Cliffhanger: Which of these investors will earn a green value premium?

Do you believe that achieving a value premium on green properties is possible? Even in the currently tough market?

Well, Jamestown and the State of California have both recently been in the press talking about how they expect to realize extra value from their commercial real estate via green and energy efficiency strategies.

Check out the articles and tell us if you think their projects should earn them greater returns than non-green market peers.

Jamestown: $3-$10 Million Portfolio-wide Retrofit Commitment

Jamestown has committed to greening its entire $4 billion commercial real estate portfolio. In the recent New York Times article about their efforts, they point to their European sensibilities as being the reason why they moved ahead with a portfolio-wide commitment to greening existing buildings.

When  you read through the savings and quick paybacks that they report achieving, it seems clear that their focus is on low-hanging fruit. After all, $3mm-$10mm in retrofit costs are peanuts on a $4 billion portfolio. The good news is that they report realizing immediate savings — meaning permanent increases to property net operating income.

Nonetheless, or perhaps because of that, they focus on the green/energy efficient building’s ability to attract the right kinds of tenants and assure the asset’s sale to a broader pool of buyers. The article showcases several recent efforts, including 999 Peachtree Street in Atlanta, GA, which recently earned LEED-Gold status.

We actively follow how German and other European investors are moving quickly to incorporate comprehensive acquisition and portfolio management sustainability programs. You can read previous posts about these investors’ enhanced criteria and due diligence here. More good stuff –> If you receive Pacesetter, our newsletter, you recently read and downloaded the new EECE study ranking global property funds according to reported and implemented energy efficiency practices.

State of California: Will Green Buildings Net Higher Sales Prices?

The State of California recently put a portfolio of 11 properties, totaling 7.3 million square feet, on the market for sale-leaseback transactions. The State is reporting that these properties, most of them being, in their words, “some of California’s most energy efficient and environmentally friendly properties” could sell for $2 billion, and would be “attractive to a market that is seeking sustainable, green designs.”

What makes this an item worth tracking is that the state official making that quote is also reported as saying that the sale will allow the State of California to “lock-in the lowest rental rates seen in years“.  Bids on the sale are due 14 April. It will be interesting to see the extent to which a green premium can be realized when market or transaction conditions stipulate particularly low rents.  The beauty of real estate is that it is not rocket science — there is no free lunch, and all trade offs come with their price. We are seeing and hearing that, in tough markets, green strategies help to hold back some amount of value deterioration, but are not necessarily rewarded with immediate upside.

That being said, there are multiple angles to watch here.  For instance, the concerns expressed recently by some investors about the mixed-use Boston property that attracted 27 bidders and might close at a “crazy” 6% cap rate.

Why the concern? That cap rate, indicating a valuation far higher than typical for the current point in the real estate cycle (even for Boston), reflects the current shortage of high quality properties combined with a lot of capital on the sidelines. This kind of activity raises fears of a liquidity bubble, even in these tough times, as investors pay up to win what few good deals are available.

That could be a strategy that helps Schwarzenegger shrink the state’s debt woes by more than they would typically recover from the assets.

Yes, the excitement continues!

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.

Task force to Mayor Newsom: “Your 7 keys to existing building efficiency in San Francisco.”

How can green finance help increase existing commercial building efficiency?

As a member of the Mayor’s Task Force on Existing Building Efficiency, I had the pleasure of attending Mayor Gavin Newsom’s Friday announcement of his introducing new legislation, aimed at improving the energy efficiency of existing buildings in San Francisco.

The contemplated legislation is the product of a task force of 19 key stakeholders convened by the Mayor.  I was happy and proud to contribute to the financing aspects of this work and you can download the entire report here:  Report of Mayor's Task Force on Existing Buildings (187)

Goal: Cut energy use by 50% from existing buildings by 2030

The back story on San Francisco’s sustainability challenges reveals high stakes:

The operation, construction, and demolition of buildings accounts for almost half of San Francisco’s greenhouse gas emissions. Commercial, industrial, and municipal buildings account for 63% of building-sector emissions.

The City has established high standards of environmental performance for new construction. However, at the historic rate of 0.8% new buildings per year, it could take more than sixty years to ‘green’ even half of San Francisco.

As a result, the task force recommended that San Francisco move to help cut energy use by 50 percent, or 2.5% p.a. by 2030, from existing commercial buildings.

7 big ways San Francisco can achieve energy reduction goals via existing commercial buildings

The Task Force distilled its research down to seven big ideas that would help the City achieve the above GHG reduction targets by 2030.

