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Green Building Investment: Energetic and Evolving

Last week brought me to San Francisco to speak at Infocast's Green Building Finance and Investment Forum. Lead sponsors of the event included Galley EcoCapital, Miller Canfield and Conestoga-Rovers & Associates. I feel fortunate to have helped create this conference in early 2008, and my company, Malachite LLC, continues to co-sponsor this energetic series. The March 2009 conference was our third, and I'm surprised how far green finance and investment has come in a year's time.

In the February 2008 conference, our first, we spent a fair amount of time documenting the value proposition associated with green real estate investment. This year, that presentation was no longer needed-conference attendees have seen repeatedly that green features can be delivered cost-effectively to the market and that sustainability leads to faster leasing, higher tenant retention and stronger-although, in this market, not necessarily premium-rental rates.

Are sustainable buildings immune from the economic downturn? Of course not. But conference participants -- including such multi-billion investors as TIAA-CREF, the AFL-CIO Housing Investment Trust and the Multi-Employer Property Trust (three investors who continue to put money into the property market) -- find green properties better positioned to weather the storm than conventional properties. Why? Lower water and energy costs are valuable tenant commodities in times of economic distress, and tenants appreciate the superior amenities found in green buildings-among them, more comfortable temperatures, cleaner finishes and more natural light. And as the real estate market slackens and tenants have wider choice in spending their real estate dollars, many will be taking advantage of market rental rate declines to secure better space. That favors higher green building occupancies.

Especially striking over the last year has been the rapid refinement of financing, contractual, leasing and management protocols to guide the development and operation of green buildings. Among them:

No-downpayment financing mechanisms to support energy-efficient retrofits. The energy-savings performance contract (ESPC), which effectively leases green upgrades to the property owner under a long-term contract, was pioneered in the federal government sector, but has been extended to private sector use. Hannon Armstrong, a leader in this market, now provides such financing for privately-owned buildings. Hannon Armstrong has revised the ESPC structure to reflect commercial real estate needs, says John Christmas, senior vice president for energy efficiency financing. Christmas and his team underwrite potential ESPC properties for cash flow and appraised value, and require investment grade contractors to install improvements.

Performance contracting in the construction and renovation of green buildings. The use of performance contracting is growing more important with respect to the functionality of green features and the attainment of green certification, according to a panel of green attorneys, including Greenberg Traurig's Doug White, Hanson Bridgett's Howard Ashcroft, and Daniel Slone of McGuire Woods. Developers and investors are being increasingly advised to make a property's LEED certification a performance specification. As well, financial penalties and incentives are increasingly being linked to the attainment of a green building rating.

New leasing and management protocols. At the property level, new leasing and management practices are being adopted to guide sustainable building operation. In the current soft market, landlords and tenants frequently supplant confrontational lease language with cooperative provisions, says Marc Winters of McNaul Ebel. Under this lease model, pioneered in Canada, enhanced sustainability performance is a goal shared by owners and tenants. Another key aspect to green leases are pass-through definitions, reports Cushman and Wakefield's Steven Ring. Owners, tenants, management companies and their attorneys continue to tackle this question as 2009 begins. Among the questions: should LEED consulting costs be passed through to tenants? How about revenues and costs associated with the sale of renewable energy credits?

Growing use of environmental performance as a screening feature in space decisions. In marked contrast to prior years, commercial leasing brokers are becoming increasingly conscious of sustainability issues, and environmental requirements are being added increasingly to standard property RFPs (requests for space proposals), reports David Pogue of C.B. Richard Ellis.

The verdict? Green building investment continues to hold its own and evolve, even in the biggest economic slump in close to a century. That's one of the few things to cheer about in 2009.

Leanne Tobias is founder and principal of Malachite LLC, an advisory firm that specializes in the development, leasing, management, financing and certification of sustainable or green real estate on a global basis. Comment online, or write to Leanne about your green real estate thoughts and experiences at [email protected]. She'll share the best of reader feedback in future posts. 


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