Let’s meet at Tulane’s Green Finance Conference, 10-11 March 2011

Two Reasons to Attend ‘Strengthening the Green Foundation’

I want to make sure that you have the latest on Strengthening the Green Foundation, an exciting green finance conference that’s taking place at Tulane University, in New Orleans, this Spring.

Tulane University’s new Master in Sustainable Real Estate Development Program and the Federal Reserve Bank of Atlanta invite researchers, industry practitioners, and policymakers to participate in a conference to advance the understanding of and improve the practice of green development and finance.

1. Set the Agenda: Advance the Study and Practice of Green Building Finance

Core research tracks include the development and finance industry structure, green valuation, and portfolio management. Practice and policy tracks include green underwriting, green measurement and certification issues, and green leasing.

Read the complete call for papers, which includes details of the conference tracks, the abstract submission process, and deadlines, as well as a link to the online abstract submission site.

2. Leverage Time: Meet Me, Other Practitioners, Policymakers and Green Finance Specialists

This will be a great use of your time spent on understanding the green finance space. I have the honor of being among the speakers and am excited about the great list of practitioners, researchers and policymakers who are scheduled to present.

If you are attending, please drop me a line at and let me know.  This is a breakout year for green finance and I’m sure this event will be filled with thought-provoking insights you can’t miss!

The first real estate and energy investment mashup is here!

The media and web worlds gave us the term ‘mashup’ to describe the combining of different files, songs and other applications into a new piece of work. Now that definition can be extended to a new domain entirely — real estate and energy investing.

Hunt Power has joined forces with TIAA-CREF, John Hancock Insurance and others to create two energy infrastructure companies that are structured as real estate investment trusts.  Initial estimates are that the companies are set to  invest up to $2.1 billion.

Yes, that’s right — electric and gas infrastructure REITS!

The new REITS will provide capital to municipalities, co-ops, utilities and others needing to install electricity and gas infrastructure.  Their initial footprint focuses on Texas, the Great Plains and the desert Southwest regions. In comments to GlobeSt. com, Hunt’s CEO explained how the companies will operate similarly to hospitality REITS:

“they’ll  develop and/or own assets and lease them to regional operators. In some cases, the REITs will acquire distribution and transmission assets from operators, who will then lease back the assets.”

The arrival of these energy infrastructure REITs caught our attention because we’ve been digging into the climate change investment reports being circulated by Goldman Sach’s (GS) and others. We are starting to see early signals of the capital markets trying to assign risk and value based upon a company’s presence in a high-emissions or low-emissions sector.

We are tracking these developments, since our commercial building landlord and lender clients will have to understand whether it makes sense and if so, how to incorporate tenant emissions exposure within their underwriting of major commercial leases.

If you’ve been following that particular strand, then you’ll be able to stay with my ’roundabout’ chain of explanations, which will tie into the significant market opportunity for firms such as the new energy infrastructure REITS.

In a 2009 report titled , “Change is Coming: A framework for climate change - a defining issue for the 21st century”, GS laid out their analysis of how competitive dynamics in several market sectors could change significantly, along the lines of those sectors’ higher or lower emissions exposure.

In a scenario assigning a US$60/t carbon price, they estimate that 15% of the total cash flows generated within the sectors might be transferred from less carbon efficient to more carbon efficient sectors.

90% of those outgoing cash flows transferred would come from the most carbon intensive industries, which includes electric and non-electric utilities. You can click on the graphic below from their report to see their breakdown of the estimated cash flows that could be lost by the utilities and a few other industries, due to emissions costs.

While there is no information available on how Hunt Power evaluates carbon emissions opportunity within its business model, and I’m not suggesting that you should buy into GS’ carbon pricing specifically, but if their  market views are even halfway true, there’s a ripe market for creative investment vehicles like these new infrastructure REITs, since their conventional utility sector brethren will not be in any position to deliver the kind of capital investment needed for the energy infrastructure so badly needed throughout the US.

The REITs arrival on the market also opens up the field of direct green finance and investments to more creative investment mashups that span multiple industries, but I will have to cover that in a future post. For now, we’ll be tracking Hunt’s developments with great interest as we are sure that more investors will be paying !

Troubleshooting multifamily energy efficiency finance

Yesterday I spoke on a panel put together by the California Public Utilities Commission (CPUC) at a  workshop investigating the barriers to and simplifiers needed for energy efficiency financing for the market rate multifamily sector.

Get mind map and video notes

Play the video to run through the highlights in ~7 minutes or download this interactive mind map to read the detailed notes at your own pace.

