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

Jean’s Question: Anybody Actually Getting Carbon Credits for Green Buildings?

Gotta love the creative local church marketing campaign! Photo credit: Mykl Roventine

In any situation, you always wanna hang with the folks that ask the tough questions — they’re usually closer to the real answers. Like Green Journey reader Jean Shia, of Avant Housing, a CalPERS fund based here in San Francisco.

She asks,

“We are interested to see if anyone has been able to figure out a way to get carbon credits on their green buildings. Is there anyone pioneering this area?”

Fascinating! We were pretty sure that lots of people would be curious about this one. And a big thanks to my colleague, George Vavaroutsos, for putting in some research time, talking with a several carbon traders to get the real story on what’s happening. Here’s the deal:

You’ve Missed Nothing So Far, And Now’s the Time to Stay Alert
Turn’s out that there is limited information in the marketplace about sustainable real estate and the carbon markets. No wonder, since there are significant challenges to property owners and developers who want to receive credits for greenhouse gas (GHG) reductions. Carbon trading experts we spoke with cannot identify a single sustainable real estate project in the US that received credits for GHG reductions.

So what’s the holdup? There are a few issues:

Measuring and Verifying GHG reductions: Measuring reductions, and the ownership of these reductions, is one of the biggest challenges. Quantification is an involved and difficult task, and there is no guarantee that auditors will accept reductions. In addition to verification being prohibitively expensive, current methodologies and standards for measuring GHG reductions do not cater to real estate.

If a developer wants GHG credits for sourcing, production, and transport related GHG reductions, it may be a challenge to quantify and satisfy ownership requirements for these reductions. Additionally, the GHG reductions may not be enough to justify the cost of verification. Note: Talk directly to a third party verifier about your GHG reduction objectives. Here is a link to the California Climate Action Registry Verifiers list.

The “Additionality” Clause: Another major limitation to developers is the “additionality” clause, which requires that in order to receive GHG credits, a carbon-reducing measure would not be implemented if not for the credits that would fund such a measure.

Therefore, if you have a project that will reduce your property’s energy usage, but you will recapture your additional capital outlay with increased operating efficiency over X years and improve your ROI, then the project will not pass the additionality test, and you will not receive the credits. Yep, its pretty technical, we know.

Future Legislation: A US cap and trade system is considered likely by the carbon trading market. I posted a couple of days ago about California already forging ahead. Buyers of GHG credits will not consider many voluntary emission reduction (VER) credits, given the uncertainty created by these expectations. Experts do not expect a sustainable real estate GHG credit mechanism to develop until after a national cap and trade mechanism is implemented.

Industry Pacesetters on the Carbon Trading Front

There are several developers who are pioneering in the field of GHG reductions and credits. ProLogis and Liberty Property Trust, both REITS, are registered entities on the Chicago Climate Exchange, a voluntary cap and trade market.

Both REITS are working to create ownership over the GHG reduction credits their properties are helping to create. ProLogis leases rooftop space on some of their industrial properties in California to Southern California Edison. This renewable power helps satisfy the renewable energy credits (REC) requirements for California utility providers. This arrangement is creating GHG credits, but they are accruing to the power company, not ProLogis.

Stay tuned for more updates — as I’ve already posted, we’re expecting lots to happen on the cap-and-trade front!

Climate Change “Opportunity”: Work from Home, More IT, Less Real Estate

Commercial real estate has had somewhat of a funny love affair with IT over the years. Remember back in the 80’s, when we were warned about the paperless office? It was still all good with IT, even though the paperless office never really happened — we never took the projected real estate angles seriously, anyway.  How about the 90’s, when folks claimed that the internet would kill the shopping mall? Then IT made us sort of nervous. Now another wave of ‘less real estate/more IT’ ideas are back, but this time with a climate change angle and, also with a smarter sounding term that can get you more attention at the cocktail party — at least until people figure out what you’re really talking about…

The Climate Group has just issued a new report that lays out the many opportunities available to the information, communications and technology (”ICT”) sectors to help reduce carbon emissions. Like many issues associated with reducing carbon emissions, buildings get a lot of attention in this report, too. Hence, my interest in understanding how the opportunities could interact with commercial real estate.

One main concept, called dematerialization, stands for using technology to replace high carbon activities with low carbon alternatives. A simple example of dematerialization would be replacing face-to-face meetings with videoconferencing for example. A farther reaching example would be e-government.  Dematerialization’s attractiveness lies in its ability to be applied to a wide range of business activities.

For the commercial real estate world, the report highlights telecommuting as one of the biggest opportunities for ICT sectors because it is a dematerialization application presenting the largest opportunity for carbon emissions reductions and absolutely requires ICT to be effective:

“Currently the largest opportunity identified within dematerialisation is teleworking – where people work from home rather than commute into an office. Although other dematerialisation opportunities may come to prominence in the future, based on historic trends, the analysis found that teleworking would have the largest impact, up to 260 MtCO2e savings each year (detailed assumptions in Appendix 3). For example, in the US, if up to 30 million people could work from home, emissions could be reduced 75-100 MtCO2e in 2030, comparable to likely reductions from other measures such as fuel efficient vehicles.”

