Part 5: Green Building Drives Triple Bottom Line Advantages

How do you achieve environmental and social progress within your real estate investment platform while delivering market rates of returns?

In Part 5 of our Special Series on the Green Building Finance & Investment Forum – New York, co-sponsored by Galley Eco Capital, triple bottom line investors discuss how and why their environmental and socially-driven investment vehicles meet and sometimes exceed market rates of return, and their investor’s expectations.

The panel consisted of Lisa Lafave of HOOPP (Hospitals of Ontario Pension Plan), Brandon Mitchell of Full Spectrum NY, Nicholas Stolatis of TIAA-CREF Global Real Estate, and Stephanie Wiggins of the AFL-CIO Housing Investment Trust. The panel was moderated by Lisa Hagerman, Ph.D., of the Institute for Responsible Investment at the Boston College Center for Corporate Citizenship.

Green building is a key ingredient within triple bottom line investing

Pension funds invest according to input from a broad universe of stakeholders. Everyone from their pensioners, to employees and major investors has a particular reason to request that the fund focus on all three bottom lines simultaneously. And absolutely no one gives an inch on returns. At the conference, these investors reported that there is a lot a variation in how triple bottom line investing can look in different companies and different regions. However, green building was a key ingredient within nearly every type of triple bottom line initiative that they reported.

At the AFL-CIO Housing Investment Trust, which has financed more than 80,000 affordable and moderately priced housing units, major investors require the trust to meet CSR criteria, ensuring that investments are handled in a socially optimal manner.

For TIAA-CREF, which has a direct real estate portfolio of over $30 billion, the focus is on connecting environmental responsibility with asset competitiveness. Major tenants want LEED certified space, and they are not willing to pay a premium for it. Failing to address these tenant requirements will decrease TIAA-CREF’s asset competitiveness and decrease portfolio performance.

“Those that don’t operate green will be obvious, and they will go the way of the dodo bird” - Nicholas Stolatis, TIAA-CREF Global Real Estate

In order to limit future downward exposure and protect portfolio value, HOOPP portfolio manager Lisa Lafave calculates risk-adjusted returns, accounting for social and environmental risk. For HOOPP, environmental risk equals the risk of not being green, and losing asset competitiveness. By accounting for this risk and greening their portfolio, HOOPP expects to see higher occupancy, better tenant retention, shorter lease-up periods, and in certain markets, higher rents.

Experienced developers deliver great results with triple bottom line investing

Many investors and lenders have preconceived notions that socially-responsible investment initiatives automatically deliver below market returns. However, there are a number of firms that are redefining socially-responsible investment vehicles, while at the same time exceeding investor expectations.

Brandon Mitchell, Director of Development at Full Spectrum of NY, explains how his firm is doing well by doing good. Full Spectrum is a mission-driven organization, that seeks to reduce the housing burden in low-income communities, while also creating opportunities for local businesses to create jobs and wealth. They work with institutional-grade debt and equity investors, and focus on sustainable development because its good for the environment, the community, and their pocket book.

Full Spectrum of NY creates a product that few other development firms consider- they create environmentally and socially sustainable mixed-use, mixed-income developments in low-income and emerging communities. They have developed several successful projects in Harlem, including the Kalihari, a 249-unit condominium building with 50% affordable and 50% market rate units, designed to use 50% less energy than a conventionally-built structure.

Key features of the Kalahari include:

• A panelized wall system to reduce construction costs and shorten the development timeline
• A tight building envelope and energy star appliances for high energy efficiency, and renewable energy from building-integrated solar panels
• A green roof for storm water retention, tenant green space, and urban heat island mitigation
• Submicron air filters to improve indoor air quality
• After school programming for children, supporting working parents
• A creative art center, with a focus on African and Latino art

By creating mixed-income housing, Full Spectrum of NY can access incentives and grants accounting for more than 25% of their project capital needs. In addition, the firm is able to secure a low cost of capital for the remaining capital requirements. By utilizing sustainable building strategies, they lower operating costs and hedge against future energy and water price risk, a great selling point for residential buyers and commercial tenants.

