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.

Finally. A Green Building Finance Course for Non-Finance Professionals

Now you can pre-order the first ever green real estate finance course for non-finance professionals

A couple of days ago we kicked off the pre-order event for the new self-study version of the Competitive Edge Workshop 1: Communicating the Value of Green Building Using Principles of Real Estate Finance.

The first ever self-study course in green real estate finance for non-finance professionals

This all-in-one compact, dynamic course helps you communicate the value of your green building services to real estate finance and investment professionals.  It teaches you how you can present the value of your green building products and services to commercial property owners.

Plenty of in-depth, material to support your learning

• Screencasts of all presentations on DVD
• Course Pack - Study guide accompanying the presentations that provides backup information on presentation topics.
• Green Finance Research & Reference Guide - catalogs the key studies and references in the field.
• Green Finance Glossary - this is the only glossary with the most essential sustainability, real estate finance, investment and energy terms all in one guide. It simply doesn’t exist anywhere else.
• Sample Property Financial Analysis - based on an actual investment as an example of the kinds of financial analysis performed by commercial property investors.

50% price for only a couple more days

Everyone on our newsletter list gets 50% off the course when they pre-order now.  So you pay $149.95 now (vs the $299.85 regular price).  This special pricing will only last a couple more days. (If you are not on our list and buy the course now, you’ll get the 50% discount and will be automatically signed-up on our list.)

Get Free Bonus Gift

You’ll get  Financing Market Transformation, a unique collection of eight articles on the latest thinking and best practices in green real estate finance - donated by the most-respected leaders in the field, so we’re giving it away.

Learn at your own pace

This course gives you the competitive edge — everything you need and nothing you don’t

Buy the course now at:

http://www.galleyecocapital.com/green-building-resources/competitive-edge-green-finance-workshop/

Mini-workshop: Five tools and tips for relevant green finance programs that don’t lead to green gridlock

We’ve said before that green finance programs that are more meaningful to customers are actually safer investments.  Here are five tools for increasing your program’s relevance to customers.

Problem →Most green finance programs drive green gridlock

No one wakes up planning to create ineffective incentives, yet it happens. Despite the mega-billions of taxpayer dollars sunk into incentives, rebates and other tools designed to stimulate green building and energy efficiency, most green finance programs aren’t getting the kind of traction needed to stimulate private investment and bring about real energy security and sustainability.

Green finance failure is evident in the thousands of redundant, fragmented monetary incentives littering the market, even as building owners complain about insufficient green funding options.  You see it every time an owner retrofits only enough to qualify for a couple of incentives and ignores other energy-saving opportunities.  He lacks the organizational bandwith to access more programs scattered throughout the market.

It’s also apparent in the choking bureaucracy investors experience in trying to access grants and loan guarantees.

Missed signals → fragmented, uncoordinated policies and incentives → green gridlock → frustration

Even more insidious are the ways in which distorted signals about funding lead to even more fragmented, ineffective incentives, adding to the confusion. Click on the graphic to enlarge it and see how that happens.

So an already clogged, murky vat of regulations, policies and confusion continues to calcify, blocking green capital flows to the very initiatives needing funding - gridlock.

The point here is not that “incentives are bad.” It’s that there needs to be more thinking about the customers these programs serve and the kind of job they’re supposed to accomplish.

This requires you to adopt a different mindset about designing and delivering green financial services for your customers.

1→ Reality check: Traditional real estate financial services is an old Buick

Commercial real estate financial services, in general, are like a gas-guzzling old Buick, and putting together commercial real estate transactions is an expensive and time-consuming endeavor.

Over a property’s lifetime, gigabytes of redundant data will be duplicated each time there’s a transaction, generating large amounts of wasted time and expense — gas-guzzling. When a property deal “breaks down,” there are no generic spare parts that you can immediately buy to fix things. Every single repair is a painfully expensive custom job.

Still, we see most green finance programs simply cloning the same gas-guzzling models that have been around for the past few decades. It’s a boring product that’s way past its prime. No wonder investors are unimpressed.

Ask yourself: when’s the last time you were excited about buying a very complex product that forced you to spend tons of money just to acquire it, with absolutely no assurance of whether your true problem would be solved once you used it?

Tip: During your program’s design, make sure you’re not simply replicating the typical commercial real estate financial product. It’s a tired, expensive commodity.

