The first real estate and energy investment mashup is here!

The media and web worlds gave us the term ‘mashup’ to describe the combining of different files, songs and other applications into a new piece of work. Now that definition can be extended to a new domain entirely — real estate and energy investing.

Hunt Power has joined forces with TIAA-CREF, John Hancock Insurance and others to create two energy infrastructure companies that are structured as real estate investment trusts.  Initial estimates are that the companies are set to  invest up to $2.1 billion.

Yes, that’s right — electric and gas infrastructure REITS!

The new REITS will provide capital to municipalities, co-ops, utilities and others needing to install electricity and gas infrastructure.  Their initial footprint focuses on Texas, the Great Plains and the desert Southwest regions. In comments to GlobeSt. com, Hunt’s CEO explained how the companies will operate similarly to hospitality REITS:

“they’ll  develop and/or own assets and lease them to regional operators. In some cases, the REITs will acquire distribution and transmission assets from operators, who will then lease back the assets.”

The arrival of these energy infrastructure REITs caught our attention because we’ve been digging into the climate change investment reports being circulated by Goldman Sach’s (GS) and others. We are starting to see early signals of the capital markets trying to assign risk and value based upon a company’s presence in a high-emissions or low-emissions sector.

We are tracking these developments, since our commercial building landlord and lender clients will have to understand whether it makes sense and if so, how to incorporate tenant emissions exposure within their underwriting of major commercial leases.

If you’ve been following that particular strand, then you’ll be able to stay with my ’roundabout’ chain of explanations, which will tie into the significant market opportunity for firms such as the new energy infrastructure REITS.

In a 2009 report titled , “Change is Coming: A framework for climate change - a defining issue for the 21st century”, GS laid out their analysis of how competitive dynamics in several market sectors could change significantly, along the lines of those sectors’ higher or lower emissions exposure.

In a scenario assigning a US$60/t carbon price, they estimate that 15% of the total cash flows generated within the sectors might be transferred from less carbon efficient to more carbon efficient sectors.

90% of those outgoing cash flows transferred would come from the most carbon intensive industries, which includes electric and non-electric utilities. You can click on the graphic below from their report to see their breakdown of the estimated cash flows that could be lost by the utilities and a few other industries, due to emissions costs.

While there is no information available on how Hunt Power evaluates carbon emissions opportunity within its business model, and I’m not suggesting that you should buy into GS’ carbon pricing specifically, but if their  market views are even halfway true, there’s a ripe market for creative investment vehicles like these new infrastructure REITs, since their conventional utility sector brethren will not be in any position to deliver the kind of capital investment needed for the energy infrastructure so badly needed throughout the US.

The REITs arrival on the market also opens up the field of direct green finance and investments to more creative investment mashups that span multiple industries, but I will have to cover that in a future post. For now, we’ll be tracking Hunt’s developments with great interest as we are sure that more investors will be paying !

Vet your metrics, avoid wrong investment decisions with these Expert Questions

Metrics are important to green building finance because they can help you prove the green value-add you’re getting from your sustainability or energy efficiency initiatives.  First of all, they’ll drive the project choices that your company makes, which will determine the future state of the green finance or investment program that you’re running. Over time, they’ll teach your company how and where to improve its green investing activities because they’ll point you to the areas to improve in order to reach your business objectives.

There’s a lot riding on your choice of metrics

However, achieving that success depends on choosing the right metrics in the first place. There’s lots of evidence that getting metrics wrong can result in huge problems… once you realize that there’s even a problem in the first place and that it stems from a faulty metric.

Enterprise Group CEO John Mariotti wrote about how the medical establishment continues to accept the “normal” human body temperature of 98.6 F, even it was proven to be 98.25 F many years ago.

There’s also the expensive (and ongoing) example of the losses suffered by governments and investors that relied on the AAA credit ratings on securitized mortgage pools, which touched off a global financial crisis, when the ratings were exposed as inaccurate.

Expert Questions for vetting metrics

We help clients to vet their metrics, so that they make the right decisions about their target environmental, social and economic impacts. I condensed them into shortlist of Expert Questions for Vetting Metrics**, that I taught my grad finance class yesterday. You can use it to locate and assess potential weaknesses in measurements, preventing wrong decisions and expensive problems.

1. Who created the metric or it’s criteria?
2. How do they define value?
3. What do they want to know?
4. What will they do with the data?
5. Does the measurement and any impacts comply with the Four C’s?
6. Are chosen discount rates and sensitivity scenarios well-justified?
7. How does it drive marginal improvement in environmental quality and well-being?
8. What’s the measurement baseline?
9. How is the metric’s range of motion defined?
10. Does the metrics reporting period match the firm’s normal financial reporting period?

There’s only enough time for now to discuss a simple principle that is behind #’s 1-4. It is: forms of social / environmental measurement serve the perspective and objectives of the measurement’s creator.

