GREEN AS A TECH PLAY: A FINANCING PERSPECTIVE

By Lawrence L. Ostema, Esq., LEED AP

Also published in Green Builder Magazine, May 2008

The single biggest stumbling block to the widespread consumer adoption of sustainable homes is the perception that sustainability equates to conservation. We can all green our lives by turning off lights, taking shorter showers, and foregoing certain conveniences. Quite frankly, that’s no fun and is not a long-term solution for most people. The sustainability movement is going mainstream because today’s green home offers the same or a better lifestyle to consumers through efficiency, not conservation. These efficiencies, whether improved energy usage, water consumption, or indoor air quality, are available because of one thing: technology.

The technology that drives today’s green home allows it to look just like any other home and offer an identical if not superior set of features with a lower cost of ownership and better indoor air quality. So why wouldn’t everyone want one?

As noted in a May report from the Calvert Group, a socially responsible investment firm, and the Boston College Institute for Responsible Investment, the residential sector is lagging the rest of the real estate industry in offering green products. This more cautious adoption of green can be attributed to many causes: consumer demand is increasing but still fairly low, green government mandates and incentives typically apply to the commercial sector, the costs of early adoption of green products are generally high, and existing non-green inventory levels are depressing prices.

Possibly the most important factor, and one that is often ignored, slowing the growth of green residential offerings is that green debt and equity groups have not yet provided attractive investment products to the residential sector. The reason for this dearth of financing options is the same one that allows green development to be so compelling. Debt and equity groups are struggling with the increased risks of green as a “tech play.”

Some of the many technologies that can go into a green home include advanced air filtration and ventilation systems, high-efficiency HVAC systems, window glazings, on-site power such as solar systems, lighting and energy control systems, moisture and heat barriers, and factory manufactured wall panels. Achieving the desired outcome in terms of air quality, energy usage, or other savings from any single product can be a risk, especially when the home’s marketing message may rely on the product’s performance. Ensuring that all of these products and technologies work together seamlessly and effectively can be a significantly greater risk.

Most real estate lenders and investors are comfortable assessing the credit risk associated with a particular asset type, location, management team, and development plan. They are not, however, accustomed or necessarily equipped to assess the risk of conflicting or ineffective technologies. Some lenders and investors will avoid a green project precisely because they do not have the expertise to access these technology risks. Others are adding expertise or coming into the arena from other more technology related investment sectors.

The green development project often results in a credit risk more analogous to a stock investment than standard real estate. For a first-time green developer or builder, it could even have a credit risk similar to a venture capital investment in a start-up technology company. This added risk often results in the investor’s demand for a higher return.

A year or two ago, many people in the real estate community believed that green debt and equity offerings would come out at a discount to market rates and terms given the perceived higher quality of green products. Given the green technology risk, today’s reality in a turbulent and tight credit market is that green debt or equity products will be at par with or even at a premium to market.

A year or two ago, many people in the real estate community believed that green debt and equity offerings would come out at a discount to market rates and terms given the perceived higher quality of green products. Given the green technology risk, today’s reality in a turbulent and tight credit market is that green debt or equity products will be at par with or even at a premium to market.

Most importantly, the risk of a new technology goes away as it is proven. For those developers and builders with prior experience with green projects, evidence of the successful long-term operation of systems will be helpful in reducing the technology risk in the eyes of potential finance partners. This evidence can come from an analysis of warranty claims or specific home buyer surveys. For newly green developers and builders, a strategy of incremental steps would be appropriate.

Ultimately, green debt and equity offerings will be more attractive than conventional programs as consumer demand increases, green experience becomes more widespread, and the interplay among heating, cooling, energy, and other systems is more standardized. In the meantime, those developers and builders that include green technology risk assessment and mitigation strategies in their submission packages to potential debt and equity partners will stand out as the companies to fund.

Attorney Lawrence L. Ostema, a LEED Accredited Professional, heads the Green Initiatives Group at Horack Talley in Charlotte, N.C. Reach him at lostema@horacktalley.com.