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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Please let us know your thoughts. Our Green Journey is a forum for sharing and your perspective is valuable.

Photo credit: Flicker/Jonathon Brennecke - Moose

San Jose’s 50 Million Square Foot Vision

CoStar and others featured San Jose Mayor Chuck Reed’s big ten point vision that will green San Jose in fifteen years by 2022.

Called the Green Vision, this plan artfully concentrates the vision’s outcomes around “10 far-reaching goals that address energy consumption, water use, greenhouse gas emissions, and other environmental impacts“.  Sounds nice, but the real estate market underwriter in me still makes me roll my eyes a little because it is intuitively doubtful that such big numbers can be achieved. Plus success will be measured several city administrations into the future leaving me wondering whether realistic accountability can be implemented.

Nevertheless, it was still interesting  to do a little fact checking to better assess San Jose’s current real estate and sustainability context. Keeping this type of info in mind helps with future assessment of the Green Vision as it evolves.

What Kind of Impact Will Retrofitting 50 Million Square Feet Have?
The vision calls for retrofitting 50 million square feet in 15 years, or 3.33 million square feet of commercial real estate per year through 2022. Rosen Consulting puts the total size of the metro San Jose commercial real estate market at just under 552 million square feet .  So mathematically, the mayor’s retrofit proposal addresses roughly 10% of the current day San Jose commercial real estate market. 90% of the commercial square footage remains untouched for the same fifteen year period, making this objective not as exciting as it appears on the surface. But it may still be tough to meet. Rosen Consulting reports metro new construction amounts to less than 2 million square feet for 2007 with lower levels projected in the immediate years ahead. So somehow, this vision requires existing owners of commercial real estate to immediately begin retrofitting properties at the rate of more than 3 million square feet per year. Hmmm…. How and for how much paid by whom?

Is San Jose a ‘Sustainable City’ in the First Place?
San Jose ranks #23 — between Phoenix and Dallas — in Warren Karlenzig’s How Green is Your City, where SustainLane ranks US Cities according to their sustainability criteria. San Jose gets lots of credit here for adopting far reaching sustainability measures way ahead of many US cities. 62% of all waste is already diverted away from landfills and the mayor’s vision increases that to 100% in 2022. Air quality already ranks #7 in the nation and water is pretty clean at #12. The city’s leadership has proven repeatedly that they get the tight connection between offering a top quality of life for residents and preserving the region’s status as the hub of high tech. That said, room for improvement lies with a severe affordable housing shortage and a widespread allergy to public transportation. Nevertheless, city actions to enforce living wages, incorporating LEED standards into public buildings, and install five new renewable energy systems in 2008 are what make SustainLane praise San Jose as being a city “best situated to promote - and reap the benefits of - a transition to a greener economy.”

So while I’m not a big fan of grand statements, it helps to see a city with a positive track record try to push itself harder to stay competitive.

Help! Need to Lose Two Tons Fast

So I just learned that I have a carbon score of 415 and must lose two tons of carbon output, just to put a mere 10% dent in my estimated individual carbon emissions.  Ouch! And that’s after taking into account that we don’t even drive our car more than once a week.

When I heard that Earthlab was providing Al Gore’s Alliance for Climate Protection website with a carbon calculator, I decided to give it a test drive. There are quite a few out there, and I am still on the lookout for the ultimate user friendly model that my clients and colleagues can work with without much difficulty.

Earthlab’s Live Impact Calculator provided an interesting experience, since it satisfied the need for instant gratification on a key level: you get immediate info on how specific lifestyle changes reduce your carbon output plus you are encouraged to make a personal pledge to improve your carbon footprint.  Most calculators just move you over to the ‘buy offsets here’ screen and send you on your way.

Learning that, as a frequent flying business traveler, my carbon score is much higher than the average 325 score for Americans or 305 for Canadians and that I alone generate approximately 20 tons in emissions was depressing, to be honest.  But I am now armed with info on how to behave my way out of the problem.

And unlike any fad diets out there, at least I can ‘offset’ the weight that I can’t lose entirely.

Do you know your carbon score? Have any experience with reducing and offsetting your emissions that you would like to share?

Talking Points on the New Green Bonds

Green Bonds are a first-of-its-kind pilot financing created by Section 701 of the American Jobs Creation Act of 2004. The Council of Development Finance Agencies summarized the basics of this newest trial debt initiative in an online ‘explainer’ memo, which outlined some of the qualifying criteria:

• Size: Projects must include cleanup of a brownfield site and contain 1 million square feet of building space or at least 20 acres.