1. Identify cost-effective savings in every commercial building: Require buildings to conduct an energy audit every 5 years.
2. Disclose energy performance information: Require building owners and managers to share energy data with the City.
3. Resolve split incentives: Provide a green lease toolkit and make submetering a policy priority.
4. Make incentives easy: Develop a web-based tool that finds all incentives and financing options for building owners in one place.
5. Educate, train, mentor and market existing building efficiency: Promote programs, facilitate mentorship and partner with institutions.
6. Lead by example in public facilities: Benchmark and disclose energy performance in public facilities.
7. Provide financing: Launch the San Francisco Sustainable Financing program and require that funding from that program prioritize efficiency before renewables.

Green finance focus - comprehensive incentives and smarter EE financing terms

Green finance mechanisms, the area I collaborated within, focused on recommendations #4 and #7.

Task force members reported seeing incentives either being ignored or misunderstood by property owners,  depressing the acceptance and prevalence of retrofits. Those problems were exacerbated by the fact that appraisers, contractors, lenders and others were equally unaware of the positive impacts that incentives could have on improving the economics of any commercial building retrofit program.

Based upon our own experience with assisting property owners in comprehensively sourcing incentives, I felt strongly that San Francisco should integrate a sourcing tool that would make it easier for property owners to quickly obtain comprehensive information on retrofit incentive options that were available to them.

We also made underwriting recommendations to the planned San Francisco Sustainable Financing program, to help it avoid problems that we’ve noticed in the loan programs of some of the other energy efficiency financing districts that are up and running.

Essentially, solar installers have a larger marketing force on the ground than energy efficiency retrofitters. As PACE loan programs are being rolled out across the country, we are getting reports of the unfortunate situation where the loans are going primarily for renewable energy, with energy efficiency funding running a distant second.  This results in the problem of solar panels supplying energy to “dirty” buildings. The regions in question are faced with achieving less of an impact from existing buildings to their climate action goals.

The financing recommendation to the City was that their own program include a provision to prioritize the funding of energy efficiency measures first, then renewable energy second. In our opinion, this requirement will would go a long way in making sure that the loans actually achieve the kind of impact expected by this financing mechanism.

I believe that even greater assurance of positive impacts from energy efficiency financing could be achieved by any program by further prioritizing energy efficiency measures according to the ‘loading order’ suggested by McKinsey in their recent studies. That level of detail was beyond the scope of our financing group’s work within this particular task force, but you’ll hear about it in upcoming posts.

At this point, it is gratifying to see that Mayor Newsom is moving forward with legislative action based upon a collaboration with key real estate industry stakeholders.

The task force has given him a lot to work with, assuring that San Francisco stands out as a leader in achieving real transformation through increasing the energy efficiency of existing buildings.

Green building investment an ‘affordable truth’

Did you catch Paul Krugman’s op-ed in the NY Times this past Sunday?

Essentially, he says that going green is more affordable than certain folks would like for us to realize. Moreover, he thinks that the investment that would be required by buildings to go green would provide a great “organic” stimulus for economy (excuse the pun).

Consider, for example, the case of investment in office buildings. Right now, with vacancy rates soaring and rents plunging, there’s not much reason to start new buildings. But suppose that a corporation that already owns buildings learns that over the next few years there will be growing incentives to make those buildings more energy-efficient. Then it might well decide to start the retrofitting now, when construction workers are easy to find and material prices are low.

The same logic would apply to many parts of the economy, so that climate change legislation would probably mean more investment over all. And more investment spending is exactly what the economy needs.

Big Landlord’s: “It’s LEED or bleed”

Thanks to Greg Porter, of MP Commercial Partners, for sending along the WSJ “adver-journalism” piece featuring several large landlords and the USGBC. It contains a good lineup of industry pacesetters who build and/or retrofit green and have seen a boost to the bottom line from operating environmentally friendly buildings. Essentially, it was a “get on the bus” writeup, encouraging environmental certification of buildings.

Remember that I asked in yesterday’s post, about whether Bloomberg’s pullback on mandating green retrofit mattered for large landlord crowd? My take: the horse is out of the barn on greening buildings and they were under pressure to keep up with the Jones’.

Read what the landlords in this article have to say — even though they’ll continue to push for more incentives at every government level — since their reports of overwhelming tenant and resident preference for green and energy efficiency buildings basically mean that a LEED or Energy Star certification is just the price of entry into the big ticket game.

Then and now

A few years ago I was on a panel that was moderated by an industry icon. Cap rate compression was still the hot thing and sustainability was pretty much ignored in real estate circles.  The moderator asked me (then a lender) if I thought green buildings would ever be worth more than conventionally-built assets. I told him that conventionally-built assets would probably start trading at a discount once enough green buildings were up and running. I’ll never forget him looking at me as if I had two heads.

Today’s WSJ article contains the following quote by Dave Pogue, of CBRE:

“This is a growing movement,” he concludes. “If you don’t improve your buildings to a good standard, there will be a market penalty. We’re already at a point where sustainability gives you an edge.”

Good to see that I probably won’t have to endure panels like that one any more.

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