financing tools for a green building stock

1GRESB | www.gresb.com | [email protected] | Copyright © GRESB 2013 1

Piet Eichholtz & Nils KokProvada, June, 2013

Financing Tools for a Green Building Stock

2GRESB | www.gresb.com | [email protected] | Copyright © GRESB 2013

IntroductionWhy investigate green property financing tools?

Dutch Green Building Council cooperates with leading Dutch property financiers

Have asked GRESB/Maastricht University to investigate global green property finance practices

What is the state of the art, and where are the opportunities?

Research report: ”Financing tools for a green building stock”

Main conclusions: Many interesting experiments all over the world, but market is still in its infancy

Mainstream property (debt) financing mostly ignores sustainability

Significant business opportunities, mainly in tax-lien financing and through guaranteed savings models


Agenda

Motivation

Barriers

Financing solutionsOn-balance equity financing

Mortgage financing

Utility on-bill financing

EUA/PACE financing

Energy savings performance contracting

Revolving retrofit funds

Conclusion and discussion


MotivationAdded value of green buildings

Energy efficiency in buildings reduces carbon emissions and can create value

Energy-efficient commercial buildings have higher effective rent (6-7%), better occupancy, and higher value (11-13%)

Dutch evidence shows that lower energy efficiency means increased risk of obsolescence

Property companies (REITs) that invest in green buildings have better operational performance and lower systematic risk

Mortgages on energy efficient homes are less likely to default (32%) and less likely to prepay (25%)


Equity investors are integrating sustainability…Screening investments in property companies and funds


…because their capital providers require itGrowth in GRESB membership signals engagement

New GRESB members:• Aegon Group (3x)• BNP Paribas• CBRE GI (3x)• Credit Suisse AG• GEPF• Threadneedle• Townsend Group


Barriers for building retrofitsKnowledge and financing

Still a significant lack of awareness of the business opportunities, but best practices are emerging

More evidence needed on realized (not theoretical) performance to understand operational risk

Recent survey: 26%-41% of property owners lack funding for energy efficiency investments

On-balance equity financing difficult, also because of property crisis

Property financing is difficult to begin with

Green financing tools often still in experimental phase

Rent contracts (split incentive) not a big barrier in the medium to long run

Security of repayments (credit risk) is main concern for banks


Solution 1: On-balance equity financingConventional property investors or specialized niche players

This is the most-used way of “green” financing

Equity providers are demanding green performance, and use tools like GRESB to engage in dialogue with fund managers

Most of the progress made by property owners thus far is funded by…retained earnings

Examples: Unibail Rodamco and Big Yellow

Specialized niche players in green building retrofits are still rare

Example: Climate Change Property Fund

Low Carbon Workplace


Solution 2: Commercial mortgage financingIncorporating “green” will become the new normal

Energy efficiency mortgagesAdditional borrowing capacity and/or lower mortgage rate

Either a re-financed first mortgage or a second mortgage

Lenders are likely to incorporate sustainability criteria into acceptance process

Government may provide additional guarantee, or make sustainability a requirement for a standard guarantee

This (slowly) happens on the home mortgage market

Examples: Bayerische Landesbank and Green Refinance Plus

But also: Triodos in residential mortgage financing


Solution 3: Utility on-bill financingMakes life very easy for the property owner

Utilities finance the upfront cost of energy efficiency upgradeMay improve client loyalty (decrease “churn”)

Interest and repayment of principal through energy bill charge

May reduce credit risk, since utility knows the customer well

Financiers needed to scale up

Examples: PG&E (US)

Nuon/Santander and Essent/GreenLoans


Solution 4: EUA/PACE financingA logical way for the government to step in

Local government (city) issues special bonds at low rates(Institutional) investors buy the bonds

Government passes on the proceeds as loans to building owners for retrofits on residential and commercial property

Borrowers pay interest and principal through temporary higher property tax (up to 20 years)

Dutch property tax system seems suited for this

Example: Prologis San Francisco headquarters


Solution 4: EUA/PACE financing

Investor

City

Contractor

Tax office

Homeowner

Utility

Source: Metrus Energy


Solution 5: Energy savings performance contractingLower risk, but also lower return for the building owner

Energy Service Company (ESCo) develops, implements, and maintains energy efficiency plan for building owner

ESCo guarantees energy reduction to building owner through Energy Performance Contract (EPC)

Funding for investment comes from ESCo or owner, but often from external financier

Guarantee reduces risk (and thus return) for owner (and financier)

Examples: Rotterdam swimming pools (Strukton, BNG) and Douwe Egberts Joure (Dalkia), and more, at www.esconetwerk.nl

http://www.esconetwerk.nl/


Solution 6: Revolving retrofit fundsLending without a mortgage

Funds to finance energy efficiency improvements or renewable energy projects

Can be private or government-sponsored

Usually loans, not equity

Can back PACE or ESCo model

Examples: KfW and Harvard Green Fund


Conclusion and discussionLots of experiments, lots of opportunities

The market for “green” property financing is still in its infancy

The Dutch (property) finance industry may jump-start and take the lead in developing financial solutions

For starters, mortgage underwriting by commercial banks should include energy efficiency criteria

Banks could look at leading institutional investors like APG, PGGM, Mn, Blue Sky Group, etc. for inspiration

Government involvement is not a requirement, but will speed up the process

financing tools for a green building stock

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