2→ Watch your customer’s movie to solve their real problem

Just as you need to understand the setting of a movie in order to understand a character’s story, you have to get a clear view of the market context that your customer operates within in order to put together a green finance offering that is most meaningful to them. What is their end goal? They’re probably not pursuing sustainability as an end in itself. Rather, sustainability is usually a valuable tool for navigating the tough bigger picture changes happening in their world, including:

• Economic instability
• Social values
• Global markets with greater local influence
• Increased customer expectations about services and products generally
• Building standards and technology improvements

While traditional financial services products are not designed to help property owners navigate these kinds of changes, any property owner who is taking on sustainability by using your green finance program will usually be grappling with these issues.

The key is to understand the particular big picture issues affecting your customers and prioritize their impact. Last month, we talked about our Real Estate Innovation Advisory® services and how they help elicit these kinds of deep insights from customers, increasing your program’s relevance to their business.

Tip: Find out your customers’ true end goals. Build your program around supplying the key resources that help them meet those objectives.

3→ Get into their world with process visualization

The successful green finance program has to beat, not just meet, traditional financial service offerings. To do so, you must know how your green finance offering fits within the customer’s world.

A quick way to immediately improve your green finance program is to look at the range of typical activities that take place during your user’s transactions.  We use Mindjet Mindmanager 8.0 ($349 retail) to sketch mind-maps of customer activities. The example below represents the core components of a property owner’s world.

Put your client’s activities into a process map:

When we work with clients, we catalog their activities and lay them out into a process map that includes the client’s service offering within the customer’s activities.

There are many different kinds of process maps. Below is a simple mock-up of a timeline process map that we  created with Smartdraw. Click on the graphic to see the enlarged view.

This immediately helps everybody to visualize and define the issues that the green finance product addresses, using the same language. We go over the details of these processes and their impacts in our workshops, or you can find out more by contacting us directly.

Tip: Collaborate with customers to learn the typical activities that form their world. The resources below can help you to map your your green finance offering to your customer’s key processes.

Quick reads about process mapping:

• http://www.ehow.com/how_5070753_make-process-map.html
• http://en.wikipedia.org/wiki/Business_process_modeling

3 process-mapping software options:

• Flowbreeze; $39-$59: http://www.breezetree.com/buy.php
• Smartdraw; $197: http://www.smartdraw.com
• Visio 2007 Standard; $399: http://office.microsoft.com/en-us/visio/fx100487861033.aspx

4 → Three design questions for better green finance programs

Tip: To study your new process map, ask yourself the kinds of questions designers do when they create products and services. Here are three starters that you should answer:

• Does your program enhance or hinder any of these activities or events within real estate finance?
• How many ways does your green finance program touch these events?
• Which activities touch whom? When? How?

5 → The bottom line: Start with a model of good green finance

If you’re starting from scratch, of course you could just work from a better model to begin with.

We use the following model to think through the key elements of successful green finance programs, and to work with clients on pinpointing opportunities and problems. It can help you to see the kinds of problems your program will run into if you copy traditional financial services or leave out some other key component.

Summary

Green gridlock is a needless waste of money and turns the positive intention of greening buildings and saving energy into frustrating experiences and unsuccessful programs.

Many green finance initiatives would become more relevant to property investors and other customers that local governments and utilities try to influence if they a) stopped copying an already flawed finance model and b) took the world of the user, the property owner in this case, under consideration.

Use a model of successful green finance programs and a process map to visualize how your programs fit in the customer’s activities. This will make you more successful because programs that appeal to customers are definitely more successful, and therefore less risky.

What do you think?

Do you have any positive or negative stories of dealing with green finance programs that you would like to share? Let us know. We’d love to address these kinds of issues in future posts.

Want to read more Mini-Workshops?

• #1: GAPS! in practice with 7-Eleven Corporation

Mini-Workshop: GAPS! in practice with 7-Eleven Corporation

Could the shift to sustainability shrink your investment footprint right under your nose?

Here’s a cautionary case study from a real life business, plus a tool to help with early detection of fatal shifts in your pipeline.

The shift to sustainability is driving many jurisdictions to rethink land use on a major scale. That can make structuring an investment program covering several markets quite complex. While land use changes happen all the time, they usually address site specific issues. Investors are very rarely confronted with the possibility of regional land use changes by multiple jurisdictions at once, due to a mega-trend like sustainability.

The sweeping nature of these changes, and the negative consequences to your program if you can’t stay in front of them, are two reasons why you need to employ better tools during program underwriting to detect broader shifts within your investment case; those that might be beyond the information analyzed in typical real estate market analysis studies.

7-Eleven moves to the suburbs

The case of 7-Eleven, covered in the May Harvard Business Review, highlights that problem in a former era - when the shift to suburbs went undetected by the real estate intensive convenience store operator.

