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.

Deep Horizon oil spill soaks $9 billion in CMBS deals

The first factoids, attaching dollar signs to the Deep Horizon oil-related damage to commercial real estate, are washing ashore.

Realpoint, a rating agency, recently reported (in Real Estate Finance & Investment and Institutional Investor) that the Gulf of Mexico oil spill is affecting “$9 billion in commercial mortgage-backed-securities (CMBS) deals“.

The article notes:

[Realpoint] found that there are about 306 loans on 319 properties on the coasts of Louisiana, Mississippi, Alabama and Florida that are feeling a direct impact from the spill. The agency believes that the biggest threat to cash flow will be reduced tourism, particularly for properties in Florida. About 247 of the properties affected by the spill are in Florida; reports are that it could cost the state about $2.2 billion.

So will those property owners and the CMBS bondholders go marching arm-in-arm to British Petroleum, to file claims for lost income on those properties and/or debt service on those loans? How will they be compensated for the permanent loss of market value on a “marked” property, not to mention loss of access to refinancing for properties that really are or perceived to be oil-damaged?

Those factoids will roll in soon, I’m sure.

So we now have the unhappy visual of real estate investors, pants rolled up to their knees, trudging through the business, legal and insurance swamp surrounding Gulf-region CMBS, added to a somber image of the rest of the industry on its slow march to building-related sustainability.

One thing’s for sure: the proximity of these events takes the option of doing nothing about environmental and social responsibility off the table (finally).

Photo credit: DVIDSHUB / Flickr

How failed US climate legislation hurts commercial property investors

“Absent very unlikely changes in federal law, this task will fall to fifty state legislatures, governors, and utility commissions,”

Yikes.

If you know any nationally-active real estate investor who’s leery of climate legislation, tell them that now -  even with climate legislation dead for 2010 - is definitely not the time to relax. Then pass along this story from Monday’s New York Times, laying out how the lack of a unified national climate and energy policy is only expected to make the US’s already feudalistic energy policy patchwork even more complex for building owners. After they read it, give them a Tylenol for their headache.

In a nutshell, US energy policy has always been driven regionally by ideology, state self-interests and political winds of the moment. In former times, readily available, cheap fossil fuel meant that buildings and businesses felt no impact. In current times, fragmented policies can make already costly energy more expensive because it will push the job of coordinating for the highest energy efficiency directly onto the real estate industry.

The Times doesn’t mention any detriment to commercial real estate by name, but you can figure with buildings being responsible for 76% of US electricity use, that these forces can be particularly brutal on a nationally-active investor with assets “in the wrong place at the wrong time”.

Not only does the current retreat from climate legislation point to sharpened regionalist state energy policies, experts fully expect those states with traction on renewables and energy efficiency, to march ahead with various regional carbon cap-and-trade regimes.

So, in addition to managing building efficiency without adequate public support in some regions, investors will have stay abreast of regional cap-and-trade programs that other states do belong to.

Real estate investors are must be vigilant in monitoring regional energy policy developments

Today, with national climate legislation off the table for 2010, the risks associated with the currently fragmented patchwork of energy policies are becoming even more fragmented against a more volatile national and global energy market. Commercial real estate investors need to remain vigilant over the evolution of regional energy policy within the areas where they are active to avoid ‘risk creep’ within their portfolios.

They should not rely on arguments such as “energy is cheap during a recession”, “energy futures are currently flat” or think of energy costs in historic terms. The Times story lays out how US regions have already set on very different paths to manage their energy needs, and the current regulatory, ideological and economic winds can provoke radically different policy responses in the different regions - which can mean differing cash flow results for the investors’ efforts.

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