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Green Development in LA
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"Monetizing"
Green Building:
The
Green Building Finance Consortium
by Lisa Lilienthal
Like the logic
of pre-emptive action to mitigate the possible effects of climate change,
the good sense of green building is taking hold and is experiencing rapid
growth. Currently
there are some four billion square feet of green building registered with
the U.S. Green Building Council, with the
numbers climbing by the minute.
The bulk of this inventory is held by building owners with a longer term
view, such as corporations and municipalities. Much less is held by those
who typically have a shorter term horizon for gain, namely developers who
are backed by institutional investors and others who are looking to
realize a quick profit.
Municipalities looking to lure private capital are using green mandates
and financial incentives, such as tax credits and entitlement-related
incentives like expedited permitting and site density bonuses to achieve
their sustainability goals. But for the short-term investor, that may not
be enough.
For green building to become mainstream or commonplace, the investment
community needs to buy in, literally and figuratively. But what is the
compelling argument? Initial cost of construction which studies show to be
no higher for building to green standards? That doesn't come near to
assessing the full range of costs and benefits over time. Energy
savings? Yes, but these can accrue largely to tenants. Healthier buildings
that improve worker health and productivity? Perhaps, but it's hard to
quantify and convey to the tenant.
While it could take years to gather enough data to quantify all of the
benefits touted by green building advocates, the investment community
won't have to wait that long. The
Green Building Finance Consortium (GBFC)
is a group of
leading corporations, real estate companies, and trade groups
who are working to establish a foundation for valuing the costs, benefits
and risks associated with investment in green buildings.
Their goal: creating
a common platform for evaluating green building investment.
Founded by Scott Muldavin of
The Muldavin Company in San Rafael, CA, GBFC is
producing six reports, including an initial report, "Fundamental
Methodology for the Financial Analysis of Sustainable Properties,"
followed by special reports on the underwriting of energy, space user
productivity, space user health, government regulations and incentives,
and tenant/space-user demand.
The reports will address such issues as mold and sick building legal
risks, the costs and risks associated with product, contractor, or other
services provider underperformance, and other issues with critical value
implications. GBFC will also address existing buildings, and the
challenges of existing leases and allocating the costs and benefits
between landlords and tenants. And rather than just developing databases
and formulas, the Consortium is focused on creating a set of written
practices and methodologies, and related resources on its web site that
will serve as a jumping off point for investors who are doing the analysis
– a how-to to include best practices for valuation, risk analysis and
underwriting.
Muldavin said that, "The work of GBFC will also help local governments
determine whether benefits are public or private, and help quantify the
benefit, which will enable our cities, our states, and the federal
government to use their regulatory and incentive power where it's needed .
. . and not over regulate in a manner that is costly and difficult for
private sector participants but does not result in substantial benefits,
or expend scarce public incentive dollars on those green attributes
private sector investors have an economic incentive to invest in."
Defining those economic incentives requires investors to re-think how they
assess value and risk.
For Tim Lowe, a Consortium member and sustainable valuation expert based
in Los Angeles,
deconstructing the financing model to value green buildings is his kind of
"fun."
"In the past 25 years, all of the innovation and creative thinking in real
estate finance has been finance-related," explains Lowe. "New thinking
about green building actually takes us back to old ideas in real estate
finance – how a building best meets the needs of its owner and occupants,
and how the building performs." Lowe says it is logical, from a business
perspective, to believe that green buildings provide a broad range of
benefits to tenants, to neighbors, and to the community. The challenge is
not only to quantify the benefits, but also to isolate who gets the
return, and when.
According to Lowe, the least controversial and challenging aspects of
green building are related to energy savings, which are widely accepted
benefits and not difficult to quantify. More complicated are the
hard-to-measure and therefore hard-to-quantify benefits, such as building
performance measured by owner and occupant health and safety, employee
retention rates, risk associated with underperforming buildings and claims
for mold and sick buildings.
Green building proponents also imagine a day when a green building will
fetch a higher price; what are the investment implications of that
thinking? Invert the argument and re-think exposure from non-green
buildings (particularly in terms of mold and sick buildings), and the
analysis "gets really interesting," he says.
"Incorporating a high degree of recyclable building materials, for
example," explains Lowe, "may get you LEED-certified, and may contribute
to the overall health of the building and its occupants. However, the
monetary value of this investment is only functionally realized by the
community at the end of the building's useful life, when those materials
are diverted from the landfill and recycled."
That long-term horizon, and community profit, are hardly compelling to an
institutional investor. On the flip side, consider the benefits a green
building provides to the reputations of corporate tenants, whose
commitment to sustainability requires that its actions (leasing building
space) need to be consistent with its messaging ("We care about the
environment."). Corporations are also concerned about hiring and retaining
staff, keeping energy costs under control, and the potential for health
and productivity gains.
"The demand for green buildings may actual justify higher rent," said
Lowe, "and that is a compelling argument for an investor."
And while the Green Building Finance Consortium was not created to be an
advocate of green building – their mandate requires objectivity and
independence – those who are passionate about sustainability are anxious
for the Consortium to complete its work.
"The practice of green building is rapidly coming into the mainstream,"
said Rick Fedrizzi, president,
CEO and founding chair of USGBC. "Work being done by real
estate finance specialists on new instruments to drive investment in green
building is a critical step to making green building more accessible for
everyone."
As corporations, developers, municipalities and others in real estate
become more green savvy, efforts like those by the Green Building Finance
Consortium will become more and more important in filling in the financing
equation.
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