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.

German funds step up sustainability screening for decision making

If you only read about US real estate investors, you might have the opinion that the real estate community is still undecided on the topic of embracing green building.

One stack of articles will quote investors talking up their green building programs.

In an equally thick stack of quotes, they complain about green building or energy efficiency costs.

In Germany, however, investors are more outspoken — favoring increased green and energy efficiency screening and investment criteria.

According to Germany’s Handelsblatt, European real estate investors are quoted as increasing their screening procedures and criteria for green buildings and energy efficiency. Per the Handelsblatt (our translation):

German open-end real estate funds are increasingly applying social and environmental criteria to their investment decision making. These criteria are also playing a growing role in portfolio management procedures.

Five funds are quoted as discussing their use of green and energy efficient criteria within their investment decision making: Pramerica, UBS, Union Investment Real Estate, Axa Real Estate and Commerz Real.

What are the funds reported activities?

• Union Real Estate utilizes a sustainability screen at acquisition. Existing buildings which do not meet their minimum energy efficiency criteria are rejected.
• UBS uses different checklists for suppliers, tenants, project acquisition, leases and building performance to monitor and enforce sustainability standards.
• Pramerica Real Estate’s investment policy within its TMW World Funds has been adjusted so that sustainability screening is conducted for all new investments as well as on the existing portfolio. Due to the fact that there really aren’t enough green buildings in existence for investment, they also check non-green investments at acquisition to make sure that they can be greened once they are in ownership.
• Axa Real Estate had its own sustainability ratings system developed and is currently testing its portfolio.
• Commerz Real reports that sustainability criteria has an increasing influence on investment decisions, since they notice that more tenants desire renting within green buildings.

While you might encounter US investors without a firm sustainability policy, it appears that if you wish to do business with German investors, you had better have your (or their) green investment checklist ready.

This is particularly interesting because several of these funds have had successful capital raises. With US real estate (and the dollar) getting cheaper, it will be interesting to see what happens when these foreign investors start looking to the US for good deals — with their sustainability criteria in hand.

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Continued challenges for neighborhood stabilization efforts

Several weeks ago we noted that our recent experience with the Neighborhood Stabilization Program (NSP) revealed significant hurdles facing the program, and highlighted the struggle to realize on-the-ground benefits for target communities.

Unfortunately, the latest news on this front confirms our assessment.

Much of the nearly $4 billion put forward under the NSP to help the country’s most blighted communities is showing limited and inconsistent benefits.

While some cities are finding success, the combination of robust private sector purchases of foreclosed properties along with banks’ unwillingness to systematically support the NSP efforts has fostered frustration.

In what might be viewed as a last ditch effort to see the NSP succeed and overcome the significant operational challenges inherent in the acquisition, rehab and funding of foreclosed homes, a new coordinating entity has emerged as a potential solution: The National Community Stabilization Trust.

A nonprofit organization, The Stabilization Trust will aim to ‘right the ship’ by providing local agencies with services that should counteract the NSP’s underperformance, specifically:

• Streamlined, coordinated access to foreclosed properties, and
• Flexible and timely financing to renovate the properties.

To execute effectively, The Stabilization Trust has established direct partnerships with leading financial institutions, such as Bank of America, Chase, Citi, Fannie Mae, Freddie Mac, GMAC and Wells Fargo, which in theory should for allow municipalities to acquire targeted properties in bulk across specific neighborhood locations.

Bigger picture considerations…

While the success of The Stabilization Trust is still uncertain, the facts on the ground to date feed the skepticism of those who opposed the NSP from its inception. As the next steps play out, current market activity raises some important questions to consider:

• Does the success of private investors (to the detriment of contained and focused city-run rehabs) signal that markets are indeed functioning quite well, thus suggesting the need for government to move aside?

• Are banks’ fiduciary responsibilities to their shareholders the driving force that trumps larger questions of long-term community welfare? If so (and many would argue yes), where is the proper balance between commitment to shareholder wealth, and service to the communities in which a bank operates?

Have an opinion on the effectiveness of the NSP, or the broader policy implications of the program? Leave us a comment, and let us know what you think.

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Things you might want to know:

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Photo credit: JoLin on istockphoto.com

Future-proof your portfolio with this SB 375 update

A few weeks ago, we blogged about how real estate practitioners may inadvertently “penalize’ the green business case through understating the true costs and risks associated with continuing business as usual.

And the latest happenings related to California’s SB 375 underscore that message.

Here’s some specific download,  courtesy of an excellent write-up by Jonathon Redding of Wendel Rosen (below ->details on getting the write-up), on how land use changes related to California’s landmark AB32 can increase the risks of doing business as usual for developers and investors in California who do not incorporate the new ways in which regional authorities are regulating environmental compliance, in fulfillment of their responsibilities under SB 375.

