Green Building Incentives Spread Sustainability & Save You Money
Monetary and regulatory incentives from utilities, federal, state and municipal agencies can do much to increase the green building market. Yet, the existence of incentives alone does not necessarily mean that developers will build green. Only when you identify and puzzle together the right incentives from a dynamic menu of choices and deploy them appropriately, can your project realize the maximum benefits incentives offer.
And, come to think of it, many of the monetary incentives available appear like small slivers compared to the rest of the capital stack. Why spend any time on them at all?
Yudelson Associates recently completed a thought-provoking study for the National Association of Industrial and Office Properties, titled “Green Building Incentives that Work: A Look at How Local Governments Are Incentivizing Green Development” – available for download from Yudelson’s homepage. The study covers the types of state and local incentives available along with survey participants’ judgments about which incentive types are compelling and to what extent.
Catch Encourage More Bees Green Building With Honey Incentives
Green building incentives are utility- or government-sponsored honeybees that carry dollars and valuable city agreements to investors in exchange for specific property improvements or complete green projects. These funds and targeted agreements literally fertilize the growth of more sustainable projects in a city. They have not received much attention in the capital markets to date, but they are a potent source of finance for a project - the relatively small amounts of incentive dollars influence decisions about what gets built at all,where and how soon. After the project is built in compliance with the incentive terms, the investor’s return has been structurally lifted by the permanent injection of upfront capital and a lifetime of reduced operating costs. Even with non-monetary incentives, an investor can enjoy a bigger project and reduced time to market.
The beauty and complexity of working with incentives is that they can appear in several forms, a few of the most common being:
- Incentive payments from a public utility energy efficiency program
- Grant, rebate or reimbursement from a city or county
- Expedited permit processing
- State income tax credit
- Density bonuses
It’s not hard to guess that the monetary payments are the most popular form of incentive. According to NAIOP’s study, “two thirds [of nine most common incentives] represent some form of monetary inducement”. So cities see ‘putting their money where their mouth is’ as a key requirement to stimulating green building in their jurisdictions.
The Green Journey Perspective
State and local incentives fit within a larger system of mechanisms aimed at increasing sustainability; but I’ll underscore my point about their unique power and value as a capital source. When we think about the honeybee, we don’t just look at its size compared to much larger animals, we understand that the pollination that they alone provide is a powerful ecological service — our food supply could be disrupted if it did not occur. Similarly with green building incentives, small dollar amounts earmarked for individual projects can stimulate disproportionately greater change within a market area.
Financiers naturally judge the importance of a capital source by its dollar amount for all sorts of good reasons. But we often have to point them to the honeybee analogy to get them to understand that they can not discount the role of incentives within the emerging green real estate financial landscape. For example, when institutional investors think about their market investment strategy, knowing a target market’s incentive environment should become part of their underwriting. Municipalities offering more incentives may spur more green building. I’ve posted before about owners of brown buildings in those same markets needing to do a more aggressive analysis of their assets’ competitiveness since - all other conditions being acceptable - they could see more pressure from green building competition than in other regions where incentives are not as prominent (yet).
And let’s not forget that the federal government has also been in on the incentive bandwagon for some time now, offering its own menu of choices, such as the energy efficiency and renewable energy tax credits. However, I’m sticking with my previous recommendation that you visit the US Conference of Mayors website to see the real leaders in incentivizing green building - local officials - cuttin’ the rug to prove their commitment to sustainability.
Barriers to Using Incentive Dollars Effectively
So with all that good news about so much money, what’s preventing incentives from being utilized more often? NAIOP’s argument is simple and true: “There’s not enough of them. Give developer’s more money and they’ll build more green buildings“.
In our work with real estate companies and strategic partners, we see mundane phenomena which unfortunately create problems for identifying and getting the most out of all the incentive dollars
available. Two issues:
- Dynamic Regulatory Environment: States and municipalities are coming up with new green building regulations at a quick pace. It is hard – and risky - for developers with long planning and building cycles to keep second guessing what the planning department might do next. So they proceed with their projects without the benefit of the incentives.
- Silo Decisionmaking: Imagine you attended a symphony concert where the conductor allowed only one instrument section to play their parts of the song at any one time. All the other instruments had to sit and wait silently until they were called. Would that sound funny?
Many cash incentives, such as those energy efficiency upgrades, are tied to discrete technologies, components or particular outcomes such as, say, a 25% reduction in energy output. But its up to the developer to do the hard work of figuring out how to tie the various specific technologies
and their attached incentives together.
Equipment vendors often sell their systems priced with the incentive dollars for that exclusive component already embedded in the calculation. And imagine each vendor focusing the investor’s attention on only their particular specialty components, to the isolation of the others. That happens a lot these days. The over narrow focus on specific purchasing decisions to the exclusion of others results in cherry picking – and causes the inadvertent sacrifice of other valuable incentive dollars.
Just as integrated design is a foundation principle of green building, best practice in underwriting incentives dollars is to identify and integrate ALL the financing sources and decisions, including the incentive dollars up front, before making specific commitments in order assure the biggest return on investment.
The Takeaway
Incentives are here to stay. They will grow in volume, variety and importance within the capital stack – since construction costs will not be decreasing anytime in the near future. Like any type of government “help”, they probably won’t be made very simple to implement – so its time to become familiar with them, since they are becoming the accepted way for cities and states to design a flexible “pro-green” interaction with the real estate community.
The NAIOP Study is a good fact basis for becoming informed about the current state of incentives in the US today. And it’s hard to miss NAIOP’s clear call for public officials to increase incentive dollars. Your projects can lose out on this valuable financing source, if decisions about specific systems and technologies are being made in isolation or based on outdated information.
And by the way, we help investors understand these and related questions regarding optimizing the financial performance of their green real estate projects. Feel free to contact us if you would like to know how we can help.
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