll share more tips from the course for you in Tuesday’s Pacesetter (subscribed, yet?)

A main point we are stressing in workshops is that green multifamily investments fulfill a far larger set of objectives than just better quality housing (which, of course, is a great start). We’ll be educating colleagues on how sustainably-designed apartments help regulated financial institutions to go beyond simply fulfilling CRA requirements. Done right, green apartments can materially improve bank CRA examination outcomes, which satisfies the institution’s broader business objectives.

But first, a short background: The Community Reinvestment Act of 1977 was established to ensure that regulated financial institutions would have an obligation to help meet the credit needs of local communities in which they were chartered. Briefly, financial institutions demonstrate compliance with these laws by providing “qualified community development loans, investments and services.”

The actual performance requirements needed to comply with the CRA vary by institution size and charter, however, it’s enough to know here that regulators use CRA examinations to verify an institution’s compliance with these laws. Those examination results are considered whenever a financial institution applies to open a branch, merge with another institution or become a financial holding company, which are the key moves bank need to make in order to grow and survive.

The CRA examination can result in four possible ratings: “outstanding,” “satisfactory,” “needs to improve” and “substantial non-compliance.” In work and conversations with CRA officers and other professionals, we learned that many banks typically receive “satisfactory” ratings, but it is very hard to improve an examination rating from “satisfactory” to “outstanding.” If you take a look at the Cliff Notes version of CRA requirements here, especially those for large banks (assets > $1billion), receiving an “outstanding” across examination categories is not a matter of simply being “very good” at a few things, the institution has to be “excellent” at many requirements, which can be very challenging, particularly during a tough economy.

One of the toughest requirements to fulfill-let alone demonstrate excellence at-is in the “Product Innovation” category, where the large bank has to “make EXTENSIVE USE of  innovative and/or flexible lending practices in serving [assessment area] credit needs.” And this is where green multifamily investments help greatly.

» SF Federal Reserve Bank’s CRA page
» CRA page at Cornell Law School’s Legal Information Institute

What I Learned at the Competitive Edge Workshop #1

 

“Teaching is half learning.”

That’s a Japanese proverb, originally from the Chinese Book of Documents.  After teaching the first Competitive Edge workshop last week, we definitely believe that’s true — teaching involves a great deal of learning.

In addition to a personally amazing experience with a fantastic group of high-caliber professionals, we found ourselves reflecting deeply on how much we learned from them.

If you’ve been following previous posts on this blog or getting Pacesetter, Investment Analysis of Green Buildings, sponsored by the US Green Building Council - Northern California Chapter and law firm Hanson Bridgett was held last week, we taught to a nearly sold out room.  On top of that, the course was granted CEU-status by USGBC national, a first for the Northern California Chapter — and for green finance anywhere, to the best of our knowledge.

Here is what we learned from listening to and working with the workshop attendees:

#1: Green finance is important to a much larger group of professionals than you might think.

While we deeply believe that green finance can change the world, we had still oriented much of this course’s material to real estate finance and investment professionals. And, we had a full house of folks from some of investment real estate’s household names, which was flattering.  In addition, however, there were also professionals from the building technology,  construction, corporate real estate, affordable housing and legal sectors. In our conversations, we asked attendees about why they attended the course. The answer we received repeatedly was that professionals were finding it critical to understand the perspective of the property owners that they worked with and they believed that updating their knowledge of financing sustainable properties would be a good way to do that.

Real estate professionals in the room were leading change within their firms or they saw the workshop as a good way to help themselves transition within real estate by upping their knowledge and skill of financing green  real estate.

#2: Attendees most liked learning a simple, cohesive underwriting approach, how to apply LEED to finance decisionmaking, metrics and taking away a rich set of resources

We had definitely focused on creating actionable content, and when we reviewed the feedback, the following  topics were voted as being most significant time and time again:

• the GAPS approach simplified underwriting: We had really focused on reducing the complexity associated with underwriting and received strong, positive feedback on this. The participants gave high marks to our own system for green real estate underwriting, which we use to help decisionmakers quickly to define, evaluate and communicate the value-add of green real estate. It was interesting that folks from many non-finance sectors found this approach quite useful, too, in their structuring of their own work with property owners. (Don’t know about GAPS, yet? You should check it out at the next Competitive Edge, Financial Considerations of Energy Efficiency Retrofits, on 7 April; sign up here.)

