Well, Jamestown and the State of California have both recently been in the press talking about how they expect to realize extra value from their commercial real estate via green and energy efficiency strategies.

Check out the articles and tell us if you think their projects should earn them greater returns than non-green market peers.

Jamestown: $3-$10 Million Portfolio-wide Retrofit Commitment

Jamestown has committed to greening its entire $4 billion commercial real estate portfolio. In the recent New York Times article about their efforts, they point to their European sensibilities as being the reason why they moved ahead with a portfolio-wide commitment to greening existing buildings.

When  you read through the savings and quick paybacks that they report achieving, it seems clear that their focus is on low-hanging fruit. After all, $3mm-$10mm in retrofit costs are peanuts on a $4 billion portfolio. The good news is that they report realizing immediate savings — meaning permanent increases to property net operating income.

Nonetheless, or perhaps because of that, they focus on the green/energy efficient building’s ability to attract the right kinds of tenants and assure the asset’s sale to a broader pool of buyers. The article showcases several recent efforts, including 999 Peachtree Street in Atlanta, GA, which recently earned LEED-Gold status.

We actively follow how German and other European investors are moving quickly to incorporate comprehensive acquisition and portfolio management sustainability programs. You can read previous posts about these investors’ enhanced criteria and due diligence here. More good stuff –> If you receive Pacesetter, our newsletter, you recently read and downloaded the new EECE study ranking global property funds according to reported and implemented energy efficiency practices.

State of California: Will Green Buildings Net Higher Sales Prices?

The State of California recently put a portfolio of 11 properties, totaling 7.3 million square feet, on the market for sale-leaseback transactions. The State is reporting that these properties, most of them being, in their words, “some of California’s most energy efficient and environmentally friendly properties” could sell for $2 billion, and would be “attractive to a market that is seeking sustainable, green designs.”

What makes this an item worth tracking is that the state official making that quote is also reported as saying that the sale will allow the State of California to “lock-in the lowest rental rates seen in years“.  Bids on the sale are due 14 April. It will be interesting to see the extent to which a green premium can be realized when market or transaction conditions stipulate particularly low rents.  The beauty of real estate is that it is not rocket science — there is no free lunch, and all trade offs come with their price. We are seeing and hearing that, in tough markets, green strategies help to hold back some amount of value deterioration, but are not necessarily rewarded with immediate upside.

That being said, there are multiple angles to watch here.  For instance, the concerns expressed recently by some investors about the mixed-use Boston property that attracted 27 bidders and might close at a “crazy” 6% cap rate.

Why the concern? That cap rate, indicating a valuation far higher than typical for the current point in the real estate cycle (even for Boston), reflects the current shortage of high quality properties combined with a lot of capital on the sidelines. This kind of activity raises fears of a liquidity bubble, even in these tough times, as investors pay up to win what few good deals are available.

That could be a strategy that helps Schwarzenegger shrink the state’s debt woes by more than they would typically recover from the assets.

Yes, the excitement continues!

That’s a Japanese proverb, originally from the Chinese Book of Documents.  After teaching the first Competitive Edge workshop last week, we definitely believe that’s true — teaching involves a great deal of learning.

In addition to a personally amazing experience with a fantastic group of high-caliber professionals, we found ourselves reflecting deeply on how much we learned from them.

If you’ve been following previous posts on this blog or getting Pacesetter, Investment Analysis of Green Buildings, sponsored by the US Green Building Council - Northern California Chapter and law firm Hanson Bridgett was held last week, we taught to a nearly sold out room.  On top of that, the course was granted CEU-status by USGBC national, a first for the Northern California Chapter — and for green finance anywhere, to the best of our knowledge.

Here is what we learned from listening to and working with the workshop attendees:

#1: Green finance is important to a much larger group of professionals than you might think.

While we deeply believe that green finance can change the world, we had still oriented much of this course’s material to real estate finance and investment professionals. And, we had a full house of folks from some of investment real estate’s household names, which was flattering.  In addition, however, there were also professionals from the building technology,  construction, corporate real estate, affordable housing and legal sectors. In our conversations, we asked attendees about why they attended the course. The answer we received repeatedly was that professionals were finding it critical to understand the perspective of the property owners that they worked with and they believed that updating their knowledge of financing sustainable properties would be a good way to do that.

