evolution partners copyright 2008 green homes and sustainable communities august 7, 2008 capital...

Green Homes and Sustainable

CommunitiesAugust 7, 2008

Evolution Partners Copyright 2008

Capital Markets and GreenNational Green Building Underwriting Standard




Overview

What is “green” as it applies to real estate finance

Capital markets’ requirement of a national standard

Which green aspects are important




What is “Green” in the Real Estate Industry?

1. Best business practices– Maximize efficiency aspects in construction /

operations– Minimize waste and costs– Capture ‘free’ inputs from natural environment– Increased architect / engineer / contractor

coordination

2. Mark of high-quality construction and asset value via several third-party verification processes

3. A product differentiation marker based on:

– Energy and water operational cost savings – IEQ and associated health benefits– Amenities– Asset quality (perceived / real)




Why Are Investors / Companies Going “Green”? It’s just business……

1. Operational cost efficiency

2. Risk reduction

3. Best management practices

4. ‘Halo effect’




Capital Markets Focus Financially Tangible Asset Attributes

• Energy efficiency

• Water efficiency

• Location aspects– Transit orientation– Pedestrian accessibility– Neighborhood amenities

• Indoor environmental quality




Capital Market Relevance

INVESTOR / LENDERFiduciary Responsibility• Effective risk management

– Energy/water price increases – risk exposure

– Energy/water price volatility – risk exposure – Litigation / liability – risk exposure

• Transparent information / reporting– Provide additional relevant data points– Third-party verified

OPERATOR / BORROWERMaximize Business

Opportunities• Improves competitiveness• Improves operational efficiency

– Cash flow and material risk factors

• Promotes market differentiation• Enhances brand value• Facilitates progress

– Societal – Business




CFO Research Services / Jones Lang LaSalle ReportMarch 2008Top Sustainability Priorities• Improve energy efficiency• Reduce carbon footprint• Reduce environmental impact of

operations• Manage risk

Barriers• Lack of decision framework / tool• Inability to measure effect on

shareholder value / investor returns• Not integrated into financial

management and control systems

Respondent Quote“As more efficient measuring tools are created and utilized, finance’s role in sustainability efforts will be greatly enhanced.”

Survey Metrics:175 responses – senior finance executives95% from companies w/ over $500MM revenue




Green Building Underwriting Standard

Reporting

Decision Tool

Investment Performance

Risk Management




Capital Markets Partnership – MembersPartial List

City of San Francisco

City of Chicago

City of Dallas

City of Denver

City of Miami

City of New York

City of Oakland

City of San Jose

City of Santa Monica

City of Seattle




US Conference of Mayors ResolutionJune 2008




Principals – Green Building Underwriting Standard1. Performance based

2. Easy to analyze / simple to implement

3. Disciplined• Tangible financial impacts• Acknowledgement of intangible value

4. Utilize/recognize consensus industry standards

5. Third-party verified

IN PRACTICE: Underwriting Overlay• Does not materially change current underwriting practices• Request additional key information pieces during underwriting process• Incorporate information data points

– Decision processes– Reporting

If you cannot measure, report, and verify……you cannot manage it




Structure – Green Building Underwriting Standard• Recognizes and incorporates existing industry

standards– Comprehensive– Transparent– Market-driven– Consensus-based

• Standards include– EPA EnergyStar– USGBC LEED Rating System– MTS Climate Neutral

• Performance based– Energy– Water– Indoor environmental quality

• Third-party verification requirement– Self-Regulation = No Regulation = Wild West




EPA EnergyStar

• Government-backed program helping businesses and individuals achieve superior energy efficiency

• Energy performance rating tools– EnergyStar Portfolio Manager (existing buildings)

– EnergyStar Target Finder (new construction)

• Scoring system of 1-100– Commercial buildings

• Bell curve based on statistically significant comparative data set• Higher score is better

