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!

Mini-Workshop: GAPS! in practice with 7-Eleven Corporation

Could the shift to sustainability shrink your investment footprint right under your nose?

Here’s a cautionary case study from a real life business, plus a tool to help with early detection of fatal shifts in your pipeline.

The shift to sustainability is driving many jurisdictions to rethink land use on a major scale. That can make structuring an investment program covering several markets quite complex. While land use changes happen all the time, they usually address site specific issues. Investors are very rarely confronted with the possibility of regional land use changes by multiple jurisdictions at once, due to a mega-trend like sustainability.

The sweeping nature of these changes, and the negative consequences to your program if you can’t stay in front of them, are two reasons why you need to employ better tools during program underwriting to detect broader shifts within your investment case; those that might be beyond the information analyzed in typical real estate market analysis studies.

7-Eleven moves to the suburbs

The case of 7-Eleven, covered in the May Harvard Business Review, highlights that problem in a former era - when the shift to suburbs went undetected by the real estate intensive convenience store operator.

Briefly, 7-Eleven had followed an investment strategy of locating stores on roads that connected residential areas with commercial business districts. As suburbs became more popular, many cities removed those roads or they were simply less traveled by suburban-focused consumers, forcing 7-Eleven to locate in shopping centers, where other retailers, such as Target, started mimicking its late business hours and drawing away shopper traffic.

7-Eleven’s U.S. stores’ productivity decreased over the subsequent years as the company gradually lost access to many of its preferred sites and was forced into tougher competition in strip malls and neighborhood shopping centers. The article’s author notes that 7-Eleven’s business in Japan did very well, however, since those stores remained accessible within walkable neighborhoods.  The entire 7-Eleven corporation was eventually bought by one of its very successful Japanese franchisees.

The GAPS! Map

If you’ve attended the recent Competitive Edge Workshops in San Francisco or were at the National Community Development Lending School in New Orleans, you learned how the GAPS! Map tools can help you to develop your business case for the potential value-add that a green or energy efficiency strategy can bring to your investment program.

The GAPS! framework helps practitioners structure the sustainability-driven assessment that is critical for real estate underwriting because sustainability exerts dynamic influences on nearly every facet of a project. The graphic here presents an overview of the tool.

The “P” in GAPS! stands for ‘PIN’ down the causes.  The GAPS framework looks at the sustainability challenge as a complex business “problem”, with root causes that need to be discovered and “solved” via mitigation within the green investment strategy.

Pinning down the causes refers to investigating factors within and external to the project as well as the capabilities of the team that will implement the green strategies. A full description of the available tools is beyond the scope of today’s article, but the case of 7-Eleven highlights the usefulness of one aspect of the assessment. The outcomes are qualitative and quantitative factors that will positively and negatively affect the success of the project.

To evaluate the factors external to the project, you have to investigate the ways that sustainability might exert influence on the social, regulatory, political and of course, environmental forces operating around the project or in the market area where invest.

Typical real estate analysis focuses on real estate specific market factors, but ignores broader regulatory or political action in adjacent markets. It is always assumed that this information is only relevant when it is priced into the real estate, but that is often not the case. If a negative trend has progressed to the point where it can be priced into real estate within your target markets, then it may be too late for you to avoid the damage. You’ll have to either accept that price, rework your investment plan to include countermeasures or leave that market.

With Pinning down the causes, you would have to ask yourself about possible sustainability interactions at a broader level and determine how that might harm or help your green building project, markets, or doing business as usual (conventional investment) if that’s your focus.

The 7-Eleven case highlights the fact that 7-Eleven never connected the dots between the mega-trend of people moving to the suburbs and how that might lead them into direct combat with category killers in suburban strip malls and neighborhood shopping centers.

If the 7-Eleven management team had applied Pinning down the causes within their investment strategy, they might have been able to turn a challenge to their business model, such as consumers moving away to the suburbs, into a bigger opportunity in urban areas:

• Instead of simply following consumers out to the suburbs one market at a time, and getting into a long destructive war with big box category killers, they could have stepped back and noted where the broader trend of suburb life was most prominent and made the decision to capture business in areas that would remain permanently “urban,” where the category killers cannot obtain sites due to their larger store format.
• It took a very long time for many retailers to understand how population density in urban areas is a big plus for retailers. 7-Eleven could have seen these urban shoppers as being a prime customer segment that had been largely overlooked by the category killers (for the first few years anyway).

Both of these ideas are strategic in nature. If a company remains too “close to the ground” in its market analysis and underwriting, it will not see the bigger trends that will impact the long-term success of its investment program.

Using Pinning down the causes forces the investors to ask the bigger, tougher questions in addition to the traditional real estate analytics, to make sure that the project is in sync with larger influences or the investor has at least had an early warning of problems on the horizon that she should make sure to protect her strategy against or possibly turn into a brand new opportunity.

These and many more aspects of using the GAPS tools and frameworks for investment programs and project underwriting are covered during our workshops on green finance. Make sure you are signed up for Pacesetter, our newsletter, so that you’ll get announcements of upcoming classes.

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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Things you might want to know:

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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.

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