This development strategy has worked well- on a recently completed development, Full Spectrum achieved a per square foot selling price for the market-rate residential units that was $125 to $350 higher than anticipated. This significantly exceeded the expectations of project investors, supporting Full Spectrum’s investment thesis:

“Integrating social and environmental factors into our projects has not only meant that the communities we build in benefit, but our investors benefit, and the homeowners benefit- we are creating a platform that allows us to redefine how we think about real estate and sustainability” - Brandon Mitchell, Full Spectrum NY

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Part 2: Unlock Hidden Cash Flow and Value with Energy Efficiency Retrofits

Face it, today’s tough capital markets force every real estate investor to drill deeper into existing building performance to eliminate waste, sustain and/or increase net operating income.

In Part 2 of our Special Series on the Green Building Finance & Investment Forum – New York, industry pacesetters detailed the positive investment benefits from building energy efficiency retrofits.

Research data and practical experiences of the World Business Council for Sustainable Development (WBCSD), Citi Realty Services, Jones Lang LaSalle (JLL), the United States Environmental Protection Agency (EPA) and Real Win Win, Inc all pointed to a mountain of evidence that greening existing buildings reduces wasted capital that is hidden within portfolio performance inefficiencies.

WBCSD: Do not underestimate the size and significance of energy efficiency retrofit opportunities within your portfolios

Many facility owners and managers think of green retrofit measures as not amounting to much savings – i.e. presenting a weak business case. But the actual data being developed by experts shows that these investors/operators are misjudging the opportunity.

Bill Sisson, director of sustainability at the WBCSD and the United Technologies Corporation, put out some tough stats that underscore the degree of financial, resource and operational inefficiency currently buried within the global property industry:

The International Energy Agency (IEA) calculates that the potential energy savings for existing building energy retrofit is 25% of global energy usage, which is equivalent to the energy that is used globally for transport (26%). The retrofit of existing structures can eliminate ¼ of the current global final energy use, equivalent to the production capacity of 3,200 700MW power plants.

The WBCSD is studying the business case for property owners via it’s “Energy Efficiency in Building” project, with the objective of creating “the first quantitative look ever at what may be accomplished economically by reducing energy demand and CO2″.  This project, based on 1 trillion square feet of data (wow!), focuses on the cost effective reduction in property energy use through new technologies, financial structures, and shared knowledge. The WBCSD has published a summary and trends report (PDF) based on their study of this data, ahead of the full report, due out in 2009.

EPA & JLL: You can earn back up to 10% of operating expenses plus lease or sell a more competitive asset

Here in the US, commercial buildings generate 45% of our national greenhouse gas emissions and cost landlords and tenants more money than necessary.  Alyssa Quarforth, the Energy Star program manager for the US Environmental Protection Agency (EPA), laid out the sizable savings and financial opportunity to property owners implementing energy retrofit projects:

• On average, energy costs represent 28% of total operating expenses for commercial office buildings.
• 30% of energy consumed in commercial buildings is used unnecessarily or inefficiently.
• Based upon these figures, almost 10% of operating expenses are inefficiently spent. These inefficiencies provide an opportunity for building owners to improve property fundamentals and increase their ROI via the green retrofit process.

Peter Belisle, president of project and development services at Jones Lang Lasalle (JLL), spoke about the competitive advantages that they see in certified green buildings over conventionally built and non-certified structures. JLL has a project volume of $13 billion as of last year. He reported that in the same submarket, and even for nearly identical structures, green buildings lease up faster, enjoy lower vacancy, and present the better potential for higher lease rates than their conventionally built peers.

Citi Realty Services: Leasing space in buildings with energy efficiency retrofits improves our bottom line and helps fulfill our corporate sustainability charter

Many of us have heard that the social responsibility charters enacted by corporate tenants are driving their demand for certified green space. Tenants are aware that green space boosts their bottom line, too.

Susan Chapman, director of global real estate operations for Citi Realty Services, which operates real estate for Citigroup, pointed out how some of the real estate strategies that Citigroup is implementing to reduce the group’s greenhouse gas emissions, also provide the immediately positive financial benefit of cutting their overhead costs.