Briefly, 7-Eleven had followed an investment strategy of locating stores on roads that connected residential areas with commercial business districts. As suburbs became more popular, many cities removed those roads or they were simply less traveled by suburban-focused consumers, forcing 7-Eleven to locate in shopping centers, where other retailers, such as Target, started mimicking its late business hours and drawing away shopper traffic.

7-Eleven’s U.S. stores’ productivity decreased over the subsequent years as the company gradually lost access to many of its preferred sites and was forced into tougher competition in strip malls and neighborhood shopping centers. The article’s author notes that 7-Eleven’s business in Japan did very well, however, since those stores remained accessible within walkable neighborhoods.  The entire 7-Eleven corporation was eventually bought by one of its very successful Japanese franchisees.

The GAPS! Map

If you’ve attended the recent Competitive Edge Workshops in San Francisco or were at the National Community Development Lending School in New Orleans, you learned how the GAPS! Map tools can help you to develop your business case for the potential value-add that a green or energy efficiency strategy can bring to your investment program.

The GAPS! framework helps practitioners structure the sustainability-driven assessment that is critical for real estate underwriting because sustainability exerts dynamic influences on nearly every facet of a project. The graphic here presents an overview of the tool.

The “P” in GAPS! stands for ‘PIN’ down the causes.  The GAPS framework looks at the sustainability challenge as a complex business “problem”, with root causes that need to be discovered and “solved” via mitigation within the green investment strategy.

Pinning down the causes refers to investigating factors within and external to the project as well as the capabilities of the team that will implement the green strategies. A full description of the available tools is beyond the scope of today’s article, but the case of 7-Eleven highlights the usefulness of one aspect of the assessment. The outcomes are qualitative and quantitative factors that will positively and negatively affect the success of the project.

To evaluate the factors external to the project, you have to investigate the ways that sustainability might exert influence on the social, regulatory, political and of course, environmental forces operating around the project or in the market area where invest.

Typical real estate analysis focuses on real estate specific market factors, but ignores broader regulatory or political action in adjacent markets. It is always assumed that this information is only relevant when it is priced into the real estate, but that is often not the case. If a negative trend has progressed to the point where it can be priced into real estate within your target markets, then it may be too late for you to avoid the damage. You’ll have to either accept that price, rework your investment plan to include countermeasures or leave that market.

With Pinning down the causes, you would have to ask yourself about possible sustainability interactions at a broader level and determine how that might harm or help your green building project, markets, or doing business as usual (conventional investment) if that’s your focus.

The 7-Eleven case highlights the fact that 7-Eleven never connected the dots between the mega-trend of people moving to the suburbs and how that might lead them into direct combat with category killers in suburban strip malls and neighborhood shopping centers.

If the 7-Eleven management team had applied Pinning down the causes within their investment strategy, they might have been able to turn a challenge to their business model, such as consumers moving away to the suburbs, into a bigger opportunity in urban areas:

• Instead of simply following consumers out to the suburbs one market at a time, and getting into a long destructive war with big box category killers, they could have stepped back and noted where the broader trend of suburb life was most prominent and made the decision to capture business in areas that would remain permanently “urban,” where the category killers cannot obtain sites due to their larger store format.
• It took a very long time for many retailers to understand how population density in urban areas is a big plus for retailers. 7-Eleven could have seen these urban shoppers as being a prime customer segment that had been largely overlooked by the category killers (for the first few years anyway).

Both of these ideas are strategic in nature. If a company remains too “close to the ground” in its market analysis and underwriting, it will not see the bigger trends that will impact the long-term success of its investment program.

Using Pinning down the causes forces the investors to ask the bigger, tougher questions in addition to the traditional real estate analytics, to make sure that the project is in sync with larger influences or the investor has at least had an early warning of problems on the horizon that she should make sure to protect her strategy against or possibly turn into a brand new opportunity.

These and many more aspects of using the GAPS tools and frameworks for investment programs and project underwriting are covered during our workshops on green finance. Make sure you are signed up for Pacesetter, our newsletter, so that you’ll get announcements of upcoming classes.

Energy Star, rigourous performance data shall set you free

“Talk is cheap” might be a tired cliche, but there’s always someone around who seems to forget.

Not a week passes without another example of someone taking the easy way out on verifying green and/or energy efficient performance.   And anyone who cares about green building investing or even just making money from their buildings in the future should be vigilant about avoiding this particularly vicious delusion.