• Learning how to connect LEED credits with the project operating cash flow: This particular need, a core requirement of our work here, got high marks as well. Most of the feedback was along the lines of participants feeling much more comfortable in conversations at work and with clients, now that they could point to very concrete areas within the LEED-NC system, which were prioritized according to cash flow impact.
  

• More metrics, please!: Green Journey readers know of our papers and posts about metrics for responsible property investing. This topic came at the end of the day, when people are typically a little tired. However, the participant feedback revealed that the topic of metrics was considered very important, telling us that professionals assign a value to incorporating both double and triple bottom line metrics within their practice.

• In-depth resources for self-study: Getting a packet of distilled, vetted sources of the latest green finance research plus tools and tips for further learning and takeaway was voted as very valuable by the attendees. While we taught course materials from  powerpoint slides and handouts, we had originally thought it would be helpful if people received an extra resource book compiling the research, tools and tips on real estate underwriting and sustainable finance that we’ve come to rely on here. So we prepared an 87-page resource book, to support the underwriting of new green construction, which expanded upon the information being taught in the course. We really focused on the green building, finance data and information that we most like to geek-out on. We were pleasantly surprised at how many attendees stated that this information was very valuable. Just this evening, I received a note from a participant saying, “I wanted to thank you for your great insight and the wealth of information that you shared”.

It was really gratifying to be able to share our knowledge and passion with a sharp group of professionals. Their feedback about the topics and resources that were most valuable to them opened our eyes also . This will definitely help us in the upcoming Competitive Edge events.

P.S. → The next Competitive Edge workshop, Financial Considerations for Existing Building Retrofits, takes place on 7 April 2010. We are excited about the fact that the City of San Francisco and PG&E will also be taking part with great information that will help properties to better finance existing building retrofits. Sign up and join us in an exciting day! Seating is limited and several of Workshop #1 attendees have indicated that they’ll be attending again, so register sooner than later. On top of that, early bird pricing runs through 24 March 2010.

Norwegian fund putting $16 billion into socially-responsible real estate

 

The juggernaut Norwegian Global Pension Fund has just announced that it intends to significantly expand its real estate holdings globally.

According to the report in Responsible Investor, “Environmental, social and governance (ESG) factors including energy efficiency and water consumption are to be key planks“ within the criteria for new property investments.

The $16 billion investment amount represents 5% of the fund’s overall value and its manager, Norges Bank Investment Management (NBIM), indicates that the fund will need a few years to actually invest in ESG-screened real estate to achieve that level, as the allocation comes from portfolio shift created by cutting the fund’s bond portfolio.

How will they actually invest responsibly?

This is interesting, as there is no real consensus about reporting standards and measurements that constitute responsible investing in the institutional real estate field (see our previous posts and papers about Metrics for Responsible Property Investing, for more details).

NBIM will be required by the government to produce an annual report of the portfolio, including an “assessment of how it conforms to responsible management and the exercise of ownership rights. The bank will be allowed to hire external managers and outsource operational functions, with returns benchmarked against a customised version of the Investment Property Databank’s Global Property Benchmark.”

Overall, we are noticing increasing interest by foreign investors in US markets, as they believe that property values have nearly bottomed out. That, plus the growing requirement for green and socially-responsible properties can possibly spur a near to mid-term shortage in green real estate, even as property markets generally are expected to be in a slow recovery.

As we have seen in previous cycles, lots of capital seeking an asset in short supply can always create some interesting market action. From my point of view, the Norwegian Global Pension Fund is not alone in the direction they are taking. Expect to hear more on this point in the near future, as others get in on the action.