Synopsis - Every energy efficiency financing decision requires knowing the green building business case

Throughout the session, we drilled down into landlords and lenders problems with energy efficiency financing. It wasn’t hard to name quite a few.

The CPUC can address these issues once they understand their relative impacts on which parties. To find that out, they have to delve into the green building business case for the market rate apartment sector. That’s something that they’ve only recently focused on.

First of all, energy savings were discussed in isolation from other retrofit benefits — similar to what I observed at yesterday’s commercial building workshop, too much silo thinking.

Retrofitting apartments can translate into higher net operating income and cash flow in a variety of ways. In addition to energy savings, more durable systems last longer, need less maintenance and decrease the amount of funds going to capital expenditures over the lifetime of ownership. On top of that, effective gross income can be improved through tenant retention.

Product design received long overdue attention.  My co-panelists echoed gripes by yesterday’s commercial building panelists about the need for simplified transaction processes and lower costs.

Understanding the landlord’s needs and requirements as a customer (and not a “ratepayer”) will help the regulators to bring financial products to market that can help property owners become more proactive about initiating deeper retrofits.

The notes and video contain more details on the topics covered. It was clear that any future products would be greatly helped by understanding the total value-creation picture (yes, systems thinking again). The green building business case helps them to quantify that and make the connection between the goals of owners and lenders as well as their own.

Tell me what you think

What green or energy efficiency finance programs are you watching these days? How well are they working in your market?  Please share your comments.

Mini-workshop: Five tools and tips for relevant green finance programs that don’t lead to green gridlock

We’ve said before that green finance programs that are more meaningful to customers are actually safer investments.  Here are five tools for increasing your program’s relevance to customers.

Problem →Most green finance programs drive green gridlock

No one wakes up planning to create ineffective incentives, yet it happens. Despite the mega-billions of taxpayer dollars sunk into incentives, rebates and other tools designed to stimulate green building and energy efficiency, most green finance programs aren’t getting the kind of traction needed to stimulate private investment and bring about real energy security and sustainability.

Green finance failure is evident in the thousands of redundant, fragmented monetary incentives littering the market, even as building owners complain about insufficient green funding options.  You see it every time an owner retrofits only enough to qualify for a couple of incentives and ignores other energy-saving opportunities.  He lacks the organizational bandwith to access more programs scattered throughout the market.

It’s also apparent in the choking bureaucracy investors experience in trying to access grants and loan guarantees.

Missed signals → fragmented, uncoordinated policies and incentives → green gridlock → frustration

Even more insidious are the ways in which distorted signals about funding lead to even more fragmented, ineffective incentives, adding to the confusion. Click on the graphic to enlarge it and see how that happens.

So an already clogged, murky vat of regulations, policies and confusion continues to calcify, blocking green capital flows to the very initiatives needing funding - gridlock.

The point here is not that “incentives are bad.” It’s that there needs to be more thinking about the customers these programs serve and the kind of job they’re supposed to accomplish.

This requires you to adopt a different mindset about designing and delivering green financial services for your customers.

1→ Reality check: Traditional real estate financial services is an old Buick

Commercial real estate financial services, in general, are like a gas-guzzling old Buick, and putting together commercial real estate transactions is an expensive and time-consuming endeavor.

Over a property’s lifetime, gigabytes of redundant data will be duplicated each time there’s a transaction, generating large amounts of wasted time and expense — gas-guzzling. When a property deal “breaks down,” there are no generic spare parts that you can immediately buy to fix things. Every single repair is a painfully expensive custom job.

Still, we see most green finance programs simply cloning the same gas-guzzling models that have been around for the past few decades. It’s a boring product that’s way past its prime. No wonder investors are unimpressed.

Ask yourself: when’s the last time you were excited about buying a very complex product that forced you to spend tons of money just to acquire it, with absolutely no assurance of whether your true problem would be solved once you used it?

Tip: During your program’s design, make sure you’re not simply replicating the typical commercial real estate financial product. It’s a tired, expensive commodity.

2→ Watch your customer’s movie to solve their real problem

Just as you need to understand the setting of a movie in order to understand a character’s story, you have to get a clear view of the market context that your customer operates within in order to put together a green finance offering that is most meaningful to them. What is their end goal? They’re probably not pursuing sustainability as an end in itself. Rather, sustainability is usually a valuable tool for navigating the tough bigger picture changes happening in their world, including:

• Economic instability
• Social values
• Global markets with greater local influence
• Increased customer expectations about services and products generally
• Building standards and technology improvements

While traditional financial services products are not designed to help property owners navigate these kinds of changes, any property owner who is taking on sustainability by using your green finance program will usually be grappling with these issues.