– Median = 50– EnergyStar Certified buildings score 75 or higher

– Residential buildings• Based on energy consumption / HERS test• Lower score is better




USGBC’s LEED™ Rating SystemLeadership in Energy and Environmental Design

Environmental Responsibility Defined For Buildings • Answers question: “What exactly is an environmentally-responsible

building?”• Third party certification of environmental achievement

LEED New Construction 2.2 Implementation • Point-based system• Broken into categories

Sustainable Sites 14 PointsWater Efficiency 5 PointsEnergy & Atmosphere 17 PointsMaterials & Resources 13 PointsIndoor Environmental Quality 15 PointsInnovation 5 PointsTOTAL POSSIBLE POINTS 69 Points

Certified 26-32 pointsSilver 33-38 pointsGold 39-51 pointsPlatinum52-69 points




Climate Neutral certification

Consensus-based national standard

Certifies carbon neutrality

Certification process:• Audit baseline energy use

• Implement efficiency measures

• Address remaining energy use:

1. Install onsite renewable energy;

2. Purchase “Green-e” renewable energy;

3. Purchase/retire “Green-e” REC’s; and/or

4. Purchase annual emissions offsets based on the Cleaner and Greener® program requirements

• Certify by accredited 3rd party professional




MechanicsGreen Building Underwriting Standards

I. Information Disclosure at time of debt financing1. Energy Star score (Portfolio Manager or Target Finder) 2. LEED certification and scorecard3. Climate Neutral certification4. Commissioning report (recommended)

II. Analyze LEED scorecard for specific LEED points achieved

Focus placed on a subset of specific LEED credits– Energy efficiency– Water use– Indoor environmental quality

III. Rate revenue/expense impacts of strategies employedRelative scale compared to a ‘market’ asset

-5 -4 -3 -2 -1 0 1 2 3 4 5

LOW MEDIUMMEDIUM HIGHHIGH

XXXXXXXXXXXXXXXXX




Example Scoring – Specific LEED PointLEED Water Efficiency WE-3.1/3.2 – 20%/30% Water Use Reduction

• LEED scorecard analysis – Achieved both WE-3.1 and WE-3.2

• Asset analysis– Dual flush toilets– Waterless urinals– Faucet aerators

• Positive score on financial impact = 2

UNDERWRITING• 30% reduction applied to ‘market’ asset water utility costs

-5 -4 -3 -2 -1 0 1 2 3 4 5

LOW MEDIUMMEDIUM HIGHHIGH

X




Value Adjusted Score Ratio Score

ENERGYSTAR Score 40% Green Building Underwriting Standard Score 35%

LEED Rating NONE 0%

(intangible value) CERTIFIED 2% SILVER 5% GOLD 10% PLATINUM 15%

Climate Neutral Certified YES 10% NO 0%

CMP GREEN SCORE 100%

Final Analysis Capital Markets Partnership Commercial Green Score Formula

CMP

GREENSCORE




Risk Management • Lower operating expenses

– Energy / water price volatility– Energy / water efficiency and conservation– Energy – peak load demand– Insurance– Waste disposal– Maintenance– Capital expenditures

• Commercial - Evolving corporate green policies– Impact on tenant demand

• Potential for two-tiered market • Obsolescence risk

– Improved tenant satisfaction / retention

• Future regulatory compliance

• CO2 trading– Cost increases based on CO2 / ton used to power asset– Value capture

• Current / future tax incentives

• Building health / IAQ liability

• Informs investment consideration, capital access and pricing

Real Estate Value

1. Cash Flow

2. Timing of Cash Flow

3. Risk of Receiving Cash Flow




Summary – Green Underwriting Standard

• Incorporates performance-based tangible attributes– Energy use /efficiency – Water use / efficiency– Location attributes– Indoor environmental quality

• Simple due diligence requirements– EnergyStar score– LEED scorecard– Commissioning report

• Straightforward implementation

• Transparent

• Third-party verified




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NYMEX Light Sweet Crude

Crude Oil – Actual (Jan 1997 thru July 28, 2008)

