CAN YOUR BALANCE SHEET AFFORD TO HAVE an environmental conscience?
When it comes to greening an apartment community, developers and owners are often of two minds. Many believe it's the right thing to do—the tougher nut to crack is figuring out whether it's the smart thing to do.
On the front end, owners and developers have a hard time finding the capital to finance green construction or retrofits. The problem hasn't been as severe on the aff ordable housing side, as there are many federal, state, and city financial incentives to help a green deal pencil out. And in the luxury apartment space, the higher level of rents can off set the relatively high cost of achieving a green certification.
But for the vast majority of those caught in between —conventional market-rate developers—it's tough to find financial incentives to go green. Many lenders aren't willing to off er better rates and terms to a green project, because the evidence of a return on investment just isn't there.
“There's this impression that there are a lot of programs available for energy- efficient financing,” says Paula Cino, director of energy and environmental policy at the Washington, D.C.–based National Multi Housing Council. “But they're really not geared toward the multifamily market-rate sector.”
While many developers have seen firsthand the monetary benefits of going green, lenders are waiting for some hard data to substantiate the claims. There's not a consistent enough benchmark to tip the scales for financiers who are skeptical about the payback of energy-efficient retrofits. Large-scale empirical research eff orts are under way but are still in their infancy.
Mary A. Brennan, former assistant commissioner for energy at the New York City Department of Housing Preservation and Development, says the lack of benchmarking has been a huge roadblock to getting energy-efficient features into multifamily properties.
“Despite rising interest in green technology and the savings it can provide, lenders will probably be reluctant to make loans when the money to repay the loan is expected to come from energy cost savings,” says Brennan. “Why? Lack of reliable data about actual savings, unreliability of audit predictions, and the need for unconventional underwriting requirements.”
Researchers are beginning to recognize, however, that tapping into some of these energy savings initiatives can be rather inexpensive, efficient to execute, and, ultimately, a boon to an owner's bottom line. And it's becoming an important selling point to a whole new generation of renter.
As the industry awaits the results of several ongoing studies looking to prove out the ROI of green, here are four ways that owners can monetize their green investments.
1. Green Leases
One of the ways a company can recoup money on energy-efficient investments is called “green leasing.” It's a relatively new idea, but it's basically a way that an owner and tenant can work together to make green retrofits and improvements a reality. A green lease outlines future rental increases and justifies those increases by detailing the energy savings a tenant can expect to see on utilities.
This approach is all about transparency and revealing a numbers game that has traditionally been contained in the corporate office. With green leases, tenants can see, in hard data, what the owner will spend on their unit and how those expenditures benefit the renter.
Nate Kredich, vice president of residential market development at the U.S. Green Building Council (USGBC), points out that multifamily owners have always approached retrofits with skepticism, since they often only off er split incentives. Spending capital to retrofit a building's lighting, HVAC, or insulation will end up saving individually metered tenants money in the long run, instead of substantially reducing net operating income (NOI) at a property, he says.
That's why the green lease concept makes so much sense—it gives owners a path to higher income and provides a way to sell those increases to the tenant.
The key concepts outlined in any green lease include rent structure and operating expenses; build-out of tenant improvements; sustainable development principles and regulations (throughout the building or larger development); the use and disposal of hazardous materials, including cleaning supplies; recycling; and environmental management plans, according to the Green Real Estate Journal.
Currently, green leases are in a pilot phase and data have yet to be collected on their success. But the burgeoning concept off ers a creative solution to a nagging problem.
Another way to monetize green initiatives is to cash in on energy-saving eff orts as a marketing tool.
Green retrofits can serve as an important selling point for attracting environmentally conscious tenants, such as the 80 million or so Gen Y renters expected to flood the market in the coming decade.
But it's not just the young and idealistic who care about green—in fact, about 80 percent of Americans say the issue of energy efficiency is deeply important to them, according to a recent Associated Press/National Organization for Research poll. So, an increasing number of multifamily companies are using their energy-efficiency certifications as a marketing tool to brand their communities as eco-friendly.
Companies like Chicago-based AMLI Residential market their green features, such as water-efficient fixtures, specialty glass, recycled building material, and energy-efficient thermostats, to set the firm apart as off ering units with cheaper utility costs than the competition. AMLI can then justify higher rents, and renters are often willing to pay that price to find a community that shares their values about environmental awareness.
But owners should be careful not to overstate the benefits. The Federal Trade Commission has a “Green Guides” publication that recommends substantiating all green claims and making environmental claims specific rather than broad and vague.
3. Common-Area Utilities
Carlos Ochoa, president of Richardson, Texas–based lighting design company JEC Energy Savings, knows firsthand how hesitant many apartment owners have been to do a lot of spending on energy retrofits during the past few years.
“2010 was a horrible year,” says Ochoa. “Most large companies had policies not to spend on energy retrofits.” Another common problem is the disconnect between owners and lenders. “The lack of knowledge about energy savings often prohibits them from doing deals like this,” he says.
But things have been on the upswing for JEC the past two years, ever since the firm decided to focus on a single aspect of utility retrofitting to prove return on invest ment. That decision has helped bring client confidence back into the process as the economy improves.
“I've always wanted to find ways to save on electricity. We chose to stick with lighting, because you'll know exactly what you're saving,” says Ochoa. “On a garden-style property, for example, one with 150 to 200 retrofitted fixtures in common areas, we can prove savings in anywhere from 45 to 60 days.”
4. Higher Price Tags
Office buildings with an Energy Star or LEED rating charge rents about 5 percent higher than their nongreen counterparts. And, incredibly, LEED-labeled office buildings can be sold for prices that are 25 percent higher than comparable trades, according to a study published last year by researchers at Reading University in England. Since the office market is ahead of the multifamily market in terms of green technology evolution, it's safe to say that similar benefits will accrue to multifamily owners, as well.
“There's an important role here for third-party organizations to help,” says the USGBC's Kredich. “Third-party certifications certainly carry a premium, especially when you're going to sell an asset at market.”
Beyond LEED and Energy Star, other standards include Enterprise Green Communities, EarthCraft, and Green Globes. Currently, the Environmental Protection Agency is developing a scale that allows multifamily owners to judge energy performance against other apartment buildings. This may help standardize some of the industry's energy retrofit data and provide the much sought-after metrics that lenders are waiting to see.
Affordable housing is still the bellwether for green building and financing, but the market-rate industry is, slowly, looking better. “So far, just getting the water to the end of the road has been the issue,” says Kredich. “The more data you have, the more benchmarking you get, and the more capital you'll start to see. We're still sort of in the infancy here.”