“Green” Real Estate Expert to Speak in Las Vegas in May

SAN FRANCISCO, CA - Of the thousands of sustainability consultants, contractors, and capital providers for green real estate transactions in the United States, Galley Eco Capital LLC is quite unique. Lisa Michelle Galley, the firm’s Managing Principal, is in a league of her own, being one of a handful of commercial real estate finance specialists in the nation with focused expertise on green real estate projects. Galley will be sharing her expertise at the 2008 Global Real Estate Investment & Deal-Making Summit in Las Vegas, Nevada on May 15 and 16 as a speaker on two different topics. The event is being hosted by the International Real Estate Trade Organization, a network that connects local real estate experts and companies to the global marketplace.

Because of her specialized experience in underwriting green real estate transactions, Galley has spoken at numerous conferences and events for companies and associations, as well as her own green real estate finance and investment seminars. This upcoming speaking engagement at the new Palazzo Resort is a particularly important one for Galley because of the emphasis on green finance and investment issues. This year’s summit will feature a half-day preconference session titled “Global Green Building & Socially Responsible Investing.” In this session, government and industry leaders will assemble to address global sustainability issues and their effect on the financing, development, and operation of properties around the world.

Galley’s presentations will take place on the afternoon of May 16 and are called “Capital for Green and Socially Responsible Developments” and “Green Building – Finance and Trends.”

Galley Eco Capital’s key differentiator is the ability to help commercial real estate developers and investors quantify the value-added from a green property transaction upfront. With a hands-on approach to implementing underwriting green buildings, deep knowledge of the capital markets and applying customized financial strategies, Galley’s company has gained superior knowledge through real-world case studies, which results in her institutional investor and developer clients achieving better returns with less risk than when using typical underwriting approaches. The focus is kept on each facet of the green investor’s success.

About Lisa Michelle Galley

Lisa Michelle Galley is the Founder and Managing Principal of Galley Eco Capital, LLC. Galley Eco Capital is a green real estate financial services consultancy dedicated to helping green investors optimize their green and socially responsible investments.

For more information about Lisa Michelle Galley and Galley Eco Capital, visit www.galleyecocapital.com. For more details about the summit, visit www.globalrealestatesummits.com.

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Energy Efficiency & Building Value: Co-Star Statistics

Looking for data to support the value of building green? Join a growing crowd and read on…

If my software let me write sarcastic subtitles, this one would be “Most often cited statistics at green real estate conferences in Spring 2008″. Seriously, now that so many in commercial real estate are trying to quantify how much (additional) asset value can be created by green initiatives, I think it is good to share those zeitgeist concepts that help shape the industry’s attitudes towards investing in green real estate.

Like alot of you, I’ve been to quite a few green building finance conferences lately. I’ve noticed that in the larger venues, the findings from the Does Green Pay Off? report always get a slide or two throughout the presentations.

Take a look at one of the basic statistics connecting greater energy efficiency with higher sales prices (click directly on the image to see a larger version):

Data source: Does Green Pay Off? by Norman Miller, Jay Spivey and Andy Florance

I read this paper some time ago when it first circulated, and was a little hesitant about how much weighting to apply to its findings since it is focused on energy efficiency, which is only a part of developing green buildings. I am still hearing people speaking about Energy Star and LEED as if they are synonymous — they are not.

Nevertheless, green real estate investors are using this information as support for the idea that optimizing a building’s energy consumption is already being rewarded in the capital markets when they sell their properties.

Based on what I’ve been hearing, many of them are also assuming (hoping!) that the seller of a fully green building should be rewarded with an even higher sales price.

So What Makes a Commercial Real Estate Loan Green?

This is PART 1 of a 2-part series on green real estate lending.

This is an actual question from a lender that I received recently, and quite timely, since even though there are many of us championing green real estate financing, there has not been enough of it happening to help the commercial real estate industry identify exactly what it is.