World oil production flat since 2004 / China and India’s consumption surging / domestic consumption in oil producing countries increasing

Energy traders / OPEC now publicly refer to the ‘proper’ price of $85 / barrel at which point OPEC reduces production to support prices




US Electricity Prices (1982 – 2006)

Source: US Department of Energy http://www.eia.doe.gov/fuelelectric.html

0.0

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12.0

Average Retail Price of Electricity, Residential Average Retail Price of Electricity, Commercial

Average Retail Price of Electricity, Industrial Average Retail Price of Electricity, Total

₵ / kwh




US Electric Power Generation Sources (2007)

49.8%

0.4%17.9%

3.0%

19.9%

2.3%6.5% 0.2%

Coal Other Gasses Natural Gas Petroleum Nuclear Solar / Wind Hydroelectric Other

Coal

Nuclear

Natural Gas

HydroSolar / Wind

Petroleum




DOE Coal Prices June 2003 to July 2006

Source: http://www.eia.doe.gov/cneaf/coal/page/coalnews/coalmar.html

CentralAppalachia+88%

Northern Appalachia+41%

Illinois Basin38%

Uinta Basin114%

Powder River Basin100%




DOE Coal Prices June 2003 to July 2008

Current Price = $149 / ton

Current Price = $140 / ton

Source: http://www.eia.doe.gov/cneaf/coal/page/coalnews/coalmar.html

+312% - Central Appalachia

+452% - Northern Appalachia

+200% - Illinois Basin

+254% - Uinta Basin

+127% - Powder River Basin




Serious Grid / Infrastructure Challenges

“There will need to be $350 billion invested in power generation over the next decade. Transmission represents another $150 billion of needed investment -- the distribution infrastructure in our cities has really deteriorated.

Environmental retrofits on existing plants are going to cost another $50 billion, and that doesn't include carbon capture. Efficiency investments are going to be another $50 billion."

Mac MacFarlandVP of Corporate Development Exelon Energy

Source: Knowledge at Whartonhttp://knowledge.wharton.upenn.edu/article.cfm?articleid=1881




What’s Your Prediction?

Source: US Department of Energy http://www.eia.doe.gov/fuelelectric.html

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Average Retail Price of Electricity, Residential Average Retail Price of Electricity, Commercial

Average Retail Price of Electricity, Industrial Average Retail Price of Electricity, Total

₵ / kwh




Natural Gas Spot Prices (Oct ’83 – Apr ‘08)

http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html

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Date

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1984

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Wellhead City Gate Residential Commercial




Energy Market Drivers

1990

MarketRestructuring

Aging Power Grid

Globalization Digital Economy

Emissions andClimate Change

Energy Reliability andSecurity

ResourceScarcity

1995 2000 2005-10 2010-20




Final Thought: Finance Industry and Sustainability

The finance industry prides itself on seeing the road ahead……

It cannot be done while using the rear view mirror……




Perspective – Evolution Partners

Work with asset owners and developers across North America– Strategy

• Pragmatic industry analysis• Advise on what competitors are doing• Portfolio analysis – buy/hold/sell

– Asset positioning (development / existing)

• LEED-NC / LEED-EB audit• EnergyStar benchmarking • Environmental audit• Recommend best practices

– Financing• Raise debt/equity capital for LEED projects• Articulate asset features during underwriting (ie – resistance to ‘mark-to-market’)

– Leasing and Marketing• Communication strategies• Green Lease Addendum

Industry Work– Industry speaking – ULI / NAIOP– Green financial underwriting standards

Clients

Regional developers

Public REITs

Private equity firms

Investment banks

Start-up firms




Dan Winters, Managing Principal1511 Wisconsin Avenue NW #200

Washington, DC 20007

[email protected]

evolution partners copyright 2008 green homes and sustainable communities august 7, 2008 capital...

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