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.

Mandatory NY green retrofits R.I.P, but does it really matter?

Blowback from NY building owners forces Bloomberg to drop mandatory retrofit proposals.

But, does this really matter for green building?

Mayor Bloomberg had to scale back his announced plans to require New York building owners to obtain energy audits and, based upon the results, require the owners to perform the upgrades suggested in those reports.

(Note: This particular item has been sent to me from several sources, so I’m compiling and can’t link back to any specific source).

Fact pattern:

• Mayor’s plan would have affected some 22,000 buildings in the city; reportedly creating 19,000 construction jobs
• Above statistic vigorously disputed –> “I’d be shocked if 5,000 of those jobs were created” from Louis Coletti, president and chief executive of the Building Trades Employers’ Association
• Funding the bills that would have created the program really stirred the pot –NY only has $16 million stimulus funding for loans to building owners for this type of work, but the estimated total investment required for the retrofits was calculated to be nearly $2.5 billion

So now the debate rages over what this all might mean for green building. Is the Bloomberg retreat damaging for the advancement of green building?

In general no, but it did highlight the plight of an often overlooked group of property owners.

New York’s pullback from requiring the retrofitting of existing buildings doesn’t mean much, in the sense that so much industry level data and momentum has been generated about the positive economics associated with the energy efficiency of buildings, that larger, quality landlords will retrofit it anyway (albeit according to their own schedules). They’ll do it because they fear devaluation of their assets within the global investor circles they travel.

More importantly, they are more likely to be capitalized in a way that allows them to implement retrofits along a decent timeline. I’m saying here that real estate cycles will force them to pony up the cash just to “keep up with the Jones” and maintain property values as real estate markets recover and investors expect rents and values to grow.

Mid-sized landlords have a different reality. Many cities are just now waking up to this. Their smaller property sizes and smaller portfolio’s make them more cash constrained. The industry owes it to these landlords to come up with existing building retrofit solutions that fit their wallets. Many mid-sized landlords own buildings larger than Bloomberg’s suggested 50,000 square foot threshold, but the costs and fees associated with implementing the retrofit are still expensive for them.  They would have been very hurt by this legislation.

The lesson I see in this is about how much of successful green building and energy efficiency retrofits (and their finance!) is about growing  partnerships within markets over time. Exuberant public officials who only propose requirements, but haven’t created the deep, lasting partnerships with the real estate community necessary to support these kinds of efforts find themselves in Bloomberg’s situation — announcing pullbacks even as experts have clearly demonstrated the excellent economics that building owners can enjoy if they retrofitted their assets.

More clearly for me, is that other cities should take a closer look at making sure that their engagement of real estate owners is differentiated between larger and smaller property owners. Larger owners often deal with different kinds of shareholders and the size of their assets gives them more cash flow on hand to consider retrofits.  Plus they are getting pressured by even larger shareholders.

Smaller property owners need special attention, and services tailored to their specific needs. They are much more cash constrained. Yes, in California and some parts of the Northeast, PACE loans are helpful for these types of building owners, but PACE is still a new phenomenon and not available everywhere.

In the meantime, let’s hope that officials in other towns are involved in more relationship building within their own markets, so that they are able to come up with green building plans that make better sense and therefore, might be more palatable to the local real estate community.

LIIF green fund launches and Bond Co’s gets pulled

Two green funds have made the news recently, due to movements in opposite directions.

The Low Income Investment Fund announced a $50 million green community fund, to fund green buildings in underserved communities over the next three years. Per their press info, the funds will be used to invest in LEED certified building development, transit oriented development (TOD) projects and greener child care centers in underserved communities across California and the New York area.

The Bond Companies and Abraham Group, on the other hand, seemed to have pulled the plug on their planned $350 million fund, which would have targeted green real estate opportunities. This comes per Real Estate Alert (no link, subscription based only).

The fund originally focused on developing and redeveloping urban market properties, but switched gears to repositioning existing buildings when the market downturn worsened. With a return goal of 13.5%, it is fair to say that equity return expectations have shifted significantly upwards since the fund was announced. That, plus the overall investor pullback from real estate could make it tough to achieve the original fund-raising targets.

In our view, this shouldn’t be seen as any negative comment against green funds generally.  The shift in real estate valuation and the capital markets downturn have stalled any vehicle that is development and/or sub-20% targeted return.

Expect to see a similar fate hit other green funds announced over the past 24 months. It’s all part of the economy and current real estate cycle.

The upside (if you can call it that) can be seen in green funds, which are announced right about now: the market is widely expected to be at or near bottom by mid-2010, and so those vehicles will be in a better position to purchase real estate more cheaply and, other factors being acceptable, generate the kinds of returns investors expect. Having said that, it is our view that it will be quite a while before new development  returns to the forefront of anyone’s focus.

And that, of course, keeps things very interesting for the retrofitting of existing buildings.

Key events on energy efficiency finance and triple bottom line investing

Meet us at the the following events. We’ll be presenting about:

- energy efficiency financing

- responsible property investment metrics for high performance portfolios

- taking the green economy to the next level

In the weeks ahead, Lisa Michelle Galley will be featured at a number of key industry conferences. The topics covered by Lisa and other leading voices in the sustainable investment community will highlight the  latest trends and provide a valuable forum to learn about innovative solutions to some of the most pressing challenges facing the green building and finance sectors.

