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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• Photo credit: “Downtown” by 66North.

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.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: U.S. Department of Energy, Energy Information Agency

Galley Eco Capital helps Helsinki to reduce carbon emissions

San Francisco-based sustainable finance consultancy Galley Eco Capital was announced as part of a winning team for the redevelopment of the Jatkasaari district in Helsinki, Finland, which will be an urban zone with low or no carbon emissions.

Sitra, the innovation agency of the Finnish government, revealed today that the winning team for their “Low2No” development design competition was made up of Arup, Saurbruch Hutton, Experientia and Galley Eco Capital. The multi-national team was selected out of 74 initial entries, for their “C_life – City as Living Factory of Ecology” project.

Galley Eco Capital  brings their unique perspective as an international sustainable finance consultancy with a focus on creating green and socially responsible finance and investment programs.  Galley Eco Capital’s work complemented the architectural and consumer behavioral aspects of Jatkasaari by contributing new ways for finance to transform both the district and Helsinki market, to positively impact people’s lives.

The competition jury stated that the innovative monetary/economic model presented contributed significantly to the team’s clear top-down as well as a bottom-up strategy for leveraging the Jätkäsaari opportunity, in the spirit of the Low2No challenge.

Sustainable finance for Jatkasaari and Helsinki

While other team members devised the design, energy and consumer behavioral strategies for the project, Galley Eco Capital’s responsibility was to create an economic and funding model, which would support the project by integrating traditional and socially-responsible capital sources and products at a regional market level and set the right incentives to achieve maximum effect in terms of emissions reduction, energy efficiency and resource savings.

Starting with a thorough analysis of Sitra’s environmental and socially-responsible real estate objectives, the Finnish climate change agenda, and Finland’s participation within the global environmental finance markets, Galley Eco Capital developed ways to create a reliable pipeline of green mortgage, environmental, energy and carbon finance capital for Jatkasaari.

These products would all seamlessly connect with the traditional Finnish financial network to form a holistic financial system. Delicate synthesis was also required to create a flexible market structure, which would monetize available sustainability benefits while adequately funding the Jatkasaari project throughout construction and operation.

About Galley Eco Capital

Using their expertise in designing and implementing sustainable finance and investment programs, Galley Eco Capital’s strategies help investors, lenders and regional governments to bridge traditional with green finance and efficiently monetize the available sustainability benefits embedded within their real estate and renewable energy initiatives.

Galley Eco Capital’s unique approach assures more successful solutions through the application of interaction design principles, driven by culturally-aware, user-centric perspectives and underpinned by long years of international real estate and capital markets experience.

The strategies help drive positive change by:

• developing debt and equity financing structures based upon the value-add contributed by sustainability and energy efficiency,
• synthesizing traditional with emerging green financial products into holistic financial solutions,
• sourcing and structuring incentives and government subsidies to offset program costs,
• designing and monitoring sustainable investment performance measurement to assure positive program impact

Over the next 6 years, the Jatkasaari district will be designed, constructed and opened to the public. From there, the sustainable ideals that govern its day-to-day life will act as a model and example for the rest of Helsinki, Finland and the world. Through Galley Eco Capital, San Francisco will be a vital part of this journey.

For more information on the Low2No project, or on Galley Eco Capital, contact Lisa Michelle Galley, Managing Principal, at +1 415 655 6668, or via email at “lisa at galleyecocapital dot com”.

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

$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!

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