For example, by utilizing alternative workspace strategies, Citigroup can eliminate the need for roughly 48,000 workspaces over the next 4 years. This will reduce their global real estate demand by roughly 10 million square feet of space. Chapman estimates that eliminating these workspaces will reduce the carbon footprint of Citigroup’s real estate by 29%, and reduce real estate-related operating expenses by 22%.

In addition to this demand reduction, Citigroup will concentrate their employees in energy efficient, green-certified facilities that maximize daylight and indoor air quality.

Many tenants are implementing real estate strategies that will reduce their commercial real estate footprint. This puts the pressure on existing landlords to retrofit space to stay competitive, or risk losing tenants when their leases are up for renewal.

Real Win Win: Your ability to ask the right questions drives the success of your energy efficiency retrofit program

One of the biggest challenges to green retrofits is to determine which particular upgrades and strategies will maximize return on investment. One of the key workshop takeaways is that integrated design is not only applicable to new construction, but is also vitally important to the retrofit process.  If you set a program for renovation, green strategies have to be planned from day one.

Mark Jewell, president of Real Win Win, Inc, presented strategies for working with existing landlords to approve these renovations, and to ensure that new operating efficiencies accrue to those who pay for them. Framed in a “myths versus math” outline, he laid out a question set that owners and facility managers can apply when selecting retrofit strategies that yield the best return on investment.  Here are a few of those questions:

• How would our existing (and future) leases allocate the costs and savings of a building wide energy retrofit?
• Has anyone examined each lease & calculated who would benefit from lower energy costs?
• Do your payback analyses consider who gets the savings?
• Do your upgrade recommendations communicate the true costs/benefits to the cap ex decision-makers?
• Would lower Op Ex (and improved comfort) help with tenant retention and attraction?

As more owners/operator become wise to the financial advantages of green retrofits, and the risks to owners that do not improve their structures continues to grow, we expect to see more activity in the retrofit sector.

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If you liked this post and would like to receive more, please subscribe. Don’t forget to read the other installments of our Special Series on the Green Building Finance and Investment Forum - New York. As always, we welcome your comments.

Green Building Finance and Investment Forum New York

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The Green Building Finance & Investment Forum is where industry pacesetters advance sustainability via their innovations and best practice in energy efficiency, green real estate development, investment, finance and operations. Twice a year, approximately 150 leading green real estate investors, financiers and practitioners come together for an intense 2-1/2 days of workshops, presentations, frank discussions and, of course, dealmaking.

The participants, all senior professionals from high-caliber firms, set the bar high. And the presenters, their equally demanding peers, never fail to deliver hard content and inspire. The result is a productive, memorable experience that we humbly call “the TED of green real estate”.

Galley Eco Capital, in collaboration with InfoCast, is a founding co-organizer of this highly unique event. On the heels of a very successful New York meeting in September ‘08, we decided, together with our friends at Building Energy Performance News, to publish the summary perspectives of the industry pacesetters that are making sustainability a successful, viable investment strategy for the real estate community.

The summaries of the forum topics and individual perspectives will be published here in a series of ten posts on a weekly basis. Here is an advance peek at the lineup (note: if a post is linked, then it has already been published – click on the link to go directly to the post).

1. Lessons for Future-Proofing Property Values
2. Unlock Hidden Cash Flow and Value with Energy Efficiency Retrofits
3. JP Morgan Chase Talks Green Real Estate Investing
   
4. Portfolio Owners Top Advice for Greening Existing Buildings
5. Green Building Drives Triple Bottom Line Advantages
6. Starting a Green Real Estate Fund?
7. Valuation & Risk in High Performance / LEED Commercial Real Estate
8. Green Leases: An Important Component of a Green Real Estate Investment Strategy
9. Perspectives on Assessing & Financing Portfolios for Energy Retrofits
10. Green Finance: Current Trends, Future Outlook
11. Carbon Risk Management: What It Means for Real Estate Portfolios

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Subscribers to Our Green Journey will be receiving this series automatically. Please subscribe to Our Green Journey either via email or RSS in order to make sure that you do not miss any of these summaries. Clients and friends who are already within Galley Eco Capital’s newsletter community will see special summaries of these posts in future newsletter editions as well.  Contact us if you wish to receive our newsletter.

