Interactive Mind Map - Energy Efficiency Finance Barriers and Simplifiers for Commercial Buildings

Today I’m speaking at the California Public Utility Commission’s (CPUC) workshops on energy efficiency finance for the commercial, industrial and residential sectors.

This is the second of a two day event that the CPUC is using to convene stakeholders to understand their views on the “state of energy efficiency finance” and what needs to be done in order to move  it forward.

I’ll be on a panel this afternoon that focuses on energy efficiency financing for market rate multifamily properties.

I sat in on yesterday’s commercial building session and had a great time sharing perspectives on the barriers and simplifiers to commercial building energy efficiency finance.  There were excellent speakers and a spirited crowd of practitioners sharing lots of great ideas (more on those later).

Where’s The Tenant End User in the Energy Efficiency Finance System?

One observation is that, while the various barriers were talked about in great detail and the many issues that landlords have with this new kind of product was analyzed in detail, absolutely no one brought up the connection between tenants looking for green and energy efficient space and how tenant acquisition and retention motivates landlords. Revenue opportunities tend to have that effect on companies.

If the CPUC policy makers and commercial real estate industry want to make real progress on the greening of buildings, they will have to embrace a systems view of how real estate works as an entire industry all the way to the end user tenant and occupant. Treating real estate like a collection of silo’s only assures that there’ll be plenty more workshops about barriers and simplifiers for decades to come.

Gaining a deeper, updated understanding — and innovating — the relationship and roles of landlord and their tenant customers vis a vis green finance will generate massive traction in the fight to reduce building energy.

Get the download on the top energy efficiency finance barriers and simplifiers

For right now, here are my notes for download on the consensus view of the biggest actions needed to make energy efficiency financing work for commercial real estate investors, reduce building energy use and emissions. By the way, this is an interactive mind map — your browser needs a flash player to view it. Email me if it doesn’t work. I’ll send you a static pdf map with all the branches opened up so you can see the notes.

Does the mind map format work for you?

Please comment here and let me know. I’ve been sharing my teaching notes via mind maps with my Presidio graduate finance class this semester and they like it.

What do you think about energy efficiency finance?

Finally, I’d also appreciate hearing  what you think about the state of energy efficiency finance for commercial real estate and its barriers and possible simplifiers. Please pass this along and let others know here what people are saying.

Study: energy efficiency spending is up, incentives less important

Johnson Controls and IFMA are out with their latest survey on the 2010 energy efficiency spending outlook for North America, based on their survey of executives with direct oversight and control of energy budgets.

Aside from the larger conclusion that survey respondents intend to spend more in 2010 on energy efficiency than in prior years, comes a “sub-conclusion” that incentives were not as high a priority among executives as  most of us would think.

Specifically, the answer to the of ‘ how influential are government/utility incentives in the organization’s energy efficiency decisions’ was ranked as “somewhat, very, or extremely” significant by a lower percentage of respondents in the 2010 study than in prior years.

When asked about the ‘significance of greenhouse gas emission reductions on their organization’s energy efficiency decisions’, a greater number indicated that GHG emission reductions were “somewhat, very, or extremely” significant than in 2009.

From there, Johnson Controls and IFMA conclude that incentives have dropped in importance.

There are a couple of related items of note, that remain unexplained by the summary presentation notes.

- in a subsequent question of “which options will  your organization consider to pay for energy efficiency and renewable energy projects over the next 12 months“, the option of grants or tax credits were chosen by 20% answering. It was the number two most selected option. Number one, with 52% answering, was capital budgets.

- large and public organizations (read: those with more cash these days) answered as being most likely to invest in energy efficiency. The retail sector was noted as lagging in this category.

- they note that respondents’ investment criteria, 44% of which answered as being a 3.2 year payback, remains unchanged.

To be sure, this study is definitely not one in advocacy, as the unchanged 3.2 year payback represents a 31.25% return on investment, which is well beyond the returns most investments can deliver.

Also, it appears that most of the respondents were not from the investment real estate community, but mainly the corporate community. So, while its great to hear that more money will be spent on building energy efficiency, one can also see that there is still an intense  focus on the low-hanging fruit.

Even though it appears that the study was directed more towards exciting the Johnson Control customer base, it nonetheless provided some insights into current thinking on investing in energy efficiency in the corporate world. From that standpoint, it is worth a read.

