Deep Horizon oil spill soaks $9 billion in CMBS deals

The first factoids, attaching dollar signs to the Deep Horizon oil-related damage to commercial real estate, are washing ashore.

Realpoint, a rating agency, recently reported (in Real Estate Finance & Investment and Institutional Investor) that the Gulf of Mexico oil spill is affecting “$9 billion in commercial mortgage-backed-securities (CMBS) deals“.

The article notes:

[Realpoint] found that there are about 306 loans on 319 properties on the coasts of Louisiana, Mississippi, Alabama and Florida that are feeling a direct impact from the spill. The agency believes that the biggest threat to cash flow will be reduced tourism, particularly for properties in Florida. About 247 of the properties affected by the spill are in Florida; reports are that it could cost the state about $2.2 billion.

So will those property owners and the CMBS bondholders go marching arm-in-arm to British Petroleum, to file claims for lost income on those properties and/or debt service on those loans? How will they be compensated for the permanent loss of market value on a “marked” property, not to mention loss of access to refinancing for properties that really are or perceived to be oil-damaged?

Those factoids will roll in soon, I’m sure.

So we now have the unhappy visual of real estate investors, pants rolled up to their knees, trudging through the business, legal and insurance swamp surrounding Gulf-region CMBS, added to a somber image of the rest of the industry on its slow march to building-related sustainability.

One thing’s for sure: the proximity of these events takes the option of doing nothing about environmental and social responsibility off the table (finally).

Photo credit: DVIDSHUB / Flickr

Talking Points on the New Green Bonds

Green Bonds are a first-of-its-kind pilot financing created by Section 701 of the American Jobs Creation Act of 2004. The Council of Development Finance Agencies summarized the basics of this newest trial debt initiative in an online ‘explainer’ memo, which outlined some of the qualifying criteria:

• Size: Projects must include cleanup of a brownfield site and contain 1 million square feet of building space or at least 20 acres.

• Mandatory LEED certification: 75 percent of the square footage of commercial buildings, which are part of the project must be registered for LEED certification.

• Energy Use Reduction: Project applicants must demonstrate how the project contributes to the reduction of electric consumption compared to conventional construction as well as other energy measures.

• Federal, State & Local Co-financing: State and local governments that nominate projects must contribute $5 million to a project. Tax abatements and in-kind contributions count toward the $5 million.

The limited scope of the financing is underscored by Section 701 specifically naming four projects, which should submit for financing within 120 days of the IRS publication of formal guidelines for the tax exemptions:

• The Atlantic Station, Atlanta, GA
• The Belmar, Lakewood, CO
• The Louisiana Riverwalk, Shreveport, LA
• Destiny USA, Syracuse, NY

Interesting for investment real estate is the conditioning of incentives based upon achieving mandatory LEED certification, requiring energy use reduction at the asset level as well as the focus on existing, large mixed-use projects in urban metro areas.

You should also take note of energy reduction goals being formulated as specified carbon footprint reductions. For example, super regional shopping center Destiny USA announced that they are closer to complying with the terms of their $229 million in green bonds by running one of their developments, The Carousel Center, on green power, stating that:

“We are committed to reduce So2 [sulfur] output on the project by 1780 tons per year. This initiative alone satisfies 10% of that requirement, avoiding 185 tons of So2 per year, reducing visible pollution like haze.”

In the green age, those commercial lenders who may be asked to co-finance the greening of of existing real estate will have to learn to do a much more complex credit assessment, incorporating direct LEED review as well as the borrower carbon reduction strategy into credit due diligence. The existence of tax exemption compliance issues plus possible additional environmental cleanup would leave too much potential liability on the shoulders of the lender if these issues were not properly examined when making the loan.

So are you up to speed now? We will keep bringing out stories about how these green bonds are shaping up in future posts.

credit: flickr/photosfromonhigh

Climate Change Legal Risks: Energy Companies Feel the Heat

“Selective disclosure of favorable or omission of unfavorable

information concerning climate change is misleading.”

- New York Attorney General Andrew M. Cuomo to Energy Companies

Check out OneAtlantic.net’s excellent post on the creative use of existing law to sensitize corporate investment practices to climate change risks. Following predecessor Eliot Spitzer’s example, New York Attorney General Andrew M. Cuomo is using an almost forgotten law to investigate five energy companies, which intend to build coal-fired power plants.  The Attorney General’s correspondence advises the energy companies that they should have made their investors aware “of the growing potential that they may be taking on big financial risks by building coal-fired plants.”  The Attorney General’s overarching thesis is that publicly-traded companies are legally liable for taking undisclosed risks that could diminish their value to shareholders. The goal appears to be one of forcing polluting companies to proactively reduce their carbon emissions.

My synopsis: this investigation, if successful, will propel commercial real estate’s risk management practices and corporate social responsibility into a new millennium — at warp speed.

In commercial real estate finance and investment, hard money liability, regulatory and reputation risk directly affect bank and investor decision making. Such amounts flow through to net cash flow or funds from operations, meaning the potential for deterioration of net asset values and with it, market capitalization and shareholder value.

Real estate investment trusts (REITS), being publicly-traded, should immediately begin to incorporate climate change risk into their corporate and portfolio risk management processes. Their client investors (pension funds, etc.), are probably following this carefully, too, and will start requiring similar reporting disclosures.  It goes even further: other investment real estate developers and operators who want to do business with REITS (practically everyone else in the industry) will have to be similarly compliant. After all, no one will take an asset into their portfolio until they are sure that they can understand and economically manage that building’s carbon footprint in compliance with the law and market expectations.

And here’s the competitive advantage angle for Green Real Estate Investors.

In the course of meetings yesterday with a couple of investor clients who already develop green apartments and retail, I asked about their motivations to focus on building green real estate. Besides the fact that they felt it is the right thing to do, they honed in on their perceived risks of not going green. Both developers indicated that they see the potential of the federal or state government passing some form of carbon tax on commercial property as being imminent. They, too, perceived any type of carbon tax as being a direct hit to their bottom lines and, therefore, a valuation risk to their properties. Already being green puts them at a competitive advantage in such an environment.