Monday, October 8, 2007

Talking Points on the New Green Bonds

credit: photosfromonhigh/flickr

Are you on the lookout for how green commercial real estate will be financed in the future? Did you know that Congress has already made $2 billion in private tax exempt bonds available for green commercial real estate projects? What about how they are structured – possibly shaping the future green commercial real estate debt market?

Green Bonds are a first-of-its-kind pilot financing created by Section 701 of the American Jobs Creation Act of 2004. The Council of Development Finance Agencies summarized the basics of this newest trial debt initiative in an online ‘explainer’ memo, which outlined some of the qualifying criteria:

  • Size: Projects must include cleanup of a brownfield site and contain 1 million square feet of building space or at least 20 acres.
  • Mandatory LEED certification: 75 percent of the square footage of commercial buildings, which are part of the project must be registered for LEED certification.
  • Energy Use Reduction: Project applicants must demonstrate how the project contributes to the reduction of electric consumption compared to conventional construction as well as other energy measures.
  • Federal, State & Local Co-financing: State and local governments that nominate projects must contribute $5 million to a project. Tax abatements and in-kind contributions count toward the $5 million.

The limited scope of the financing is underscored by Section 701 specifically naming four projects, which should submit for financing within 120 days of the IRS publication of formal guidelines for the tax exemptions: Destiny USA in Syracuse, NY; the Atlantic Station in Atlanta, GA; the Belmar in Lakewood, CO; and the Louisiana Riverwalk in Shreveport.

Interesting for investment real estate is the conditioning of incentives based upon achieving mandatory LEED certification, requiring energy use reduction at the asset level as well as the focus on existing, large mixed-use projects in urban metro areas.

You should also take note of energy reduction goals being formulated as specified carbon footprint reductions. For example, super regional shopping center Destiny USA announced that they are closer to complying with the terms of their $229 million in green bonds by running one of their developments, the Carousel Center, on green power, stating that:

Destiny USA committed to reduce So2 [sulfur] output on the project by 1780 tons per year. This initiative alone satisfies 10% of that requirement, avoiding 185 tons of So2 per year, reducing visible pollution like haze.
In the green age, those commercial lenders who may be asked to co-finance the greening of of existing real estate will have to learn to do a much more complex credit assessment, incorporating direct LEED review as well as the borrower carbon reduction strategy into credit due diligence. The existence of tax exemption compliance issues plus possible additional environmental cleanup would leave too much potential liability on the shoulders of the lender if these issues were not properly examined when making the loan.

So are you up to speed now? We will keep bringing out stories about how these green bonds are shaping up in future posts.


Steve said...

That's interesting news. Tax exempt bonds. While reading your blog, I was raising a few question of practical nature:

Do you know by any chance what the net impact of those bonds on the yield is? I mean in order to be certified I had to invest upfront in upgrades and green technology. In return, I would qualify for those tax exempt bonds. How much cheaper would those bonds be for an investor as supposed to a conventional long term financing (the CMBS market seems to have dried up considerably)? Which in return would determine the potential investment (assuming an average durability of 20 years for those additional green technology), right?

Do you know whether California has introduced a similar program (cause you only mention a few other states and I'm not quite sure if that program is in effect nationwide)? Would make a difference, particularly after Mr. Schwarzenegger has unilaterally pledged to slash greenhouse gases by 20% over the next decade or so.

Could I simply talk to my house bank about this program or do I have to turn to a special provider? Lisa, does your bank provide such bonds? A one stop shop solution were a real service for interested investors...

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