Most practitioners know that it’s important to use metrics that are comparable across many firms, to get a transparent view and the right context about a company’s or portfolio’s performance.  In green investing, there are various private data collection firms compiling this information, but they may focus their data reporting on a particular sub-sector of clients. The measurements used can be less effective for you if your firm does not fit the profile of this client sub-sector.

I’ll write more on the other vetting questions from time to time, but feel free to use this list to check or recheck your own metrics or the criteria that’s behind them. When you know you’re accurately measuring green investment performance, then you’ll enjoy the benefits of better decision making and impact.

**What are Expert Questions?

Troubleshooting multifamily energy efficiency finance

Yesterday I spoke on a panel put together by the California Public Utilities Commission (CPUC) at a  workshop investigating the barriers to and simplifiers needed for energy efficiency financing for the market rate multifamily sector.

Get mind map and video notes

Play the video to run through the highlights in ~7 minutes or download this interactive mind map to read the detailed notes at your own pace.

Synopsis - Every energy efficiency financing decision requires knowing the green building business case

Throughout the session, we drilled down into landlords and lenders problems with energy efficiency financing. It wasn’t hard to name quite a few.

The CPUC can address these issues once they understand their relative impacts on which parties. To find that out, they have to delve into the green building business case for the market rate apartment sector. That’s something that they’ve only recently focused on.

First of all, energy savings were discussed in isolation from other retrofit benefits — similar to what I observed at yesterday’s commercial building workshop, too much silo thinking.

Retrofitting apartments can translate into higher net operating income and cash flow in a variety of ways. In addition to energy savings, more durable systems last longer, need less maintenance and decrease the amount of funds going to capital expenditures over the lifetime of ownership. On top of that, effective gross income can be improved through tenant retention.

Product design received long overdue attention.  My co-panelists echoed gripes by yesterday’s commercial building panelists about the need for simplified transaction processes and lower costs.

Understanding the landlord’s needs and requirements as a customer (and not a “ratepayer”) will help the regulators to bring financial products to market that can help property owners become more proactive about initiating deeper retrofits.

The notes and video contain more details on the topics covered. It was clear that any future products would be greatly helped by understanding the total value-creation picture (yes, systems thinking again). The green building business case helps them to quantify that and make the connection between the goals of owners and lenders as well as their own.

Tell me what you think

What green or energy efficiency finance programs are you watching these days? How well are they working in your market?  Please share your comments.

Interactive Mind Map - Energy Efficiency Finance Barriers and Simplifiers for Commercial Buildings

Today I’m speaking at the California Public Utility Commission’s (CPUC) workshops on energy efficiency finance for the commercial, industrial and residential sectors.

This is the second of a two day event that the CPUC is using to convene stakeholders to understand their views on the “state of energy efficiency finance” and what needs to be done in order to move  it forward.

I’ll be on a panel this afternoon that focuses on energy efficiency financing for market rate multifamily properties.

I sat in on yesterday’s commercial building session and had a great time sharing perspectives on the barriers and simplifiers to commercial building energy efficiency finance.  There were excellent speakers and a spirited crowd of practitioners sharing lots of great ideas (more on those later).

Where’s The Tenant End User in the Energy Efficiency Finance System?

One observation is that, while the various barriers were talked about in great detail and the many issues that landlords have with this new kind of product was analyzed in detail, absolutely no one brought up the connection between tenants looking for green and energy efficient space and how tenant acquisition and retention motivates landlords. Revenue opportunities tend to have that effect on companies.

If the CPUC policy makers and commercial real estate industry want to make real progress on the greening of buildings, they will have to embrace a systems view of how real estate works as an entire industry all the way to the end user tenant and occupant. Treating real estate like a collection of silo’s only assures that there’ll be plenty more workshops about barriers and simplifiers for decades to come.

Gaining a deeper, updated understanding — and innovating — the relationship and roles of landlord and their tenant customers vis a vis green finance will generate massive traction in the fight to reduce building energy.

Get the download on the top energy efficiency finance barriers and simplifiers

For right now, here are my notes for download on the consensus view of the biggest actions needed to make energy efficiency financing work for commercial real estate investors, reduce building energy use and emissions. By the way, this is an interactive mind map — your browser needs a flash player to view it. Email me if it doesn’t work. I’ll send you a static pdf map with all the branches opened up so you can see the notes.

Does the mind map format work for you?

Please comment here and let me know. I’ve been sharing my teaching notes via mind maps with my Presidio graduate finance class this semester and they like it.

What do you think about energy efficiency finance?

Finally, I’d also appreciate hearing  what you think about the state of energy efficiency finance for commercial real estate and its barriers and possible simplifiers. Please pass this along and let others know here what people are saying.

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!

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