This week’s (most unfortunate) case in point is the US EPA’s EnergyStar appliance certification program, facing accusations of being vulnerable to manufacturer fraud by the General Accountability Office, as featured in the 26 March New York Times.

If you picture the emerging green real estate finance and investment ecosystem as being a giant computer, the US EPA’s EnergyStar Program is the “Intel inside” –  a powerful, branded technology within the nascent green investment “operating system” that drives the circulation of capital into and throughout the nearly $200 billion ecosystem, via providing the market standard in tools to collect and measure building energy data as well as certification regimes for the energy performance of most kinds of buildings and equipment.

EnergyStar is a big player, providing a sort of “software” that systemically links the value proposition of building energy savings throughout communities, environmentalists, investors, and citizens. Look at all the roles it plays in our green real estate finance and investment universe:

• Regulation: Building energy disclosure laws in California and Washington, D.C. are largely premised on the availability of and reliance on EnergyStar.  Regulating building energy disclosure as a part of market transformation is showing early promise in Washington, D.C. where practitioners attribute these new laws to the rise in green building certifications there.

• Green building certification: The US Green Building Council’s LEED 2009 rating systems require achieving an EnergyStar rating of 75 as a prerequisite to certification. Co-Star data (April 2009) indicates 433 million square feet of LEED-certified green building space in operation in California alone. The US Green Building Council estimated that green buildings will represent $180 billion in construction value by year-end 2009.

• Investment best practice: Within ULI’s CLUE 2009 study¹, nearly 80% of the respondents (investment funds, financial services, lenders) indicate that they perform “an explicit analysis of energy efficiency when completing a due diligence review on a project or transaction”.  Among larger property owners and managers, EnergyStar’s Portfolio Manager is as ubiquitous as Microsoft Excel for spreadsheets.

• Property Valuation: Lower exposure to energy supply and price risk is a key tenet supporting the lower operating costs, which partially drives the superior valuation of green and energy efficient (mostly defined as Energy-Star rated) homes and buildings. While we haven’t yet achieved sufficient transaction data to say with certainty the amount of valuation increase attributable to energy efficient buildings, we do know that lower operating costs are a key point of property value and value appreciation is an essential wealth creation mechanism in the United States (current economic climate aside).

• Monetary support: Closer to today’s focus, billions of dollars in taxpayer money and utility fees,  in the form of rebates and incentives, are allocated to support the purchase of EnergyStar-rated appliances and equipment within residential and commercial buildings.

With that in mind, the report about possible fraud vulnerabilities within EnergyStar’s appliance certification system should be a concern for anyone who builds, lives in or operates buildings in the United States.  It is not an understatement to say that the fortune of US green real estate finance and investment is directly linked to that of EnergyStar as a certification, data collection and reporting tool.

To be clear, I am not saying that EnergyStar Portfolio Manager, the energy data and benchmarking tool of choice commercial building owners, is faulty due to the appliance snafu. However, the residential and commercial real estate industry directly relies on EnergyStar-certified appliances and equipment, as well as the taxpayer-funded rebates attached to them. The growth of the green finance and investment industry in the United States, still very much at an early stage, also relies on faith in EnergyStar’s positive reputation, which can be compromised by false performance data on the equipment it certifies.

Add to that the weight of political capital at risk within hundreds of cities with climate action and/or energy conservation goals, based in part on residents and businesses (like property owners) switching to EnergyStar-certified appliances and equipment over the next couple of decades.

EnergyStar, rigorous performance data shall set you free

Trust is built on truth. In green real estate English that means real, vetted performance data.  Smart homeowners and investors deserve the truth about the energy performance of everything and they’ll keep their money in their pockets until you proved it. Don’t forget that the speed of the internet economy can make everybody equally smart about performance data in an instant.

Like Intel chips in computers, EnergyStar is an extremely valuable technology within our green investment “operating system”. Our reliance on it drives billions of dollars of annual growth in green and energy efficient buildings (even in a recession economy).

Nipping appliance certification concerns in the bud is not only a big deal for the EPA, it is an imperative for for the real estate finance and investment industry.

I hope that EnergyStar and the broader real estate industry will recognize what, not to mention how much, we stand to lose if we don’t take swift action to make sure that every aspect of it’s programming and reputation represent the platinum standard in energy performance data, measurement and certification.

¹Sorry to footnote a blog post, but I couldn’t find a link to the ULI 2009 CLUE report anywhere on their site, despite some intense searching. If you do want to look up this citation, and have the study handy, look at survey question #5, on page 8. I only have it in hardcopy form.

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