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Financing Tools for a Green Building Stock

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This report is the first result of a research program on existing incentives and conditions for the financing of sustainable real estate. This project is part of the program Energo Fiego, which has …

This report is the first result of a research program on existing incentives and conditions for the financing of sustainable real estate. This project is part of the program Energo Fiego, which has been initiated by the Market Financiers Group of the Dutch Green Building Council (DGBC) and is conducted in partnership with the Holland Financial Centre, Utrecht Sustainability Institute and GRESB. The Dutch Green Building Council (DGBC) acts as secretary of the Group.

The importance of sustainability in the built environment is increasing, and the main Dutch property financing firms recognize this importance. In 2011, the financiers expressed the intention to contribute to the road to a sustainable built environment through a covenant, and the financiers are now members of the Market Financiers Group of the DGBC.

Through this partnership, the financiers explore the opportunities for integration of sustainability requirements into financing of new developments, redevelopments, or refinancing of commercial real estate. Through rigorous research, the aim is to make sustainability an implied condition in financing new construction, redevelopment or refinance real estate.

The member of the Market Financiers Group are:
• ABN Amro Real Estate
• ING Real Estate Finance
• FGH Bank
• NIBC
• Syntrus Achmea Real Estate & Finance

This report has been authored by Piet Eichholtz and Nils Kok of GRESB & Maastricht University.

Published in: Economy & Finance, Business

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  • 1. 1GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 1 Piet Eichholtz & Nils Kok Provada, June, 2013 Financing Tools for a Green Building Stock
  • 2. 2GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Introduction Why 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
  • 3. 3GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Agenda Motivation Barriers Financing solutions On-balance equity financing Mortgage financing Utility on-bill financing EUA/PACE financing Energy savings performance contracting Revolving retrofit funds Conclusion and discussion
  • 4. 4GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Motivation Added 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%)
  • 5. 5GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Equity investors are integrating sustainability… Screening investments in property companies and funds
  • 6. 6GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 6 …because their capital providers require it Growth in GRESB membership signals engagement New GRESB members: • Aegon Group (3x) • BNP Paribas • CBRE GI (3x) • Credit Suisse AG • GEPF • Threadneedle • Townsend Group
  • 7. 7GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Barriers for building retrofits Knowledge 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
  • 8. 8GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Solution 1: On-balance equity financing Conventional 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
  • 9. 9GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Solution 2: Commercial mortgage financing Incorporating “green” will become the new normal Energy efficiency mortgages Additional 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
  • 10. 10GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 10
  • 11. 11GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 11
  • 12. 12GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Solution 3: Utility on-bill financing Makes life very easy for the property owner Utilities finance the upfront cost of energy efficiency upgrade May 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
  • 13. 13GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 13
  • 14. 14GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Solution 4: EUA/PACE financing A 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
  • 15. 15GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 15 Solution 4: EUA/PACE financing Investor City Contractor Tax office Home owner Utility Source: Metrus Energy
  • 16. 16GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Solution 5: Energy savings performance contracting Lower 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
  • 17. 17GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Solution 6: Revolving retrofit funds Lending 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
  • 18. 18GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013
  • 19. 19GRESB | www.gresb.com | info@gresb.com | Copyright © GRESB 2013 Conclusion and discussion Lots 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