Our special thanks to Building Energy Performance News for helping us to spread the word about this special event and its participants, as well as to InfoCast, which has been an innovative partner in creating and advancing this particular meeting for the green real estate community.

And if you were a participant at these meetings, and wish to share your feedback, by all means contact us.

The Green Building Finance & Investment Forum: First Movers, 9 Ideas & Some Challenges

So today is a two post day, just to stay on top of the info deluge that is besieging my inbox. I’d posted before about the Green Building Finance & Investment Forum, which took place the latter half of last week.

The focus of the conference was for the green first movers to share experiences from their particular vantage point.

Most Talked About Green Building Ideas

• Be green or be obsolete. You have heard this one here many times before. It was reiterated throughout every panel and presentation. Leanne Tobias used the term “future-proofing” to refer to how green is being seen as a way to mitigate the risk of obsolescence. It became one of the most repeated buzzwords throughout the event.

• Think abundance - apply sustainability to grow the top line. Tom Paladino gave a wonderful case study about how his firm uses sustainability to create specific features that increase the rent premium owners can get on their buildings. This runs contrary to most people’s focus on using green building principles to reduce expenses.

• Sustainable markets – the downtown premium. Jonathan Rose presented his company’s approach to investing, which includes focusing on smart growth locations. They’ve got it down to the point where they have established relative return premiums for various markets.

• LEED branding is gaining economic value. Transwestern’s Greg O’Brien pointed out that investors were seeing a particular value in green building being certified. It is not enough for an investor to just say that they had made specific improvements to the property, but that LEED certification was being seen as a ‘good housekeeping’ seal of approval on the asset.

• Think beyond the net zero building. On the technology and innovation panel, panelists talked about thinking in terms of a net zero community, not just individual buildings. Bill Sisson, of United Technologies and the World Business Council for Sustainable Development and Laura Rodormer, of Swinerton Management Consulting talked about the need for the investment community to enlarge its view of how far we can go with net zero energy.

• Go for the low-hanging fruit. Immediately adopt low cost green strategies. Several panelists said that there were many high ROI green moves that can be immediately implemented at little or no cost (and without an investment committee’s approval). Changing lightbulbs might sound boring, but the energy savings generate a great return.

• Metrics measure what matters. Several investors pointed this out. We will not have positive financial, environmental and social outcomes unless we are measuring portfolio performance on all of these dimensions. Real estate investors now have the challenge to integrate measuring environmental and even some social outcomes within their portfolios alongside financial returns.

• Use government incentives, subsidies and tax breaks to your advantage. Steve Grant, of the Bond Companies, was in the audience.  He stood up in the middle of a presentation and pointed out how his company has gotten quite strategic about how they source and apply incentive dollars. It can be a significant source of financing that is often overlooked by investors.

• The green building tsunami is just beginning. State of California Treasurer Bill Lockyer commented that a year ago the investment officers at CalPERS and CalSTRS (our state pension funds) hardly ever heard about green building investments. Now they get about two proposals a week, requesting their investment in a new green fund.

And then there are still challenges

• Diagnosing with LEED-EB: Lots of investors talked about how implementing LEED for Existing Buildings is a very challenging, highly imperfect endeavor. Not only just to green a building, but they are also applying LEED-EB (now LEED-EBOM) as a screen for potential investments. No solutions were offered, this is an open point for all of us to follow. However, it was interesting to note that several
  consultants in the audience were muttering that the investors difficulties stemmed from trying to force LEED to fit their organization’s existing investment approach (i.e. put LEED criteria into the organization’s existing checklists) and not the other way around. There are lots of efforts underway throughout the industry trying to tackle this problem, so I’m sure we’ll see lots of movement here in the coming months.

• Underwriting, Appraisals & Standards: When it comes to talking about underwriting standards, the industry talk sounds like the City of Babel. Lots of confusion. We still lack formalized underwriting standards that the industry can apply in order to understand green buildings financially, but there are groups, such as the Green Building Finance Consortium, that will be putting out papers about this topic in the coming months. Tim Lowe also presented a detailed analysis of what needed to happen in order for real estate appraisers to adequately value green properties. In short, there is lots of education still needed within the appraisal industry.