Real estate professionals in the room were leading change within their firms or they saw the workshop as a good way to help themselves transition within real estate by upping their knowledge and skill of financing green  real estate.

#2: Attendees most liked learning a simple, cohesive underwriting approach, how to apply LEED to finance decisionmaking, metrics and taking away a rich set of resources

We had definitely focused on creating actionable content, and when we reviewed the feedback, the following  topics were voted as being most significant time and time again:

• the GAPS approach simplified underwriting: We had really focused on reducing the complexity associated with underwriting and received strong, positive feedback on this. The participants gave high marks to our own system for green real estate underwriting, which we use to help decisionmakers quickly to define, evaluate and communicate the value-add of green real estate. It was interesting that folks from many non-finance sectors found this approach quite useful, too, in their structuring of their own work with property owners. (Don’t know about GAPS, yet? You should check it out at the next Competitive Edge, Financial Considerations of Energy Efficiency Retrofits, on 7 April; sign up here.)

• Learning how to connect LEED credits with the project operating cash flow: This particular need, a core requirement of our work here, got high marks as well. Most of the feedback was along the lines of participants feeling much more comfortable in conversations at work and with clients, now that they could point to very concrete areas within the LEED-NC system, which were prioritized according to cash flow impact.
  

• More metrics, please!: Green Journey readers know of our papers and posts about metrics for responsible property investing. This topic came at the end of the day, when people are typically a little tired. However, the participant feedback revealed that the topic of metrics was considered very important, telling us that professionals assign a value to incorporating both double and triple bottom line metrics within their practice.

• In-depth resources for self-study: Getting a packet of distilled, vetted sources of the latest green finance research plus tools and tips for further learning and takeaway was voted as very valuable by the attendees. While we taught course materials from  powerpoint slides and handouts, we had originally thought it would be helpful if people received an extra resource book compiling the research, tools and tips on real estate underwriting and sustainable finance that we’ve come to rely on here. So we prepared an 87-page resource book, to support the underwriting of new green construction, which expanded upon the information being taught in the course. We really focused on the green building, finance data and information that we most like to geek-out on. We were pleasantly surprised at how many attendees stated that this information was very valuable. Just this evening, I received a note from a participant saying, “I wanted to thank you for your great insight and the wealth of information that you shared”.

It was really gratifying to be able to share our knowledge and passion with a sharp group of professionals. Their feedback about the topics and resources that were most valuable to them opened our eyes also . This will definitely help us in the upcoming Competitive Edge events.

P.S. → The next Competitive Edge workshop, Financial Considerations for Existing Building Retrofits, takes place on 7 April 2010. We are excited about the fact that the City of San Francisco and PG&E will also be taking part with great information that will help properties to better finance existing building retrofits. Sign up and join us in an exciting day! Seating is limited and several of Workshop #1 attendees have indicated that they’ll be attending again, so register sooner than later. On top of that, early bird pricing runs through 24 March 2010.

According to the report in Responsible Investor, “Environmental, social and governance (ESG) factors including energy efficiency and water consumption are to be key planks“ within the criteria for new property investments.

The $16 billion investment amount represents 5% of the fund’s overall value and its manager, Norges Bank Investment Management (NBIM), indicates that the fund will need a few years to actually invest in ESG-screened real estate to achieve that level, as the allocation comes from portfolio shift created by cutting the fund’s bond portfolio.

How will they actually invest responsibly?

This is interesting, as there is no real consensus about reporting standards and measurements that constitute responsible investing in the institutional real estate field (see our previous posts and papers about Metrics for Responsible Property Investing, for more details).

NBIM will be required by the government to produce an annual report of the portfolio, including an “assessment of how it conforms to responsible management and the exercise of ownership rights. The bank will be allowed to hire external managers and outsource operational functions, with returns benchmarked against a customised version of the Investment Property Databank’s Global Property Benchmark.”

Overall, we are noticing increasing interest by foreign investors in US markets, as they believe that property values have nearly bottomed out. That, plus the growing requirement for green and socially-responsible properties can possibly spur a near to mid-term shortage in green real estate, even as property markets generally are expected to be in a slow recovery.

As we have seen in previous cycles, lots of capital seeking an asset in short supply can always create some interesting market action. From my point of view, the Norwegian Global Pension Fund is not alone in the direction they are taking. Expect to hear more on this point in the near future, as others get in on the action.

