Dan Geiger Recommends: USGBC’s Green Building Policy Database

Ah,  the wisdom of crowds!

If you follow the author who made this phrase famous, then you know that having a large group of people solving a problem is better than an elite few (his words).

And that thinking has definitely propelled lots of solutions in  the green building sector.

So, with that, let me thank Green Journey reader Dan Geiger, Executive Director of the USGBC Chapter here in Northern California for contributing a helpful reminder for all those who, like my friend in the previous post are in the process of drafting green building policies.

Dan reminded me that the USGBC maintains a searchable database of public policies — including green building ordinances. Check it out. It’s awsome.

Not quite the download template, copy, paste action that my friend was hoping for, but it would definitely advance your municipality’s climate change mission way beyond what you could accomplish just doing it yourself from scratch.

California’s Green Building Codes: Tahoe or Prius?

Photocredit: labadieautoGood news!

As of Thursday, we have Green Building Codes in California — on a voluntary basis till 2010, when they become mandatory.

The two step-process to mandatory green building codes probably looks like a politically necessity today. Many would say that we should be happy to have any green building codes at all.  Plus California still maintains its image as a leader in sustainability.

But could the attachment to our shiny green image cause us to shy away from policy that addresses the public’s best interest in energy security and climate change?

Too much more brinksmanship and California’s green building codes risk being called a Chevy Tahoe Hybrid, voted “the green car of the year” and “the most fuel efficient car in its class”**.  The codes might look good when compared to other “SUV”-codes around the US, as long as you accept SUV’s as a benchmark. But we fool ourselves if we keep quietly ignoring the Prius’s out there:  Germany and Japan have been proving for years that construction of buildings with much lower energy usage is a feasible, achievable goal. And they’ve got the numbers to prove it.

Of course, I could be wrong. By 2010, we could be so far down the road to better resource use and energy independence that we will look upon the passage of these voluntary codes as being a milestone moment of courage.

And if that’s how things shape up, then I don’t mind being wrong at all.

More Calls for Sustainability Financing Districts

Photo credit: LA WadCalifornia Assembly Bill 811 fans: here’s another update.
Yet another call was issued recently for a sustainability financing district; where the city would offer residential green tech financing via property tax assessments - one of my super faves among the green finance moves out there.

Back in May, I posted about how legislation authorizing cities to create sustainability financing districts has been gaining traction.

That traction continues.

In this latest item, you basically have a key staff member of a state senator’s very green leaning Santa Rosa  district, calling for a sustainability financing district for their city. I’m not saying that enacting this type of program is a no brainer, but given the headway already made by Berkley, San Francisco and others — Santa Rosa should have an easier time envisioning how to get it done and reaping the benefits. Once legislation authorizes them to take action.

I can’t stop singing this song: AB 811 represents one of the best new strategies in green real estate finance. It can foster the rapid adoption of green technology via sharing a city’s cost of capital with homeowners. It empowers cities to step up and address climate change using their own unique financial advantages.

As a result, the proposed sustainability financing districts could create a mega-win for the cities, homeowners, green tech companies and the future green collar job holders involved.

Oh yeah, and let me sing my other AB 811 song: Banks and other consumer financiers, that currently shy away from residential lending should be taking notice of a very big horse that has taken another step out of the barn in California.

Green Building Incentives Spread Sustainability & Save You Money

Monetary and regulatory incentives from utilities, federal, state and municipal agencies can do much to increase the green building market. Yet, the existence of incentives alone does not necessarily mean that developers will build green. Only when you identify and puzzle together the right incentives from a dynamic menu of choices and deploy them  appropriately, can your project realize the maximum benefits incentives offer.

And, come to think of it, many of the monetary incentives available appear like small slivers compared to the rest of the capital stack. Why spend any time on them at all?

Yudelson Associates recently completed a thought-provoking study for the National Association of Industrial and Office Properties, titled “Green Building Incentives that Work: A Look at How Local Governments Are Incentivizing Green Development” – available for download from Yudelson’s homepage. The study covers the types of state and local incentives available along with survey participants’ judgments about which incentive types are compelling and to what extent.