Green Real Estate Loans Today: “I know it when I see it!”
We are seeing more banks offering green financial products or making public announcements of multi-billion dollar commitments to investing and financing green business across many sectors. This increased activity as well as the subjectivity of defining green products creates fertile ground to focus anew on what green loans should look like and the issues banks and investors will deal with as they do green finance deals together in the future.

Good Green Loan Design: Agree on a Clear Definition
The big deal about green building is that a green property represents a change in our expectations about how buildings are embedded into the neighborhood plan, greater energy and water efficiency, being built using more sustainable materials and resources, creating healthy living and working environments, not to mention operating the property to standards which maintain those benefits.

Defining “green” up front gets lenders and investors on the same page about those expectations in order to assure that each party gets what they paid for. In the integrated design process, the project team conducts charrettes with designers, the owner and community representatives to reduce the risk of stakeholders not having their expectations addressed. However, at this stage of the process, the mortgage lender is no where in sight. Often regarded as the ‘boring’ part of a deal, defining is critical because the particular risks of the green project stem from the failure of the finished property to perform to stakeholder expectations – i.e. green components and systems not delivering the promised savings and performance enhancements that the lender, investor, tenant or city official was anticipating.

The Green Journey take on this is that the definition of green for a real estate transaction contains specifics about 1) the rating system to be used, 2) the certification level within that rating system to be achieved and 3) quantifying certain performance thresholds that are to be achieved either during construction or upon stabilization.

Talk in Shorthand, but Don’t Take Shortcuts in Defining Green Performance
So what’s happening today? Most of my conversations with lenders and investors involve defining a property’s greenness in terms of a specific LEED certification level. LEED provides the shorthand that is supposed to cover the specific performance concerns that each party has about the asset. And since it is currently the most widely acknowledged third-party rating system for green buildings in the United States, using it helps assure the continued marketability of the property as being green – helping to reduce lenders and investors exit risk at the end of their hold period.

Keep in mind, however, that while LEED prescribes design and construction processes that are considered best practice and higher certification levels are tied to better energy performance, it does not guarantee a particular performance result. Moreover, not properly reconciling the building performance specified by the certification level with other stakeholder-defined thresholds can result in a less than optimal business case.

• Reconcile LEED certification requirements with actual performance targets. The LEED point system allows for certain tradeoffs among the categories. Though some categories have fixed prerequisites, which must be fulfilled no matter what, the rating system offers the opportunity to make up points not achieved in one category with achieving more points in other categories. So lenders and investors still have to define minimum expectations about energy and water efficiency thresholds, for example, regardless of the project’s certification level, and reconcile their minimum expectations with the LEED points that their target threshold intends to achieve and the financial impact of those choices on the green project’s business case.

• Don’t underwrite financial incentives out of the deal. Secondly, many of the rebates and incentives being offered by governments and utilities require utilizing specific technologies as well as achieving stipulated thresholds of energy and water efficiency. Simply looking to a LEED certification level, without reconciling the design and construction choices against the requirements of rebates and incentive programs might result in the property missing out on a valuable source of capital to pay for those green components – and loss of a great boost to net project value.

• Target a smaller carbon footprint. The third consideration in establishing the green definition is that local, state and even the federal agencies are mandating greenhouse gas reduction targets for many industries within their jurisdiction. In order to ‘sell’ their project to officials, the real estate investor will increasingly have to demonstrate that the green project has a carbon footprint that helps the region to achieve their climate change goals. In these regions, a green definition which integrates a carbon footprint reduction target goes a long way to addressing the concerns of this important stakeholder group and is a way for the real estate investor to show that their partners and lenders they have taken reasonable initial steps to shield the project from any future carbon tax regulation.

* * *

This is Part 1 of a 2 part series on green real estate lending. In coming posts, we’ll deal with related questions about due diligence and underwriting green real estate deals.

