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Can Green Building Go Mainstream?

Bridging the Green Divide

APARTMENT FINANCE TODAY • May/June 2009

While green building is the right thing to do for the environment, can your balance sheet afford to have a social conscience?

BY Jerry Ascierto

WHEN CROSLAND WAS designing its first full-scale sustainable community, it wasn’t focused on certifi cation.

The developer began the design process by leafing through several green building ratings systems—LEED, EarthCraft, Green Globes EnergyStar—and decided to use whichever aspect of each made the most economic sense.

But when it came time to secure fi nancing, the deal’s lenders—Bank of America and U.S. Bank—and the equity partner— Northwest Mutual Life—all were excited to be part of a certifiable “green” community.

The financiers encouraged Crosland to apply for the U.S. Green Building Council’s LEED certification and even helped the company find consultants to execute the vision. In today’s financing world, Crosland wasn’t about to say no.

That episode reflects a larger trend: Many lenders and investors are giving energy-efficient projects the green light more quickly and with more gusto than they would for standard communities.

“The resident doesn’t necessarily care if you’re LEED Silver, Gold, or Platinum, but the eventual buyer of the project cares, and the banks care,” says David Ravin, president of Charlotte, N.C.-based Crosland’s residential division. “There will be a point in time when people looking to buy, refi nance, or put some big capital infusion into a project will say they only want to go green.”

There’s a perfect storm of green building interest at the local, state, and federal levels. The Obama administration has rolled out a myriad of programs to drive sustainable building practices; many states, cities, and utility companies are upping their incentive programs; and consumer interest is becoming more acute.

Despite this, there is currently a “green divide” in the multifamily world that has left many market-rate developers in a lurch. High-end luxury projects can offset the cost of sustainable building techniques by demanding higher rents and sales prices, while many state and federal dollars are available to affordable housing developers employing energy-efficient measures. But for those caught in the middle, it’s not easy being green. How will green development become the norm if market-rate developers can’t offset the upfront costs with powerful grants and incentives?

“The programs that are in place at the federal, state, and local levels are grossly inadequate,” says Art Lomenick, president of Dallas-based developer High Street Residential. “Until they get better, green building is not going to be mainstream, and companies that do it now, like us, have to have it as part of their own initiative. There’s a long way to go.”

The Case for Sustainability

Despite the lack of direct enticements, the case for going green is growing. The eventual payback of energy-efficiency measures to a property’s bottom line often justifies the upfront cost. Consider that a single compact fluorescent lightbulb uses 75 percent less energy than a standard bulb and saves about $30 during its life, according to Energy Star. Now think about all the bulbs in your common areas that can be replaced, and those savings add up quickly.

Another consideration is increased consumer awareness of green products, which opens up a marketing opportunity for early adopters who will get a jump on the competition.

"For companies now making their development greener and more sustainable, there’s an instant capacity to become a leader, to catapult to a different class,” says Dana Bourland, director of the Green Communities program at Columbia, Md.-based Enterprise Community Partners.

What’s more, there is growing evidence that green features can reap a premium in pricing. Consider trends in the office sector, which was quicker to adopt sustainable techniques than the multifamily industry. According to a study released last year by market research firm CoStar Group, LEED-certified office buildings sell at a 64 percent premium—and rent at a 36 percent premium—over non-certified buildings. Those premiums may translate over to the multifamily sector: A recent study by Apartments.com found that more than 60 percent of renters said they specifically look for environmentally-friendly apartments, and 25 percent of them are willing to pay more for those features.

But there are also several nonfinancial incentives available to developers. Many cities, such as Chicago, Dallas, San Diego, and Portland, Ore., offer expedited entitlement and permitting for market-rate green developments, which could shorten the process by a year and save developers big money in the carrying cost of the land.

Density bonuses, where projects can add more units than the local code allows, are also increasingly being offered in many municipalities. Plus, a green development often receives more political and community support than a conventional deal.

While these efforts certainly help, developers active in high-barrier markets see sustainable building practices as increasingly becoming the norm. “It’s not even about fast-tracking anymore; it’s just the price of admission in many jurisdictions,” says Tom Javits, a vice president who heads Alexandria, Va.-based AvalonBay Communities’ sustainability initiatives. “Whether it’s New York, San Francisco, Seattle, or Boston, municipalities require more attention to these matters now.”

Some developers envision a day when a property’s energy score will become a key metric for measuring value, like the milesper-gallon sticker on a new car. And that day may be soon. There is currently draft legislation before Congress which proposes energy-efficiency labeling as part of a larger climate change bill expected to be introduced later this year.

Energy-efficiency labeling, already under way in parts of Europe, would require all commercial buildings to be assigned an “energy efficiency” score. “You’ll be buying and selling your properties with this number,” predicts Doug Walker, senior vice president of asset quality and green initiatives at Highlands Ranch, Colo.based developer UDR. “The theory is that buyers would want the highest energy rating because they’ll be more valuable.”

Going Retro

Multifamily firms eager to get ahead of the green curve are laying the foundation for a future in sustainability—doing everything from establishing internal task forces to logging lightbulbs.

Crosland, intent on becoming an early adopter, has a 16-member interdisciplinary “green team,” all of whom are certifi ed LEED-accredited professionals. Meanwhile, AvalonBay has 10 new developments pursuing LEED certifi cation, and the company is also focused on reducing energy consumption at its existing communities. AvalonBay also recently established an internal sustainability fund, which will fi nance energy-conserving retrofits in a pilot program to prove out the cost savings of these measures.

The company will soon install a cogeneration plant in the 397-unit Avalon River View in Long Island City, N.Y. The cogeneration plant takes the natural gas that previously went into a conventional boiler and uses it to generate electricity. The plant then captures the waste heat that emerges from electricity production and uses it to heat the apartments as well as the community’s hot water.