Catch Encourage More Bees Green Building With Honey Incentives

Green building incentives are utility- or government-sponsored honeybees that carry dollars and valuable city agreements to investors in exchange for specific property improvements or complete green projects. These funds and targeted agreements literally fertilize the growth of more sustainable projects in a city. They have not received much attention in the capital markets to date, but they are a potent source of finance for a project - the relatively small amounts of incentive dollars influence decisions about what gets built at all,where and how soon. After the project is built in compliance with the incentive terms, the investor’s return has been structurally lifted by the permanent injection of upfront capital and a lifetime of reduced operating costs. Even with non-monetary incentives, an investor can enjoy a bigger project and reduced time to market.

The beauty and complexity of working with incentives is that they can appear in several forms, a few of the most common being:

• Incentive payments from a public utility energy efficiency program
• Grant, rebate or reimbursement from a city or county
• Expedited permit processing
• State income tax credit
• Density bonuses

It’s not hard to guess that the monetary payments are the most popular form of incentive. According to NAIOP’s study, “two thirds [of nine most common incentives] represent some form of monetary inducement”. So cities see ‘putting their money where their mouth is’ as a key requirement to stimulating green building in their jurisdictions.

The Green Journey Perspective

State and local incentives fit within a larger system of mechanisms aimed at increasing sustainability; but I’ll underscore my point about their unique power and value as a capital source. When we think about the honeybee, we don’t just look at its size compared to much larger animals, we understand that the pollination that they alone provide is a powerful ecological service — our food supply could be disrupted if it did not occur. Similarly with green building incentives, small dollar amounts earmarked for individual projects can stimulate disproportionately greater change within a market area.

Financiers naturally judge the importance of a capital source by its dollar amount for all sorts of good reasons. But we often have to point them to the honeybee analogy to get them to understand that they can not discount the role of incentives within the emerging green real estate financial landscape. For example, when institutional investors think about their market investment strategy, knowing a target market’s incentive environment should become part of their underwriting. Municipalities offering more incentives may spur more green building. I’ve posted before about owners of brown buildings in those same markets needing to do a more aggressive analysis of their assets’ competitiveness since - all other conditions being acceptable - they could see more pressure from green building competition than in other regions where incentives are not as prominent (yet).

And let’s not forget that the federal government has also been in on the incentive bandwagon for some time now, offering its own menu of choices, such as the energy efficiency and renewable energy tax credits. However, I’m sticking with my previous recommendation that you visit the US Conference of Mayors website to see the real leaders in incentivizing green building - local officials - cuttin’ the rug to prove their commitment to sustainability.

Barriers to Using Incentive Dollars Effectively

So with all that good news about so much money, what’s preventing incentives from being utilized more often? NAIOP’s argument is simple and true: “There’s not enough of them. Give developer’s more money and they’ll build more green buildings“.

In our work with real estate companies and strategic partners, we see mundane phenomena which unfortunately create problems for identifying and getting the most out of all the incentive dollars
available. Two issues:

• Dynamic Regulatory Environment: States and municipalities are coming up with new green building regulations at a quick pace. It is hard – and risky - for developers with long planning and building cycles to keep second guessing what the planning department might do next. So they proceed with their projects without the benefit of the incentives.

• Silo Decisionmaking: Imagine you attended a symphony concert where the conductor allowed only one instrument section to play their parts of the song at any one time. All the other instruments had to sit and wait silently until they were called. Would that sound funny?

Many cash incentives, such as those energy efficiency upgrades, are tied to discrete technologies, components or particular outcomes such as, say, a 25% reduction in energy output. But its up to the developer to do the hard work of figuring out how to tie the various specific technologies
and their attached incentives together.

Equipment vendors often sell their systems priced with the incentive dollars for that exclusive component already embedded in the calculation. And imagine each vendor focusing the investor’s attention on only their particular specialty components, to the isolation of the others. That happens a lot these days. The over narrow focus on specific purchasing decisions to the exclusion of others results in cherry picking – and causes the inadvertent sacrifice of other valuable incentive dollars.