So think about it –

what could happen in commercial real estate if 30 million people eventually worked from home?

The trick to realizing substantial emissions reductions from telecommuting appears to be in how far-reaching the employer’s work-from-home program extends. A company would need to have a significant number of employees working from home more than three days per week to generate substantial energy savings of 20%-50%. Less than that level of telecommuting means that the company still maintains significant office space for periodic office-workers, and therefore, less energy cost reductions.

UN ’s New Report on Responsible Property Investing

Today, multiple posts are required just to stay on top of the good news onslaught.

Earlier this year, I put out a bunch of posts about the good work of the Responsible Property Investing Center and why it is so critical for spreading the principles of triple bottom line investing within commercial real estate.

Now, we’ve learned through Dr. Gary Pivo, that the UN has just issued a new, stronger report cataloging the many successes institutional investors have enjoyed applying the principles of responsible property investing.  It also urges the rest of the investment real estate community to work harder to adopt its Principles for Responsible Investment.

Still mulling over whether triple bottom line investing would make a difference to your portfolio’s returns? Then you should definitely take a look. I think the terms ‘triple bottom line’ or ‘environmental, social, and governance’ tends to trip up some of our old school colleagues.

When you read through the principles plus the examples of day to day actions most of the signatories are taking across their portfolios, however,  it becomes pretty clear: RPI simply represents good management practices.

Already have some experience with applying responsible property investing across your asset portfolio? By all means, speak up! The rest of us would love to hear about it.

Finance Industry Spin or Denial on Sustainability?

I thought I’d share some of the latest that has made its way over to my inbox over the past  few days. Take a look and let me know what you think. Is it spin? Denial? Spinial?

The Mortgage Bankers Association on Green Lending: “We’re already underwriting green.”

MBA research director Jamie Woodwell put out an article in the March 2008 issue of Mortgage Banking, their trade magazine, titled “Class G–The New Class A” (sorry, folks, no link, it was sent to me from a subscriber). Within a piece that includes decent info on the greenwave hitting finance, begins a decent lead-in to the MBA’s take on green lending:

“For most lenders, green lending is simply a new shade of their traditional lending programs.

As with any request for financing, a lender approaches the financing of a green building by developing an underwriting of the property that takes into account property-specific income, expenses, property value and costs. The extra challenge in financing green buildings has been the degree to which the underwriting associated with a building’s green features differ from those of a standard building.

But the commercial/multifamily lending industry is accustomed to heterogeneity in the same properties it underwrites. No two properties have the same location, tenants, lease rolls, rents expense mix, purchase price and cap rate — think, for example, 1970’s New York office tower, 1980’s Sacramento, California, industrial park; and 1990’s Atlanta apartment building. The industry has become extremely adept at recognizing these differences through underwriting — a process in which a property’s unique circumstances are researched, assessed and factored in.”

And that leads to this:

“As a result, in most cases, the existing commercial/multifamily lending paradigm already takes into account a property’s green characteristics. When fully revealed, a full underwriting and appraisal discounted cash flow (DCF) takes into account, for example, that a green property’s initial cost may be higher, its rents  higher, its utility expenses lower, its lease rollovers shorter and its terminal value higher. The result is that economic costs and benefits inherent in a green building can be recognized in, and will generally flow through its underwriting.”

Green Journey Take: Two observations: 1) Green buildings in total make up only about 2% of the entire real estate market, and 2) the nationwide credit crunch has been going on for much of the time that sustainability has been getting traction within commercial real estate. There are lots of deals out there that are not getting done. Nevertheless, the MBA has already counted so many private sector green loans being underwritten, not to mention confirming the underwriting on those loans as being ‘green’, that it can publish “typical” underwriting standards.

At the time of this writing, two major industry coalitions, the Green Building Finance Consortium, and the Market Transformation to Sustainability, are still pushing hard for leading institutions, some of whom are named in the article as green lenders, to adopt a common set of underwriting protocols for sustainable real estate. Also note that there are some major lenders cooperating with these efforts — they’re just not quite ‘there’ yet. Real estate investors are filling conferences, looking for elusive ‘green finance’ packages.

But you can prove me wrong and educate all of us: How many commercial real estate loans have you done with your lender, where they’ve already given you economic underwriting credit for the green features on your investment property? Please share your comments here, as there are many in the industry who would like to know. Plus these pacesetters deserve to get credit where credit is due.

The Mortgage Reports: Even $150/Barrel Oil Doesn’t Matter — Consumers Will Keep Drivin’

I dig Dan Green. He gives some of the most consistently straight-up download on the residential finance market. And he’s big on the crunchy technicals, which is good. Regular Green Journey readers also know that I’ve got a “thing” about energy price risk’s negative effects on US real estate.  Actually, it is fair to say that quite a few of us in the real estate industry do. Now read Dan’s recent post about oil prices and consumers.

You make the call: Is Dan tellin’ it like it is or like it ain’t?  Are US consumers really going to keep up their current driving habits no matter how high gas prices rise?

Please tell us what you think.

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