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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Profile: Climate Benefit Districts, powered by green finance
District-wide sustainability is hot!
As we blogged about last week, equally hot are the green finance tools and mechanisms being created to pay for it.
Mithun Architects‘ has developed the Climate Benefit District (CBD) in the State of Washington (disclosure: Galley Eco Capital works with Mithun on other projects). The definition from their own documentation is here:
A CBD is an independent taxing district and a quasi-municipal corporation. It will have its own
taxing authority and its own debt capacity independent of the city.
A CBD must be located within an urban growth area and should approximate “neighborhood”
scale, or roughly a square mile. It may include unincorporated territory that is within the city’s
urban growth boundary, but only if the unincorporated territory is less than 50% of the total area
and only after the city and county enter into an interlocal agreement. Multi-city CBDs may be
created pursuant to interlocal agreement.
While Climate Benefit Districts are not yet in action, parts of the structure are similar to other initiatives emerging across the nation, so this brief profile might be helpful to your efforts to expand your green finance toolbox.
How are Climate Benefit Districts financed?
A CBD is an independent taxing district with ability to issue general obligation, revenue or special assessment bonds.
It’s structure makes it eligible to create tax credit partnerships to take advantage of federal tax credit incentives such as: low-income housing tax credits, renewable energy tax credits, new markets tax credits, historic preservation tax credits and other federal tax credits that may be created. A CBD may also administer federal grant funds, is eligible to receive priority consideration for state grant and loan programs, and is eligible to create energy efficiency loan program.
Additionally, revenue can come from funds earmarked by the City where the CBD is located or from direct assessments within the CBD. The CBD chooses those assessments from a menu of “local option revenue tools”:
- Climate benefit services charges (similar to fire benefit charges, based on measurable benefits from CBD projects and services)
- A parking tax on commercial parking facilities
- A vehicle license fee
- The local option revenues available to transportation benefit districts
- Special assessments for the financing of local improvement district (LID) improvements.
- Voter approved excess property taxes for the repayment of bonds issued to finance climate benefit projects.
How is performance measured?
Performance measurement is a key strength of the Climate Benefit District. Each district’s sustainability plan would include “climate benefit targets” for:
- utility infrastructure and service;
- vehicle miles traveled reduction strategy;
- land use, green building and energy efficiency; and
- neighborhood social sustainability programs and services.
Opportunities & Challenges
One advantage within the mechanism is that the financing platform is based purely upon the coordination of existing financial products, allowing the municipal sponsor to “look under the hood” and quickly understand the proposed business plan.
But a challenge might lie within understanding ‘how much additional assessment buys how much additional value?‘ One of the primary arguments for climate benefit districts are that property within such districts would be worth more to those property owners.
We definitely agree from our own work that mixed-use projects usually achieve a sales premium to competing existing projects within their local market. There is also strong industry evidence that tenants typically prefer green buildings. Extending those facts to an entire district makes us think that this assertion of higher property value is very plausible.
But at what cost? And who pays?
Remember that this mechanism is based upon compulsory district-wide assessments based upon proportional benefit creation, as opposed to the voluntary opt-in by owners within energy efficiency financing districts here in California. That means that you are required to pay your calculated share of the additional costs if you live or do business there.
So we wonder how this mechanism works for the parts of town, where low-to moderate income residents and small businesses are too cash constrained to pay the special assessment for a district-wide sustainability program.
Will the City step in to subsidize improvements in order to allow those lower income residents and small businesses the same district-wide sustainability benefits?
Nonetheless, the Climate Benefit District offers deep green performance measurement, coupled with practical ideas that should stimulate thinking for many practitioners and communities needing district-wide solutions.
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Yudelson: ‘You should be tougher’ on non-LEED West Village
Your input is requested on a very important matter!
Yesterday, I highlighted the UC Davis West Village student/faculty housing development getting a $2 million grant from the California Energy Commission.
I also noted the project not adhering to LEED guidelines or any other third-party rating standard for that matter.
That definitely caught the attention of none other than Jerry Yudelson — a Green Journey reader with regular comments — who took me to task on not going deeper on the lack of third-party rating standard for the project.
His point:
Like this story, but you have to be tougher in your commentary. Not only is LEED not mentioned, thus no third-party accountability, but CEC did not require it as a condition of the grant, going against a clear requirement for all new state buildings. Also, there are no clear sustainability objectives: e.g., housing to use no more than 5 kWh/sq.ft./year for heating, cooling, hot water and lighting, no more than 50 gals/capita/day water, 100% use of certified wood, no use of PVC, etc. Without these touchstones/benchmarks, the so-called “sustainable design” is not ground-breaking at all, just a grab bag of technologies and design approaches.
I gotta admit: Jerry’s making a big point. It is true that not even the most minimum standard for energy and water saving guidelines were agreed for the project, despite it being a deal controlled and co-sponsored by the University of California (sponsorship from ground lessor relationship). Adding to that, the project received funding from the California Energy Commission, a big proponent of green building in general.