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

Photo credit: Flickr/Fatmanwalking - Green is the Color of Money

LEED: Avoid Underwriting Misconceptions

Do you prepare your non-green project budget and then add your “green costs” on top of it? At which LEED-rating do you think you own a distinctive higher value green asset? Think that ‘integrated design’ is only interesting for the architects and engineers? Read on.

I’ve blogged before about Davis Langdon’s update study on LEED-rated project costs and recently saw a talk by one of their architects, Lisa Fay Matthiessen, that went substantially beyond just concluding that LEED projects do not necessarily cost more than non-green buildings. She spoke in depth about the source of misconceptions about LEED project costs and shared a surprise that challenges our current knowledge of LEED-ratings and the associated project costs.

Recap of Davis Langdon’s Findings
In case the study is still sitting on your “weekend reading” stack, here are the Cliff Notes takeaways:

• Many projects are achieving certification within their budgets and in the same cost range as non-LEED projects.
• Construction costs have risen dramatically but projects are still achieving LEED certification.
• The idea of green as an added feature continues to be a problem.

The study conclusions were essentially preaching to the choir. Nothing new for the audience of mainly architects, designers and engineers – many of whom were LEED accredited. But when they drilled down into the ‘why?’ behind these findings, things got pretty interesting.

Why Add Green Components When You Can Integrate Them?

Matthiessen says that the false notion of being able to design and build a green project by adding the desired green components to an already planned non-green project is a deep-seated misconception. Moreover, this sets up the project team for another incorrect evalation approach: comparing the building to itself. When this happens, the project team compares the budgeted construction costs of the building without any green elements to the same budget with estimated costs to achieve the determined level of LEED certification. Naturally, the latter budget is often greater then the former, and individual green components get put on the fiscal “chopping block” instead of the team focusing more on better design and engineering solutions to optimize budget constraints. Matthiessen stressed the need for an evaluation based upon benchmarking costs from a pool of comparable projects, as was done in the study, meaning that the project costs of green buildings were compared with normalized costs for a larger array of similar projects with similar elements and criteria. Also, a heightened awareness about the potential economic benefits, or savings from an integrated design approach will help project teams to achieve their intended goal of the best LEED-rating for their budget.

LEED-Gold Sometimes Costs Less Than LEED-Silver
This was a surprise that was not discussed within the study text and that not many people know about. Davis Langdon’s data included several instances of LEED-Gold projects costing less than LEED-Silver projects, which the audience focused on quite intensely. While Davis Langdon did not study this observation individually, Matthiessen said that the study team concluded that the project teams for those less expensive Gold properties had met the challenge of attaining the required higher level of LEED points by having green elements perform several more functions for the project than normally expected. For example, the roof and building skin might provide more ventilation, heating and cooling assistance than would typically be required of such components. These multi-functional integrated elements not only help the project to qualify for the greater number of points needed for the higher LEED rating, Davis Langdon thinks that the bundling of so many functions within certain components actually saved money.  This is good evidence that extending integrated design principles into the project budgeting process can deliver a financially competitive advantage: a project owner could come out with higher performing assets with higher LEED-ratings for less than assumed.

And achieving that level of financial optimization has implications for financiers and capital markets investors. A standard investment underwriting process involves the preparation of linear spreadsheets, so that investors can evaluate project costs and revenue generation potential against their desired payback and return hurdles. Standard operating procedure involves judging specific line items against specific intended paybacks.

But this type of process assumes that every single line item in can be tied to one measurable benefit. And that assumption is at odds with the premise and approach of integrative design. Optimizing your project to the point where you deliver LEED-Gold assets for less than the cost of LEED-Silver will take your financial underwriting to a whole new level. The capital markets are not that familiar with multi-tasking line items that simultaneously deliver multiple and overlapping quantitative benefits.  In order to make the best assessment of such a project’s potential investment value , investors – and their lenders – need to implement a holistic financial analysis based upon utilizing these cutting-edge green building best practices.

