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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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