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There's no doubt that the sub-prime residential mortgage crisis has cast a shadow over the economy. But the market remains favorable for commercial green building projects.
That's according to Leanne Tobias. She's the founder and principal of Malachite LLC in Bethesda, Md. She's spent more than 20 years managing commercial real estate funds and developing public policy for industry groups and government agencies.
Leanne recently sat down with GreenBiz Radio to talk about some of the financing opportunities available, whether you're constructing a new building or want to refinance in order to make your commercial building more energy efficient.
Tilde Herrera: Leanne, welcome to GreenBiz Radio. Can you tell us a little bit about your job and what you do in the construction market?
Leanne Tobias: Absolutely, and I'm very glad to be here. What I do with Malachite LLC is serve as a real estate adviser to developers, property owners and investors who want to engage in developing or investing in green real estate.
I am a LEED-accredited professional for developers. I can walk them through the process of how to get a building certified as green. I can also help them to secure financing.
For investors, I can help the investor conversely select developers and projects that might be of interest to them.
TH: Leanne, how would you describe the commercial construction market right now? What are some of the challenges that are facing commercial builders?
LT: I'd say there are immediate challenges created by the credit crunch and by the concerns caused by a potential recession. Lenders are, even though the commercial markets are rather stable, still being very, very cautious about committing credit to new projects.
Another challenge is that in some areas of the United States, the expertise needed to do a green building is less readily available.
At the same time, despite the immediate market and credit concerns, the outlook for green real estate is honestly very, very bright. The mechanisms, the technologies, and the talent to launch and create green buildings has never been better. There's increasing interest and experience being developed to bring those technologies to existing buildings.
So what I would say to developers is to begin to explore these technologies at present, and when the market does pick up, I think there will be a great deal of enthusiasm for green building.
TH: And how would you describe the green building market in terms of existing versus new construction?
LT: The standards for building green were first developed for new construction, and I think that area is a bit farther along the learning curve than are the existing buildings.
However, the promulgation of the LEED-Commercial Interior standards and the LEED-Existing Buildings standards have developed an approach for existing buildings.
With respect to residential properties, there is a LEED-Homes pilot, and there is also the standard associated with the National Association of Home Builders.
So we are seeing standards evolving in other areas of the green building market, and these standards provide the type of guidelines that developers need to get their projects produced, and also provide guidance for investors who wish to invest in the green real estate market. And in that, they have a template to follow, and they do know that they are getting a project that is, in fact, green.
TH: What are some of the opportunities that are available for existing building owners in terms of financing for green building? Say I own a commercial building and I would like to retrofit it. What am I going to find when I start looking for financing?
LT: What you are typically going to find is that you will have to refinance the property. And in that sense, what you will do is you will need the cash flow that is able to accommodate the renovation costs on top of refinancing the existing mortgage.
Also, however, there are some opportunities available from the federal government for properties placed in service through the end of 2007, and the good news is that Congress is very likely to extend these incentives for two to five years. And these incentives include a 30 percent tax credit for solar improvements, as well a tax deduction for properties built according to energy efficient guidelines.
So these guidelines do mean for a building owner that there is a tax advantage to some of the opportunities in going green. As well, the utilities in various areas, many utility companies offer rebates for the installation of various energy efficient equipment.
And what I would recommend to building owners is that prior to finalizing the budget, that they figure out and they research the various incentives available to them to offset or minimize the upfront cost.
TH: And you talked about incentives, and these were federal incentives, correct?
LT: The federal incentives are the best known. It also is helpful to look on a state and local basis. For example, the state of New York has various incentives for green projects, as does the state of Oregon. The city of Portland, Ore., also has some property tax credits.
And more and more, states and localities are beginning to adopt tax credits to stimulate energy efficient and green development. So I would suggest to a developer that the waterfront be searched pretty extensively, both for the federal incentives and then to see what is available at the state and local level. Very frequently, the federal incentives will be the most potent, but I think as well it's appropriate to look into other areas.
TH: So you recommend first looking at incentives, also going to my local utility to see if they offer any incentives or programs. What would I do next?
LT: I think you would also check with the local taxing authority to see if there are tax incentives or tax deductions at the local level and similarly, the state level. The federal credits, your accounting professional can very likely apprise you of those.
And then the next step is to look into options for private financing. What I would say is interesting is that there is emerging interest among many banks to do more in the retrofit market. This is in its infancy, and I think you'll be seeing more of that over the coming years.
But there are some banking organizations that are providing programs that emphasize energy efficient retrofits. Among them are Shore Bank, which operates in Chicago and on the West Coast, New Resource Bank, which operates in the San Francisco area, and then both Bank of America and Citibank have announced major commitments to energy efficiency and are developing programs that ultimately may be useful for developers. But those programs are still coming on stream.
TH: OK. So after I've checked for incentives and when I go to my bank, what am I going to have to have on hand to show them?
LT: What you are going to probably have to have on hand is, first of all, a fairly detailed plan for what improvements you hope to undertake, the cost of the improvements, an energy audit which shows your existing energy use and your likely decrease in energy use after the installation of the improvements.
And then, most important, on the financial side, the lender is going to want to see that the cash flow from the building or some other form of cash flow is sufficient to repay the loan. So that part of it is analogous to what is asked for, for any commercial refinancing.
But in regard to some of the newer technologies that a developer might want to utilize, such as solar technologies or geothermal technologies, I think that the banking institution should be made comfortable with the improvements, the ease of installation and the likely effectiveness of the improvements after installation.