For more fun — and insight, these exact questions should have been asked of institutional real estate investors and managers in a separate group, so that we could compare their answers with those responding to Johnson Controls here. I suspect that there would be quite a divergence in opinion on some of the questions.

For even more perspective, they should also be asked of lenders separately, too, about the projected spending of their borrower clients and loan portfolios on energy efficiency.

Perhaps, next year.

Happy reading!

PACE inside baseball: Private-label securities to the rescue?

GSE’s bench PACE

If you follow the PACE saga — which we covered in February’s Pacesetter as well as in numerous posts before, you know that it’s attracted enough interest to keep us all hopeful about the prospects for a liquid secondary market for energy efficiency loans.

But, like any saga, there are always curveballs and intrigue to keep us wondering.

GSE’s (government-sponsored entities) Fannie Mae and Freddie Mac supplied the  action in this latest edition of PACEwatch.

They recently sent PACE financing back to the dugout, by declining the purchase of tax-lien secured energy efficiency loans on residential properties, citing concerns with repayment risk associated with the priority of the tax-lien over the senior mortgages.

No, folks,  the tax-lien-priority issue will not just get up and walk away on it’s own.  Market watchers quoted in the article point out that pricing in the theoretical risk and/or clearer underwriting to clarify the value improvements to the retrofitted properties could help the GSE’s and others buy into PACE-related debt.

IMHO, it’s going to take a solid mix of both approaches to get the secondary market comfortable with fund PACE paper.  Altering a senior mortgage’s status makes it tougher for the lender to price and re-sell their loans, even if retrofits improve property valuation. They’ll want compensation for what could be an important change to their contractual structure. It’s always been that way with modifications and I don’t think there’s anything wrong with a lender expecting to be paid a market return for agreeing to re-do a deal.

Additionally, requests to see, touch and feel (and standardize) the control of the retrofit value-creation process, beyond the theoretical math of energy savings is reasonable. Programs that dole out tax payer dollars without robust underwriting and performance measurement are setting themselves up for failure.  No matter how smart we become every economic cycle, a certain percentage of loans typically fail for the same old reasons.  “Failure to properly monitor” loans is one of the oldest, and most typical paths to default.

So, while I greatly wish to see lots more capital flowing towards PACE financing, I still think it’s prudent for any lender to request clarity on the loans they buy and to be paid the right price for the risk and underwriting.

Inside baseball: private-label securitizations to the rescue?

That being said, I suggest we keep our collective eyes on the private-label securities market as an alternative funding source.  Yeah, I know it’s been dead since the economic downturn, but that would be the alternative for PACE to build up a liquid secondary market as long as the GSE’s aren’t stepping up to buy energy loans.

And the idea’s not so far-fetched since the private-label market is now starting to show signs of life.  While the GSE’s are definitely big players in the residential mortgage secondary market, which reached $2 trillion at it’s height in 2006, private-label securities were responsible for as much as 56% of home mortgage securitizations during the same time frame.

Today’s WSJ details how Redwood Trust is taking a shot at offering ~$200 million in jumbo residential mortgages in a private-label sale. This will be the first sale of private-label mortgages in two years. Market watchers say that the timing seems good for private-label securitizations to make a comeback, now that the homeowner default surge that killed the market a couple of years ago has receded. Add to that, the currently tight underwriting guidelines in effect, which strengthens the credit quality of these loans, making them attractive to secondary market investors.

Note that this particular transaction is not a done deal yet, and Redwood may have to postpone the transaction if they can’t generate sufficient interest in the offering.

For us PACE fans, however, this is bit of side action is worth tracking. The private-label securitization market is another potential source of secondary market liquidity, if the GSE’s continue to reject energy efficiency finance.

I’m willing to bet, however, that private-label market will be just as tough on conforming documentation and tight underwriting guidelines. If investors are now able to buy into residential mortgage paper structured  with tight underwriting and and high credit quality, what will compel them to give that up for PACE-paper?

Nothing, I think.

Nonetheless, the game is not over and we’ve still got several more innings to go.

Green finance workshops to sharpen your competitive edge

A few days ago, we announced the kick-off of a series of workshops focusing on green finance and investment issues via our newsletter, Pacesetter (sign up here). We are posting it here, to update those blog readers who get their news via RSS feed and might not have signed up for our monthly newsletter, yet.