Here at Galley Eco Capital, we’re aware of several large developments in California that have gone through an extensive environmental review and entitlement process taking many years. The sustainability requirements that they were required to adhere to were baked into the deal years ago, somewhere during the process.
Should the developer feel compelled to achieve LEED-certification anyway? I know that we USGBC supporters would want them to do so.
They finally achieve entitlements now, years later, during a new era that expects more vigorous, sustainable land use, transportation, environmental and building policy. I am not 100% sure about whether this is the case for West Village, but it fits the fact pattern.
Other developments, such as the Catellus Mission Bay project here in San Francisco, encountered a similar situation with their entitlements. In Mission Bay’s case, the master developer did not have to require LEED-certification from vertical developers, but some — Alexandria and McCarthy Cook, for example — built buildings to LEED-Silver, anyway.
In their case, these vertical developers needed LEED-certification from a marketability standpoint, to remain competitive with UC San Francisco or the large biotech and pharma companies on the prowl for new space. The West Village developers are marketing the units at below market prices, so assuming the pent up demand remains strong, they will not face any marketing risk associated with the fact that their product is essentially “self-certified”. Here the real estate story could trump the broader trend towards going green.
Your turn: What do you think?
- Should we be harder on the West Villages of the world, who are getting grant funding for “research” even as they avoid adhering to the most minimal third-party certification?
- Are we not hard enough?
- Are their efforts really just a ‘grab bag of technologies and design practices like Jerry says?
Please send me (and Jerry) your point of view. I will compile all the messages and share with those who respond.
We like this kind of issue here on Our Green Journey, because we want an authentic discussion first amongst finance and investment professionals — no fluff. That’s the only way that we are all going to create better, more sustainable results for our communities.
So tell it like you really see it. Your input would be very much appreciated.
San Francisco Once Step Closer to Mandatory LEED
Mandatory LEED in San Francisco is a critical step closer to being fully approved, according to yesterday’s San Francisco Chronicle. The Building Inspection Commission signed off on it last night. Its now at the Board of Supervisors for approval.
Bare Bones Overview
Under the proposed addition to the building codes, the following construction must be LEED-certified:
- new residential high-rise buildings taller than 75 feet
- new commercial buildings larger than 5,000 sf
- renovations on commercial buildings larger than 25,000
Additionally, new residential construction will have to comply with Build It Green’s GreenPoint Rated system.
The article also indicates that complying with the legislation will cost developers an additional 5% on their project budgets, but does not provide a source for this particular information.
No Incentives on Tap
Interestingly, a city official is quoted as saying that city officials had hoped to offer incentives to builders whose projects obtained highest levels of environmental performance, but they scrapped the idea because they feared “it could lead to developers unnecessarily tearing down buildings or remodeling structures in order to take advantage of incentives”.
Hmmm…. so exactly how much in incentive fundings did the City think it would have to shell out? I’m sure they could have devised some sort of method to reduce this particular concern, (if this was truly the main concern).
The quote:
“What we now have is legislation that says if you’re going to build, you have to build to this standard. But it doesn’t encourage you to build a green building in lieu of keeping an existing building.”
Read the article for yourself and decide.
The Carbon March Visits Moosehead Lake, Maine
A few posts back, I depicted climate change concerns within urban planning as becoming the ‘new civil rights movement’. It was a stark metaphor, illustrating the degree to which greenhouse gas emissions within real estate development has become a defining issue for our industry.
The Christian Science Monitor has just devoted lengthy column space to a development dispute in Moosehead Lake, Maine, where environmental groups raised concerns over the potential negative carbon impacts from the proposed 2,300 housing and apartment units. By their calculations, the development would produce 9,500 tons of carbon dioxide annually – putting an additional 1,850 vehicles on the road. A representative from one of the groups cites their concerns as several and interrelated – not only are they unhappy with the the size of the development, but also with its location being far from town and only accessible by car, encouraging lots of driving.
Particularly timely for the Green Journey was the article’s update on states’ efforts to formally tie real estate development activities to climate impacts and state emissions reductions targets.
“Climate change has kind of permeated everything with regard to land use”.
-Scott Morgan, senior planner with the California Governor’s Office, as quoted in the Christian Science Monitor.
Carbon March Status: Regions That Formally Connect Real Estate Development to Climate Impacts
- 35 states have climate action plans or are in the process of developing them.
- Of the above, 17 states have set emissions targets for greenhouse gases. However, far fewer have laws that presently allow direct action on the basis of greenhouse gas emissions.
- California is seen the nation’s leader in pushing towards the inclusion of greenhouse gas assessments within local development plans and taking legal action against municipalities and/or companies, which it believes are not taking sufficient action to reduce their greenhouse gas emissions.
- Across the US, only California, Massachusetts and King County, Washington have established climate change analysis into the state environmental review process that applies to land development.
In previous posts, we recommended that real estate investors learn about a) any climate change plan in effect in jurisdictions where they develop and operate investments and b) proactively managing the carbon footprint of their assets as the regulatory environment evolves.
So far, there is no need to change that suggestion.
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