The US Green Building Council Northern California Chapter and law firm, Hanson Bridgett, have generously co-sponsored the seminar series, titled The Competitive Edge: Financial Tools for Green Building Investment.

Why the Competitive Edge?

We want to help you add more value to your marketplace. We’re convinced that there is a real need in the industry to understand how to approach analyzing the value-add of green strategies within real estate investments. So we worked with the US Green Building Council Northern California Chapter and Hanson Bridgett to organize courses that address the core of those issues:

• how to use the LEED rating system when analyzing project cash flows (and move beyond first costs)
• common investment analysis issues and tools for retrofits
• an approach for structuring the investment review of new and existing green buildings
• how A/E/C professionals can learn common investment analysis processes and terms to improve communication with property owners about design, construction, and budget issues.
• what to consider when assembling a portfolio or fund of green investment properties.

We believe that green finance and investment techniques represent the next level of skills that real estate professionals need to stay current with changes in the real estate market place. ‘

Since sustainable design can change the economics of a building, and there are many ways to go about creating a green building, finance and investment professionals need to know a good, and efficient, process for incorporating this information into their decision making.

Below are a complete list of courses as well as links to registration. Also, you can sign up and join our Pacesetter list, which will contain updates on these courses, too.

Competitive Edge Course Summary

• Course 1, “Investment Analysis of Green Buildings”, (March 3, 2010 - Register now) covers green investment underwriting skills that help professionals to quickly use the USGBC’s LEED-rating system in their decision-making. Full day seminar.
• Course 2, “Financial Considerations of Existing Building Retrofits”, (April 7, 2010) addresses the financial considerations related to energy efficiency retrofits, so that professionals can integrate the additional decision-making tools and analysis for making buildings more energy efficient. Full day seminar.
• Course 3, “Understanding and Communicating the Financial Case for A/E/C Professionals”, (April 28, 2010) gives architects, engineers and sustainability consultants an overview of the real estate investment analysis process, stressing how to use this information to ‘go beyond first costs’ in their conversations with owners about their green design and construction choices. Half day seminar.
• Course 4, “Raising the Bar: Green Investment Fund Strategies”, (May, 2010 - date to be announced) walks the real estate senior executive through the business and legal aspects of assembling a portfolio of green property investments so that they can create more strategic advantages for their firms via creating pools of green building investments for the real estate market.

Instructors: I’m pleased to be co-teaching these courses with David Longinotti, Partner at Hanson Bridgett.  Dave’s bio can be read here. You can check out my bio here.

To facilitate the best interaction, please note that seating is limited for all courses. Got any questions? Feel free to write us or call us at +1 (415) 655-6668. We’d love to see you there!

Generators using methane from a landfill to generate electricity

The Department of Energy has just announced funding $20.5 million for several community-scale renewable energy projects.

UC Davis & West Village

One of the recipients is West Village, next to UC Davis, which generated a bit of criticism among Green Journey readers the last time we covered them. In partnership with UC Davis, they’ve now received $2.5 million in funding for a waste-to-renewable energy (WTRE) system. The DOE provides an explanation of how the new system should work:

The system would generate power from a renewable biogas-fed fuel cell.  The organic waste will enter a digester to produce biogas from organic wastes. The biogas will power a 300-kW fuel cell, which will work in combination with an advanced battery system to provide power to the campus’

Montpelier, VT

A second community level energy system of interest is the funding of $8 million to the City of Montpelier, Vermont, for a combined heat and power district heating system that will burn sustainably-sourced wood chips and provide 1.8 million KWh to the grid.

The CHP system will be sized to provide heating to the Vermont Capitol Complex, city owned schools, the City Hall Complex, and up to 156 buildings in the community’s designated downtown district for a total of 176 buildings and 1.8 million square feet served.

We follow these announcements with lots of interest, since we work with partners to identify the best combination of financing streams for achieving community-level sustainability.

As we continue to study eco-districts and similar low-carbon neighborhoods in various stages of design and planning around the world, district-level renewable energy infrastructure  — particularly waste-to-renewable-energy comes up time and time again within the case studies of the more successful communities.

A more in depth discussion of the ’success factors’ within green communities will definitely make for an exciting post in the near future as we consolidate our findings.

Video explains value of district energy

Some of these technical terms might be outside of the typical real estate finance and investment discussion, so I found a 40 second video that explains how district energy saves buildings money. Email subscribers should click on this link to go to the video.