Additionally, the banking institution I think will derive some comfort from the quality of the team that the developer is putting in place to carry out the improvements. The lender will want to know that the development team and the contractors and the design team can execute the project on time and on budget. So I would encourage developers to find them most experienced project teams possible.
TH: And when you talk about some of the existing technologies, can you describe some of them, and can you also say whether or not there's a lot of research or metrics that are available out there to use in a presentation?
LT: In terms of the alternative energy technologies, a number of them have been available for years. But I would also say that broad-based metrics are only now beginning to be produced.
But with respect to alternative energy technologies, some of the alternatives are photovoltaic panels, passive solar technologies, geothermal technologies. In more limited instances, wind power for power supplied to the building by wind.
I think that an area that developers might want to explore, and it's becoming more readily available, is purchasing "green power," for the building. This is power that is produced with the use of alternative energy sources. Additionally, I think that it's important for developers to look at lower impact methods and more readily attainable methods to increase energy efficiency and use less water.
And with regard to water reduction, there such equipment that's low-flow equipment, low-flow shower head, low-flow sinks, low-flow showers and bathroom equipment. I think that's fairly helpful.
There are also lighting controls that can greatly reduce the use of lighting in a building, and that is occupancy sensors. That's another alternative for developers to use. As well, there is the use of windows that have a more energy efficient glass content and are glazed such that the exterior elements are penetrating the building to a lesser extent.
All of these items can be used to reduce heating and cooling bills, as can cool or vegetated roofing. Vegetated roofing, which is plantings, is frequently quite expensive and increases the load on the roof, but is a nice amenity for occupants.
On the other hand, so-called cool roofing activities -- cool roofing materials, which have a high reflectant content, can also be used to make a building more energy efficient, and those cool roofing materials are coming down in price.
TH: Now, you spoke about some areas of the country, particularly the large cities, where there seems to be more green building activity and expertise. What about for building owners, say, in more rural areas, or even suburban areas, where the lenders might not be as educated about green building practices? How do you educate the lender to make them understand that this is a good deal for them?
LT: I think that once the developer has located a design team to include a representative of the design team to answer the lender's questions, and assure the lender that the design and development team are able to execute. I think, really, the other item is that trade associations are beginning to become interested in educating lenders about green technologies. And as that training proceeds throughout the industry, the task of securing financing for green projects will be lessened.
But it's a learning process. A new way of constructing is coming into the marketplace through green and energy efficient technologies, and I would say the market is working. It will take a little time, but I think that all of this is going to become increasingly common in the next several years.
TH: Do you have any statistics that would support how green building practices could generate the needed cash flow to pay back some of these loans?
LT: The case study data is fairly clear that green buildings very frequently enjoy accelerated lease up and top-tier rental rates, and that's typically in the new construction market. To be very honest, the data for the existing market is less evolved.
There is some interesting information from CoStar, one of the leading real estate data services in the U.S.
CoStar has developed some multi-year data comparing buildings certified under the EPA's Energy Star program, with conventional buildings. And their data set which relates to office buildings shows that the Energy Star buildings had higher occupancies, slightly higher rental rates, and as of 2007, higher sell prices per square foot than the non-energy efficient buildings. So that seems to indicate enhanced financial performance for energy efficient buildings.
Now, to that I would say that perhaps this is preliminary data and CoStar cautions that additional data sets be developed and evaluated before jumping to the conclusion that energy efficient or green buildings are always more valuable than conventional buildings.
But that having been said, I would comment that the preliminary data from CoStar are very similar to the case study data that developers have been reporting informally. And all of that would suggest that very frequently, energy efficient and green buildings perform very well in the marketplace.
TH: So where do you see this market going, Leanne? How do you see it evolving?
LT: Tremendous growth over the next several years. The best estimate that the industry has put out recently is from McGraw-Hill Construction, and as of roughly 2006, green buildings represented approximately 5 percent of all structures. That's expected to double by 2010, and the marketplace for green building construction is expected to reach approximately $30 to $50 billion annually by 2010, versus $11 billion in 2006. So we are looking at some very significant growth rates.
TH: Is there anything that you would like to add?
LT: I think that what I'd like to tell the owners of existing buildings is that making your building energy efficient can be done in a process that's comfortable for you, relative to your conventional management and development techniques.
And what you really do want to find is a green professional or consultant who will work with you to identify the lenders you need for financing and work with you to identify the design and construction professionals that you'll need to execute your projects cost effectively.
And what I'd like to stress is the process to do that is the same process that is applied to conventional buildings. It's finding potential financing sources and potential design and construction sources, comparing opportunities and very carefully researching and qualifying your vendors before signing on with a particular company.
What is very, very promising is that the number of lending professionals, design professionals and contractors who are familiar with and experienced in green technologies is increasing.
So the task to find these professionals and managing them is a great deal easier than many developers anticipate. In my practice, I found that what my clients have appreciated is approaching the greening of a building from the same framework that you would apply to managing or improving a building with conventional technologies. And what a developer or investor does want is a team that combines real estate management and investment expertise with the understanding of green technology, so that the core real estate skills are represented alongside the understanding and utilization of green and environmentally efficient skills.
And when those factors are combined, typically what you will see is a more cost-effective delivery of a green building, and something that brings satisfaction and value to both owners and tenants.
TH: Thank you so much for joining us today, Leanne.
LT: I very much appreciate the opportunity. Thank you so much.
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