Just as integrated design is a foundation principle of green building, best practice in underwriting incentives dollars is to identify and integrate ALL the financing sources and decisions, including the incentive dollars up front, before making specific commitments in order assure the biggest return on investment.

The Takeaway

Incentives are here to stay. They will grow in volume, variety and importance within the capital stack – since construction  costs will not be decreasing anytime in the near future. Like any type of government “help”, they probably won’t be made very simple to implement – so its time to become familiar with them, since they are becoming the accepted way for cities and states to design a flexible “pro-green” interaction with the real estate community.

The NAIOP Study is a good fact basis for becoming informed about the current state of incentives in the US today. And it’s hard to miss NAIOP’s clear call for public officials to increase incentive dollars. Your projects can lose out on this valuable financing source, if decisions about specific systems and technologies are being made in isolation or based on outdated information.

And by the way, we help investors understand these and related questions regarding optimizing the financial performance of their green real estate projects. Feel free to contact us if you would like to know how we can help.

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Please let us know your thoughts about this post. Our Green Journey is a forum for sharing and your perspective would be valuable for us and the rest of our readers.

Photo Credit: Flickr/Tamed Blossom - Honey bee

Our (2007-2008) Green Journey - 9 Ways Green Building is Revolutionizing Commercial Real Estate

Happy New Year from Berlin’s Prenzlberg! The former East Germany is a great place to reflect on transformation and my usual year end questions are “how is my life different now than a year ago?”, and “where should I focus my attention in the coming year?”. The Green Journey approach to understanding green real estate finance and investment trends is not much different:

• What changes in real estate and green building are making us talk and act differently now as opposed to a year ago?
  

• What issues will shape what we say and do about green real estate  in 2008

2007 - The Sustainability Revolution

9 Building green is now a requirement, not an option.
At the end of 2006, green building was a futuristic concept - not a critical component of value creation. Now that is over:

• Studies from Davis, Langdon and United Technologies show the cost of building green can be comparable to non-green buildings, making the benefits of green building accessible to every real estate owner.
• We also covered industry pacesetters, such as Digital Realty Trust and GE Real Estate, who are already out of the gate with investment strategies centered on building, acquiring and greening their assets.
• Going green became a cool investment move recommended by mainstream economists by the end of 2007, making it clear that green is also competitive and profitable.

8 Uncontrolled and undisclosed carbon emissions are a legal and economic risk.
Aggressive legal and regulatory action kicked up some dust in 2007, showing that cities and states are regulating Corporate America’s carbon emissions, regardless of the political winds at the federal level. As one fund manager put it, “[carbon emissions regulation] is not a question of if, but when“.

• Real estate investors should check out Post Carbon Cities and pay special attention to the advice being given to municipalities on aligning local zoning and land use policy with sustainability and climate change goals.
• We posted before about the evolving requirement of disclosure of material risks associated with climate change and greenhouse gas emissions to shareholders.

7 Green financial pilot projects make first spflutters
While the credit markets went sideways on us, that didn’t stop some forward thinking groups from taking on the challenge of accelerating capital flows to green real estate. Nothing tangible is out of the gate, yet, but they still deserve our praise and attention.

• We posted about Sustainable Capital’s green residential mortgage backed securities platform, Green Bonds as well as the Clinton Climate Exchange’s $5 billion kick start of the building retrofit finance market. Expect a vigilant birddogging of these initiatives, since increased capital flows to green building is the critical validation needed for further expansion of sustainability.

6 National credit crunch =  Has anybody seen my lender?
Unfortunately, for a lot of the banks, “the beatings will continue until morale improves”. The latest post from The Real Estate Bloggers says it all. The silver lining for green building? Capital markets volatility forced us to hit the ‘pause’ button on business as usual dealmaking. Survival in ‘08 requires excellence at old school fundamentals: operations, tenant retention, and value creation. We posted about whether “subprime was good for green real estate?” with the answer that ‘cash is king’, meaning that green real estate is in a better position to generate more cash flow.