The US Green Building Council Northern California Chapter and law firm, Hanson Bridgett, have generously co-sponsored the seminar series, titled The Competitive Edge: Financial Tools for Green Building Investment.

Why the Competitive Edge?

We want to help you add more value to your marketplace. We’re convinced that there is a real need in the industry to understand how to approach analyzing the value-add of green strategies within real estate investments. So we worked with the US Green Building Council Northern California Chapter and Hanson Bridgett to organize courses that address the core of those issues:

• how to use the LEED rating system when analyzing project cash flows (and move beyond first costs)
• common investment analysis issues and tools for retrofits
• an approach for structuring the investment review of new and existing green buildings
• how A/E/C professionals can learn common investment analysis processes and terms to improve communication with property owners about design, construction, and budget issues.
• what to consider when assembling a portfolio or fund of green investment properties.

We believe that green finance and investment techniques represent the next level of skills that real estate professionals need to stay current with changes in the real estate market place. ‘

Since sustainable design can change the economics of a building, and there are many ways to go about creating a green building, finance and investment professionals need to know a good, and efficient, process for incorporating this information into their decision making.

Below are a complete list of courses as well as links to registration. Also, you can sign up and join our Pacesetter list, which will contain updates on these courses, too.

Competitive Edge Course Summary

• Course 1, “Investment Analysis of Green Buildings”, (March 3, 2010 - Register now) covers green investment underwriting skills that help professionals to quickly use the USGBC’s LEED-rating system in their decision-making. Full day seminar.
• Course 2, “Financial Considerations of Existing Building Retrofits”, (April 7, 2010) addresses the financial considerations related to energy efficiency retrofits, so that professionals can integrate the additional decision-making tools and analysis for making buildings more energy efficient. Full day seminar.
• Course 3, “Understanding and Communicating the Financial Case for A/E/C Professionals”, (April 28, 2010) gives architects, engineers and sustainability consultants an overview of the real estate investment analysis process, stressing how to use this information to ‘go beyond first costs’ in their conversations with owners about their green design and construction choices. Half day seminar.
• Course 4, “Raising the Bar: Green Investment Fund Strategies”, (May, 2010 - date to be announced) walks the real estate senior executive through the business and legal aspects of assembling a portfolio of green property investments so that they can create more strategic advantages for their firms via creating pools of green building investments for the real estate market.

Instructors: I’m pleased to be co-teaching these courses with David Longinotti, Partner at Hanson Bridgett.  Dave’s bio can be read here. You can check out my bio here.

To facilitate the best interaction, please note that seating is limited for all courses. Got any questions? Feel free to write us or call us at +1 (415) 655-6668. We’d love to see you there!

$20.5 million from DOE helps communities turn trash into cash

The Department of Energy has just announced funding $20.5 million for several community-scale renewable energy projects.

UC Davis & West Village

One of the recipients is West Village, next to UC Davis, which generated a bit of criticism among Green Journey readers the last time we covered them. In partnership with UC Davis, they’ve now received $2.5 million in funding for a waste-to-renewable energy (WTRE) system. The DOE provides an explanation of how the new system should work:

The system would generate power from a renewable biogas-fed fuel cell.  The organic waste will enter a digester to produce biogas from organic wastes. The biogas will power a 300-kW fuel cell, which will work in combination with an advanced battery system to provide power to the campus’

Montpelier, VT

A second community level energy system of interest is the funding of $8 million to the City of Montpelier, Vermont, for a combined heat and power district heating system that will burn sustainably-sourced wood chips and provide 1.8 million KWh to the grid.

The CHP system will be sized to provide heating to the Vermont Capitol Complex, city owned schools, the City Hall Complex, and up to 156 buildings in the community’s designated downtown district for a total of 176 buildings and 1.8 million square feet served.

We follow these announcements with lots of interest, since we work with partners to identify the best combination of financing streams for achieving community-level sustainability.

As we continue to study eco-districts and similar low-carbon neighborhoods in various stages of design and planning around the world, district-level renewable energy infrastructure  — particularly waste-to-renewable-energy comes up time and time again within the case studies of the more successful communities.

A more in depth discussion of the ’success factors’ within green communities will definitely make for an exciting post in the near future as we consolidate our findings.

Video explains value of district energy

Some of these technical terms might be outside of the typical real estate finance and investment discussion, so I found a 40 second video that explains how district energy saves buildings money. Email subscribers should click on this link to go to the video.

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