And the company has tapped some incentives along the way. For a recent boiler retrofit in California, AvalonBay took advantage of rebates and direct cash incentives from local utility companies. The fi rm also expects to receive some fi nancial aid from New York’s State Energy Research and Development Agency for a community it just completed in White Plains, N.Y.

UDR is likewise concentrating on existing communities. In fact, the company has painstakingly developed guidelines around replacing each lightbulb, fi xture, shower-head, faucet, thermostat, and appliance at each of the 10,000 units in its portfolio. “We’ve got 1.2 million lightbulbs, more than 100 different wattages, and more than 35 different bulb types,” Walker says. “I’ve done my homework.”

UDR is currently upgrading the common areas and plans to begin upgrading each individual unit in January 2010. The company estimates that the program, budgeted at $16 million, will save $2.5 million annually, while each individual unit will save more than $450 a year.

“There are savings to be made, and when that savings comes off your expense side and drops down to the NOI on your property, you can generate a lot of value for these properties,” Walker adds. “We can take the increased NOI, tap it, and then go out and refinance those properties.”

But the firm, which has eight developments submitted for LEED certification in various stages of design and construction, isn’t stopping at cost-effective green solutions. One of UDR’s LEED projects still in the planning stages is a San Diego development that will use solar panels to power hot water heaters and parking lot lighting. In fact, it’s the company’s first project with a solar component.

UDR plans to access both federal and state tax credits to help offset the cost of purchasing and installing the solar panels, which typically runs about $1 million for a 75- to 100-unit project. Plus, the project received expedited entitlement and permitting, which shaved eight to 12 months off of the entitlement timeline, and cut the permitting process in half.

“Economically, solar is not there yet,” Walker says. “But when you take federal tax credits, state tax credits, and then throw in the savings from expedited entitlement and permitting, all of a sudden, solar is getting close to making economic sense.”

High Street Residential is working on a 73-acre, mixed-use, transit-oriented development in Austin, Texas, called Midtown Commons. Among its green aspects, Midtown Commons will feature a small solar energy component that will power a portion of the transit plaza.

“It’s not very big because the cost was prohibitive, but we did it more as a test case, a pilot,” Lomenick says. High Street is currently negotiating with the City of Austin to receive solar tax credits from the city to offset the cost. The 900-unit development will finish the first phase of its construction, which will feature 316 luxury rentals in the fall.

Designing Incentives

Still, being an early adopter is impossible for most market-rate multifamily firms without a helping hand from the government or lending sectors.

Unfortunately, the information around various federal, state, and local incentives is often hard to find. All of the developers interviewed for this story were busy compiling internal databases of what each market offered in an effort to pencil out their green initiatives. Many states and jurisdictions that offer incentives for green development design them for commercial buildings in general or the single-family market in particular, and often try to fit multifamily into the program after the fact.

“The market-rate guys have sort of been left out in the cold,” says Paula Cino, director of energy and environmental policy for the Washington D.C.-based National Multi Housing Council. “There are some tax incentives at the federal level, but I know of virtually no multifamily developers who have been able to take advantage of those.”

Federal tax credits, such as solar tax credits, often don’t work well with multifamily development since they are limited to a fixed dollar amount. “A credit up to $5,000 might be a good chunk of money for a single-family home,” Cino says. “But that doesn’t go too far if you’re trying to add solar to a multifamily project.”

At the corporate level, financial institutions are increasingly reducing the environmental impact of their own operations, while simultaneously promoting sustainable development activity. In 2007, Bank of America announced a $20 billion, 10-year green initiative that includes environmental lending consideration. As part of the initiative, the company gives favorable consideration to borrowers creating and implementing environmentally-sustainable products.

“Banks are moving into LEED office buildings, even trying to get their branches to be green, and that’s being pushed down to the things they’re lending on and partnering on,” Crosland’s Ravin says.

But the structure of the lending and investment markets needs to improve to recognize the financial impact of green building techniques, industry insiders agree. There are few standards around underwriting green projects, though the Green Building Financing Consortium (GBFC) hopes to change that.

Founded in 2006 by Scott Muldavin, the GBFC aims to answer the question: How do you value and account for risk when underwriting green or energy-efficient buildings? The group is set to release two heavily researched studies this summer, “Pricing and Mitigating Risk in Sustainable Property Investment” and “Underwriting Sustainable Property Investment.”

Words of Advice

Chuck Miller, owner of Boise, Idaho-based Chuck Miller Construction, teaches various courses about green building for the National Association of Home Builders. His advice to market-rate developers is to start with a measured approach. “Both the National Green Building Standard and LEED award the largest percentage of points for the energy-efficiency component, so I counsel builders that’s the place to start,” Miller says.

For those pursuing a national green rating standard certification, it’s important to begin the planning process with the program’s requirements in mind. The biggest green horror stories often involve companies that decide to try to get certified once they’ve already broken ground, forcing the development’s key players to reengineer the project on the fly.

“If from day one you begin that planning process and get buy-in from the architect, the various engineers, and your general contractor, then you can do it quite efficiently,” says Jim Silverwood, president of Affirmed Housing, a developer currently constructing a 23-story LEED-certified high-rise in San Diego.

Developers would also do best to check the backgrounds of the professional staff working on a project beforehand. “Not all green architects and engineers are green architects and engineers,” UDR’s Walker says. “Make sure their version of green is your version.”

But for those new to the green game, the main thing is to think in small bites. Focus on those practices that are easiest to quantify, such as energy efficiency and water conservation. Upgrading plumbing fixtures or installing fluorescent bulbs, for instance, have well-established paybacks. “Not everyone has to jump to that LEED Platinum level,” Cino says. “Take it slow, and go for the low-hanging fruit.”