SB 375 is one of the keystones of California’s regulation of greenhouse gas emissions. From its mandate, regional authorities are required to adopt plans to limit greenhouse gas emissions by forcing projects through an “enhanced” environmental review process (read: tortuous) if the projected greenhouse gas emissions of their proposed projects exceed determined thresholds.

Redding lays out the landscape for practitioners planning projects in Northern California, where the Bay Area Air Quality Management District (BAAQMD) has just proposed the threshold of 1,100 metric tons per year of maximum greenhouse gas emissions for any project in its jurisdiction. This proposal, which will be finally reviewed for approval on 21 October 2009, is also the most sensitive threshold for GHG emissions proposed.

If the above thresholds are adopted by the BAAQMD in the next month or so, any projects which have not undergone environmental review will be subject to these thresholds.

You have four main options if your project exceeds the new GHG annual emissions thresholds:

(1) perform an expensive analysis to establish the project is below the adopted thresholds;

(2) apply technologies or best management practices to mitigate GHG emissions below significance thresholds;

(3) purchase verifiable offsets or reduction credits to the extent allowed by law; or,

(4) provide information to support the lead agency finding that it is impossible to mitigate the project’s impacts and adoption of a Statement of Overriding Considerations. In the fourth scenario, they will need to explain why the public benefits of the project outweigh the significant and unavoidable adverse impacts associated with the project.

The gist is this, if you have wholly overlooked this new regulation, or have designed a new project in BAAMQD’s jurisdiction that does not quite meet the threshold, compliance “after the fact” will cost you big: dollars and headaches.

Of course, you can spend time isolating SB 375-related costs and adding them to your cost of doing business as usual, to determine the “value-add” of sustainability via avoiding them with good green design that complies with the thresholds.

From our experience, the value of avoiding an unduly long, messy “enhanced” environmental review by itself is — to paraphrase a famous advertiser — priceless.

(Note: we couldn’t get a direct link to Jonathon Redding’s write-up for you, but will happily forward this great information if you request it.

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Get plugged in:

• 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.
• 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.
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• Sometimes you can see what we’re doing on Twitter.
• Photo credit: “Downtown” by 66North.

Is it a good idea to guarantee LEED certification?

Cheap stunt to grab market share?

Or is this just a sign of how commoditized the LEED consulting market is becoming?

LEED consultants Energy Ace have announced that they guarantee LEED-certification on their projects, which has caught quite a bit of attention around the industry over the past few days.

I am sure attorneys all over the  nation are getting pretty curious about how this firm got comfortable with  making this offer.

As this lawyer writing for GreenerBuildings points out:

Energy Ace doesn’t appear to serve any design or construction role.  Remember, important decisions are made at both the design and construction stages that impact achieving LEED certification.  How can Energy Ace be comfortable that LEED administration is enough?

So what makes Energy Ace comfortable with offering this ? The lawyer writing the article alludes to revealing more information on Friday, and we’ll be checking in to see what that is.

My take on these things is that there is no free lunch and most people do things for rational reasons (most of the time).

So we just need to locate the quid pro quo in this deal and decide if it contains sufficient countervalue for Energy Ace to make this offer.

What limits their exposure on this type of agreement? Possible issues to explore are:

• What does the owner have to agree to contractually to get this kind of protection?
• Is it worth it to the ownership? Have owners really been that skittish  about “certification risk” in the first place, since the real estate industry has largely accepted the need to green their properties already?
• Isn’t there already enough knowledge present in the industry about the certification process that makes a guarantee redundant?
• Does the presence of this guarantee allow them to charge more for services (as they are theoretically offering more protection to the owner for the economic risk they are taking)?
• Is it transferable? When a bank forecloses on a project that Energy Ace is working on, can the lender take over the guarantee and enforce it once they step into the owner’s shoes? Or would the guarantee be void the moment any of the other key parties are no longer on the active on the job (like the general contractor, for example).
• How is liability determined if LEED-certification is ultimately not achieved as promised?

Yep, we’re pretty curious here.

With real estate construction volume and transactions down so dramatically, third parties such as LEED consultants have to market extra hard to win business within the much smaller pool of projects available.

LEED consultants are currently price takers within their sector, as fees have been decreasing in a weak industry. That is partly due to the presence of more firms entering the sector as green building is taking off.

So while the certification guarantee might help Energy Ace win more business, I’m concerned that it opens the strategic floodgate to intensify competition and weaken pricing for LEED consulting services beyond what is reasonable.

It is not a good point in the real estate and overall economic cycle for this intensity of competitive forces to become so active in green building, just as it is starting to take off.

My questions to the (many) Green Journey readers who are LEED consultants:

Do you think that Energy Ace’s guarantee will force others to make the same kind of offers to win business?

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