Presentation on Energy Efficiency Financing

GSMI -The Sustainable Buildings Series: Retrofits

October 21, 2009; 11:15am – 12pm, Mission Bay Conference Center at UCSF
Lisa will cover the key considerations for different types of energy efficiency financing.  From there she will talk about how owners can more effectively coordinate their energy efficiency financing efforts across their portfolios. Lisa will be co-presenting with Peter Liu of New Resource Bank.

Presentation on Metrics for High-Performance Portfolios

Responsible Property Investing Council: 2009 ULI Fall Meeting
November 04, 2009 – Joint session of RPI and Sustainable Development Councils
Moscone Center South, San Francisco
Along with co-presenters David Wood, of the Responsible Property Investment Center and  Jean Rogers of ARUP, Lisa will offer fresh insights and recommendations developed in a year long study of the development and application of  responsible property investing metrics on institutional real estate portfolios. Lisa and Jean will discuss how the real estate investment ‘system’ has been impacted by sustainability.

Taking the Green Economy to the next level

Sustainable Industries Economic Forum in San Francisco
November 19, 2009; 9:30am -10:15am
St. Regis Hotel, San Francisco
Lisa will join a panel of industry leaders including Paul Hawken, author and CEO of the Pax Engineering Group, to discuss some of the most challenging aspect of successfully implementing triple bottom line solutions and how we can take the green economy forward. The event will offer valuable perspective on growing strategic partnerships as a core aspect of sustainable business.

If you would like to meet us at any of these events, please email us info@galleyecocapital.com

News about future events is available through our website.

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• Sign up for our list on our green finance training page, to get info on upcoming workshops, which go deeper into the green business case.
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This green finance approach makes your initiatives more successful

When you are putting together a green finance strategy, what are the key pieces of the puzzle?

When we compare the climate change and energy efficiency strategies that public and private bodies have created to date, we’re seeing lots of them calling for new incentives to pay for climate change and energy saving initiatives (answering the “how much”, “what” and “why” strategy questions), but almost none of them answering the “which”, “when” and “how” questions on the financial support they call for. By the latter phrase, we mean ‘which kinds financial mechanisms and products’ work best with ‘which technology and energy savings initiatives’ at ‘what point in time of the carbon reduction time frame’?

Those are very tough questions, we know. However, the failure to embed those particular answers about financing any strategy leads to the tragic irony that we now see in many jurisdictions: experts say energy efficiency offers huge business potential, billions of dollars and euros in incentives are authorized, with billions more in the pipeline, but everybody’s still scratching their heads about how to access the funds and put them to good use. Without clearly acknowledging and differentiating finance’s varied impacts across a sustainable strategy’s time line, lots of good plans are assured ineffectiveness by fragmented, uncoordinated financial support.

It’s almost as if sustainability might be starving in a grocery store full of food.

Now here’s an interesting model we have come across that, in our humble opinion, does a neat  job framing the coordination of financing mechanisms so that sustainable finance can better deliver what’s intended: provide the right kinds of funding for the right types of initiatives and technologies at the right points in time over the life of the carbon emissions reduction strategy. We see the individual points of this framework in many strategies, but this model elegantly organizes those disparate pieces into a coordinated approach to sustainable finance.

A Green Finance Approach from the European Commission

From our work in the European Union, we’ve seen the European Commission’s recent announcement of their plans to invest EUR 50 billion (USD 73.5 billion) into low carbon technologies over the next 10 years. This really caught our attention because the Commission’s strategies are among the few which include a detailed framework, called an ‘impact assessment’ for deciding on the right combination of financing structures to pay for identified groups of technologies and mechanisms needed to achieve greenhouse gas emissions reductions targets.

So if you wanted to apply a similar process to assessing finance within your own green investment and/or energy efficiency platform, how would you do it?

1) Lay out your most likely individual finance options. Financial policy options were first derived independently of the underlying technical applications. Starting with the ‘business as usual investments and institutional arrangements’ and proceeding along a continuum to ‘the creation of new investment vehicles along with specific institutional arrangements’, they were each evaluated for individual strengths and weaknesses.

2) Group your initiative/technology investments around key characteristics. In the case of the European Commission, strategic planning involves technologies/initiatives that were grouped into different timing buckets based upon how close they were to market competitiveness. You can do this for all kinds of initiatives, too. We can imagine that investors in green and/or energy efficient real estate might not think in terms of the technology groupings. However, if you see your sustainable real estate portfolio as being geographic and technical groupings of properties, leases, regulations and technologies over time, then you will have taken the crucial first step to removing the confusion of fragmented incentives and other ineffectual financing moves.

3) Clearly define assessment criteria for each finance option to be adopted. In the case of the European Commission, the finance policies considered were evaluated in terms of mobilization, suitability, flexibility and effectiveness. By the way, we think these particular criteria could be useful in a broad array of cases.

We’ll let you read the document to learn about the particular finance policies that the European Commission came up with, since we’re more focused here on their framework’s broader application.

The results of their approach highlights the need to maximize sustainable value creation through better, up front coordination and structuring of finance policies and initiatives.  One way that their recommendations are better as a result of this framework is that they are able to distinguish up front between instances where simply more funding was needed, such as for energy efficiency, and those areas where different types of funding and/or institutional arrangements would be more appropriate.

We hope this discussion gives you a good starting point for structuring and coordinating your own green finance and investment options, so that your own portfolio and programs are more successful.

Send us any stories you have to share on that front, since this is a topic that we are very passionate about.

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Things you might want to know:

• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: chromatika on istockphoto

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