The key is to understand the particular big picture issues affecting your customers and prioritize their impact. Last month, we talked about our Real Estate Innovation Advisory® services and how they help elicit these kinds of deep insights from customers, increasing your program’s relevance to their business.

Tip: Find out your customers’ true end goals. Build your program around supplying the key resources that help them meet those objectives.

3→ Get into their world with process visualization

The successful green finance program has to beat, not just meet, traditional financial service offerings. To do so, you must know how your green finance offering fits within the customer’s world.

A quick way to immediately improve your green finance program is to look at the range of typical activities that take place during your user’s transactions.  We use Mindjet Mindmanager 8.0 ($349 retail) to sketch mind-maps of customer activities. The example below represents the core components of a property owner’s world.

Put your client’s activities into a process map:

When we work with clients, we catalog their activities and lay them out into a process map that includes the client’s service offering within the customer’s activities.

There are many different kinds of process maps. Below is a simple mock-up of a timeline process map that we  created with Smartdraw. Click on the graphic to see the enlarged view.

This immediately helps everybody to visualize and define the issues that the green finance product addresses, using the same language. We go over the details of these processes and their impacts in our workshops, or you can find out more by contacting us directly.

Tip: Collaborate with customers to learn the typical activities that form their world. The resources below can help you to map your your green finance offering to your customer’s key processes.

Quick reads about process mapping:

• http://www.ehow.com/how_5070753_make-process-map.html
• http://en.wikipedia.org/wiki/Business_process_modeling

3 process-mapping software options:

• Flowbreeze; $39-$59: http://www.breezetree.com/buy.php
• Smartdraw; $197: http://www.smartdraw.com
• Visio 2007 Standard; $399: http://office.microsoft.com/en-us/visio/fx100487861033.aspx

4 → Three design questions for better green finance programs

Tip: To study your new process map, ask yourself the kinds of questions designers do when they create products and services. Here are three starters that you should answer:

• Does your program enhance or hinder any of these activities or events within real estate finance?
• How many ways does your green finance program touch these events?
• Which activities touch whom? When? How?

5 → The bottom line: Start with a model of good green finance

If you’re starting from scratch, of course you could just work from a better model to begin with.

We use the following model to think through the key elements of successful green finance programs, and to work with clients on pinpointing opportunities and problems. It can help you to see the kinds of problems your program will run into if you copy traditional financial services or leave out some other key component.

Summary

Green gridlock is a needless waste of money and turns the positive intention of greening buildings and saving energy into frustrating experiences and unsuccessful programs.

Many green finance initiatives would become more relevant to property investors and other customers that local governments and utilities try to influence if they a) stopped copying an already flawed finance model and b) took the world of the user, the property owner in this case, under consideration.

Use a model of successful green finance programs and a process map to visualize how your programs fit in the customer’s activities. This will make you more successful because programs that appeal to customers are definitely more successful, and therefore less risky.

What do you think?

Do you have any positive or negative stories of dealing with green finance programs that you would like to share? Let us know. We’d love to address these kinds of issues in future posts.

Want to read more Mini-Workshops?

• #1: GAPS! in practice with 7-Eleven Corporation

Galley Eco Capital Moves to Hub SoMa, Summer Get-Together in the Works

We’ve moved — here are the details:

We’re excited to announce that we’ve moved our offices to the Hub SoMa!

Hub SoMa is the newest Hub Bay Area venture - taking their co-working, collaboration business model into the heart of downtown San Francisco.

What’s great about the new location is that we can do more of our lab work — creatively designing green finance programs and collaborating on great ideas with the other companies focusing on social and environmental change.

Add to that the great event space we’ve gained where we can hold more workshops, talks and related events for the green finance and investment community. We can’t wait to show it to you!

In fact, we’re already psyched that it is the perfect place to to host our new Real Estate Innovation Advisory® forums (see the upcoming May Pacesetter for details on that other exciting offering!).

Summer Get-Together, Anyone?

We’ll be announcing our Summer Get-Together, happening sometime in June. We’ll have a meet-up among friends new and old, for an informal, fun time. Of course, you’re always welcome to call or stop by anytime before then.

If you want to make sure you hear about our Summer Get-Together plus upcoming green finance and investment workshops and events, make sure you’re on our newsletter list — sign up for it here and we’ll make sure you get the word.

Till then, please update our contact details in your records:

Galley Eco Capital, LLC

901 Mission Street, Suite 105

San Francisco, CA 94103

(415) 305-9512

(P.S. I’m off to Germany for the next few weeks — you might see a blog post or two if I run across any interesting green finance happenings while I’m out there (volcanoes permitting).

Auf widersehen!

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