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.

Green Real Estate Champions: Do You Know the ‘1% Rule’?

How does green building knowledge spread inside your company? Does the company focus on formal technical training? More on triple bottom line values? Concentrate the new knowledge on a ‘chosen few’ and leave it to them to transfer their green building know-how to others? Or is it a viral, water-cooler kind of movement?

The big real estate investment companies are making serious moves to adopt green building and sustainability and I’ve been talking to folks who ask, how’s it really spreading?

In any case, these industry pacesetters shoulder the greening of trillions of dollars of real estate not to mention (re-)educating thousands of professionals all over the globe. And they are doing this while the industry is turning on a dime to go green. So these companies’ competitiveness is riding on the success of their approach.

And back to the question –  how is green building knowledge spreading in real estate companies?

We don’t have the silver bullet answer, yet. In the meantime, I’ll share a hypothesis about knowledge ‘makers’ and ‘users’ from Church of the Customer – the ‘must read’ blog for marketers.

They call it the ‘1% Rule‘. It describes their theory of knowledge creation and sharing within communities. Paraphrased, it says that

roughly 1% of the people in your ‘community’ create nearly all the content. Roughly 10% of the employees actively synthesize it.

Basically, the authors observed that it is usually a small group of people who are having the most powerful effect on the knowledge that is created and spread within a certain community. If you believe them, then you will spend time and resources identifying this group of employees, customers, suppliers, etc. and engage them heavily. And give them a platform to engage you. Relying on formal tools like employee surveys and job descriptions is not useful for really getting to the people most likely to embrace and spread the gospel. They are motivated by other things.

And here’s one catch: the 1% Rule uses the phrase democratized community in the definition. Everybody in these communities has equal access to the information and equal opportunity to contribute their own opinions.

So what about spreading green building knowledge in investment real estate firms? A few questions:

• Is your company going for the mass marketing approach to spreading green building know how?
• Do you have democratized knowledge creation and sharing in your company?
• Do you know the sustainability 1%-ers in your firm, beyond the ones who have sustainability directly in their job description?
• Are you the green building 1%-er in your firm?
• Could and should the 1% Rule apply to spreading green building know how within investment real estate firms at all?

Share what you think with the Green Journey community!

Photo Credit: Flickr/Sue Richards - Knowledge

Come to the Green Building Finance & Investment Forum

I’m spreading the word about the Green Building Finance & Investment Forum, 20-22 February here in San Francisco. Its tailored especially for green real estate investors, developers and their capital sources. (Full disclosure:My firm, Galley Eco Capital, is a leading conference sponsor.) Registrations are coming in at a pretty good pace and we are expecting a great crowd.

There’s a great lineup of Industry Pacesetters — that’s Green Journey talk for the early adopters within institutional real estate — those who are already committed to building and operating green real estate. They’ll be talking about how they’re making good returns by building and retrofitting green.

I’ll be teaching a class, moderating a panel on triple bottom line investing as well as on another panel talking away about, guess what — green finance. There will be a diverse group on that panel, covering emerging topics such as renewable energy finance, green real estate securitization as well as the role of incentives in underwriting green deals.

Participants will also get to hear from well known social investors who are active in investment real estate. They’ll get a dialogue going with the real estate crowd about why we see so little action from socially responsible investors in investment real estate — and what we can all do to change that.

Last but not least, topics like risk management, legal and valuation issues will be talked about as well.

Hopefully this forum will extend and deepen the network of committed green investors and developers, with more capital to follow.

Follow the link to check out the details.

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

The Carbon March Visits Moosehead Lake, Maine

A few posts back, I depicted climate change concerns within urban planning as becoming the ‘new civil rights movement’. It was a stark metaphor, illustrating the degree to which greenhouse gas emissions within real estate development has become a defining issue for our industry.

The Christian Science Monitor has just devoted lengthy column space to a development dispute in Moosehead Lake, Maine, where environmental groups raised concerns over the potential negative carbon impacts from the proposed 2,300 housing and apartment units. By their calculations, the development would produce 9,500 tons of carbon dioxide annually – putting an additional 1,850 vehicles on the road. A representative from one of the groups cites their concerns as several and interrelated – not only are they unhappy with the the size of the development, but also with its location being far from town and only accessible by car, encouraging lots of driving.

Particularly timely for the Green Journey was the article’s update on states’ efforts to formally tie real estate development activities to climate impacts and state emissions reductions targets.

“Climate change has kind of permeated everything with regard to land use”.
-Scott Morgan, senior planner with the California Governor’s Office, as quoted in the Christian Science Monitor.

Carbon March Status: Regions That Formally Connect Real Estate Development to Climate Impacts

• 35 states have climate action plans or are in the process of developing them.
• Of the above, 17 states have set emissions targets for greenhouse gases. However, far fewer have laws that presently allow direct action on the basis of greenhouse gas emissions.
• California is seen the nation’s leader in pushing towards the inclusion of greenhouse gas assessments within local development plans and taking legal action against municipalities and/or companies, which it believes are not taking sufficient action to reduce their greenhouse gas emissions.
• Across the US, only California, Massachusetts and King County, Washington have established climate change analysis into the state environmental review process that applies to land development.

In previous posts, we recommended that real estate investors learn about a) any climate change plan in effect in jurisdictions where they develop and operate investments and b) proactively managing the carbon footprint of their assets as the regulatory environment evolves.

So far, there is no need to change that suggestion.

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Please let us know your thoughts. Our Green Journey is a forum for sharing and your perspective is valuable.

Photo credit: Flicker/Jonathon Brennecke - Moose

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