When is a Green Building Really Better?
This was an interesting side discussion, with Matthiessen relating her opinion that a LEED-certified or LEED-Silver project essentially represented a few good upgrades to a non-green building. However, the elements and engineering required to make a LEED-Gold or Platinum building greatly distinguish the building from its peers, to the point where she considers these properties to truly be several steps ahead in terms of quality and performance. A basic question for the new green investment funds and their partners is “At what point are we building or buying higher value real estate?” This opinion also points to the potential for more differentiation in asset pricing for those higher-rated properties. For example, if that opinion prevail with the current ratings system remaining in effect, speculative development of LEED Core and Shell projects would not be considered as more valuable simply because they are green.

Taken together, Matthiessen’s talk pointed to a needed paradigm shift for investment real estate analysis in order to fully assess and realize the value of green development. Project owners cannot stick with a ‘business as usual’ approach of appending green to the back end of their existing decision making process and expect to successfully compete in the market with green real estate investment strategy. Successful, high value LEED-projects will challenge professionals to employ a deeper, holistic financial evaluation much earlier in the project’s lifespan that goes beyond individual line item measurement.

I tell my friends that, in today’s green age, the deal is done in the architect’s and engineer’s offices, because environmental impact differentiation is the point of value and that’s where it occurs. That shift will continue to challenge our basic assumptions about the way we commercial real estate professionals do business.

Is Subprime Lending Good for Green Real Estate?

One of my friends, a sustainability consultant, called me up and what she actually asked was,  “What is the connection between subprime lending and green?” She went on to explain that her firm had an internal pow wow on how the credit crunch might be affecting their real estate customers.

What a great question. I immediately saw its Freakonomics potential. We talked about it at length and afterwards, I even related it to one of my institutional clients. He also reacted immediately, so I knew that I was on to something.  It is always good thing for a sustainability consultant get some independent validation by  investor.

These days, real estate investors sail choppy waters in the capital markets  Some cruise in elegant ocean liners, other in make halting headway in rugged frigates, and a few are surviving with flimsy canoes. So the current market’s impact really depends on the condition of your fleet. Bloomberg chronicled the mood of anticipatory doom that is swirling about institutional real estate, projecting a possible 15 percent drop in real estate sales prices and values in the coming year. I think they should have inserted one of those instant polls where people can vote on whether they were going to renew their antidepressant prescriptions.

And as for the connection:

• What goes down, must go up. The current events in the credit markets represent a reversion to the mean. For months, there have been mumblings in and out of real estate that the prior-go years of mega deals, and value increases have been fueled by cheap, “covenant light” debt. So from this perspective, interest rates were long overdue for increases back to historical averages. Subprime lending was a natural, timely trigger for for an observable market process that is critical to economic cycles.
  

• Cash is King. The stronger sailers represent cashflowing assets in resilient markets with good, diversified employment fundamentals. Asset types with weaker cashflow prospects relative to lenders revised underwriting guidelines will be subject to the most volatile repricing. Lenders will not lend as much debt on these properties, the cost of any financing will be higher and investors will have to accept lower returns on their investments. Yes, even stronger cash flowing properties will be affected by lenders’ tougher underwriting standards, however, they will obtain better credit terms relative to weaker assets and, just as important, higher sales prices.

• Green is good for the Cashflow.  In their 2006 update study, “The Cost of Green Revisited“, Davis Langdon shows “no significant difference in average costs of green buildings compared to non-green buildings”.  On top of that, green buildings enjoy lower operating costs to boot.  So let’s do the math: same costs and more net operating income for a green asset. Which means, all other factors being equal, in today’s tougher credit market,  building and operating a green building is a quantifiable positive hedge of the asset’s underwritten cash flow against market driven declines in value, sales prices and returns.
  

So the existence of subprime lending, as problematic as it is these days, is highlighting a strong common interest in cashflow that aligns more investors with the sustainability community and underscores investing in green buildings. Let’s see what happens from here.

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