• Mandatory LEED certification: 75 percent of the square footage of commercial buildings, which are part of the project must be registered for LEED certification.

• Energy Use Reduction: Project applicants must demonstrate how the project contributes to the reduction of electric consumption compared to conventional construction as well as other energy measures.

• Federal, State & Local Co-financing: State and local governments that nominate projects must contribute $5 million to a project. Tax abatements and in-kind contributions count toward the $5 million.

The limited scope of the financing is underscored by Section 701 specifically naming four projects, which should submit for financing within 120 days of the IRS publication of formal guidelines for the tax exemptions:

• The Atlantic Station, Atlanta, GA
• The Belmar, Lakewood, CO
• The Louisiana Riverwalk, Shreveport, LA
• Destiny USA, Syracuse, NY

Interesting for investment real estate is the conditioning of incentives based upon achieving mandatory LEED certification, requiring energy use reduction at the asset level as well as the focus on existing, large mixed-use projects in urban metro areas.

You should also take note of energy reduction goals being formulated as specified carbon footprint reductions. For example, super regional shopping center Destiny USA announced that they are closer to complying with the terms of their $229 million in green bonds by running one of their developments, The Carousel Center, on green power, stating that:

“We are committed to reduce So2 [sulfur] output on the project by 1780 tons per year. This initiative alone satisfies 10% of that requirement, avoiding 185 tons of So2 per year, reducing visible pollution like haze.”

In the green age, those commercial lenders who may be asked to co-finance the greening of of existing real estate will have to learn to do a much more complex credit assessment, incorporating direct LEED review as well as the borrower carbon reduction strategy into credit due diligence. The existence of tax exemption compliance issues plus possible additional environmental cleanup would leave too much potential liability on the shoulders of the lender if these issues were not properly examined when making the loan.

So are you up to speed now? We will keep bringing out stories about how these green bonds are shaping up in future posts.

credit: flickr/photosfromonhigh

Climate Change Legal Risks: Energy Companies Feel the Heat

“Selective disclosure of favorable or omission of unfavorable

information concerning climate change is misleading.”

- New York Attorney General Andrew M. Cuomo to Energy Companies

Check out OneAtlantic.net’s excellent post on the creative use of existing law to sensitize corporate investment practices to climate change risks. Following predecessor Eliot Spitzer’s example, New York Attorney General Andrew M. Cuomo is using an almost forgotten law to investigate five energy companies, which intend to build coal-fired power plants.  The Attorney General’s correspondence advises the energy companies that they should have made their investors aware “of the growing potential that they may be taking on big financial risks by building coal-fired plants.”  The Attorney General’s overarching thesis is that publicly-traded companies are legally liable for taking undisclosed risks that could diminish their value to shareholders. The goal appears to be one of forcing polluting companies to proactively reduce their carbon emissions.

My synopsis: this investigation, if successful, will propel commercial real estate’s risk management practices and corporate social responsibility into a new millennium — at warp speed.

In commercial real estate finance and investment, hard money liability, regulatory and reputation risk directly affect bank and investor decision making. Such amounts flow through to net cash flow or funds from operations, meaning the potential for deterioration of net asset values and with it, market capitalization and shareholder value.

Real estate investment trusts (REITS), being publicly-traded, should immediately begin to incorporate climate change risk into their corporate and portfolio risk management processes. Their client investors (pension funds, etc.), are probably following this carefully, too, and will start requiring similar reporting disclosures.  It goes even further: other investment real estate developers and operators who want to do business with REITS (practically everyone else in the industry) will have to be similarly compliant. After all, no one will take an asset into their portfolio until they are sure that they can understand and economically manage that building’s carbon footprint in compliance with the law and market expectations.

And here’s the competitive advantage angle for Green Real Estate Investors.

In the course of meetings yesterday with a couple of investor clients who already develop green apartments and retail, I asked about their motivations to focus on building green real estate. Besides the fact that they felt it is the right thing to do, they honed in on their perceived risks of not going green. Both developers indicated that they see the potential of the federal or state government passing some form of carbon tax on commercial property as being imminent. They, too, perceived any type of carbon tax as being a direct hit to their bottom lines and, therefore, a valuation risk to their properties. Already being green puts them at a competitive advantage in such an environment.

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