2008 - ‘The [Sustainability] Revolution Will Be Standardized’

5 Institutional Investors: Insufficient green product & at what price?
Constrained Debt has a cousin named Lotta Equity and she has a couple of frustrating problems — there’s not enough green projects out there to buy and no one has figured out how much to pay for it. A colleague forwarded a great article from the San Jose Mercury News, where a RREEF’s Andrew Nelson outlined the dilemmas:

“There just isn’t much green real estate to buy, making it tough to determine the value of green… “All the initial construction was owned and built for governments and you can’t turn around and sell that, so there has been very few - almost no transactions of green buildings,” he said. “When investors think about the business case for green buildings, they want to know: How do they sell? The answer is we don’t know.”

4 The Rise of Sustainable Markets: Know your city’s climate change, resource and energy agenda

With our post on San Jose, we considered cities that use sustainability to compete for talent, investment and to maintain long term viability. They have become sustainability’s cowboys, driving their own resource, energy and climate change policies, since the federal government can not deliver a comprehensive enough solution that preserves their viability. Since real estate has been outed as the big consumer of city resources and energy services and the big contributer to regional carbon output, it is fair to say that investors will have to think about investment markets in terms of resource and energy sustainability in addition to classic real estate fundamentals so that they can remain relevant to their municipal partners. Check out the U.S. Conference of Mayors website where you’ll see the cities strut their stuff on resource, energy and climate change.

3 Real Estate Innovations: Compete using adaptive reuse and explore overlooked construction methods

We posted here about moving beyond simply building brand new LEED-certified buildings. Eeking out profits from existing real estate and focusing on other construction methods must since the cost side of new construction is not expected to decrease ever. Check out these two posts as food for thought:

• Dave Stejkowski, aka The Dirt Attorney, blogged about a compelling Economist story on lifestyle centers. Nothing for me to add here. Read the post and the article for the full picture.
• Howard Liggett posted about ‘The Myths of Modular Housing’ - a lower cost building method long in use in Germany and other countries, but still stigmatized and misunderstood in the United States.

2 LEED & Beyond: We need transparent performance assessment of building performance

We stay abreast of the EU’s moves on greenhouse gas and energy policy to understand the various ways green buildings are being adopted. And we concluded that ‘transparency makes a market’. No particular rating system in and of itself completely informs an investor about the true performance of a green building. In addition to increasing the certification of green buildings, there will have to be a focus on establishing transparent disclosure of the actual performance being achieved by green buildings, to remove the risk of investors and tenants overpaying for substandard green buildings in the coming years.

1 Land use policy is the new civil rights movement.

I was at a recent function where an executive said “Land use is what will change our children’s future”. His position was that we overfocus on individual green projects, forgetting that the greatest impact on a development happens within zoning and land use planning forums, since this is where decisions on use, infrastructure, transit, density, energy and resource use are made. And these decisions determine the quality of life and livelihood of ordinary citizens and businesses for generations. Sustainability as a movement is changing our individual assumptions about fairness, rights and responsibilities at every level of society. Local officials and citizens are now more vocal about the fair allocation and continued provision of resources and energy as a part of their basic rights  — and are becoming increasingly active in shaping land use decisions to defend those interests. Real estate investors are already very familiar with land use and environmental issues in general, but the growing notion of citizens perceiving resources and energy access as part of their moral rights is an additional level of complexity that sustainability brings to the land use planning. Read ULI’s The Ground Floor to keep abreast of the (r)evolution of sustainability within land use policy.

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I think a nine point countdown is enough for a year - plus we can never be sure what else is around the corner. If you have any more burning issues that you think we should be covering, please drop us a line! We would love to hear your thoughts and perhaps share your contributions the rest of the Green Journey crowd.

So much success in in 2008 and we hope for an exciting year in green real estate!

Photo credit: flickr/inky Bob - Compass and Map Mono