Financial Sustainability (series)

Greener Buildings has a good interview with Leanne Tobias at Malachite about the financing of sustainable projects. Tobias shares some useful information about the state of the commercial real estate market (CRE) in the fall/winter of 2007 and highlights some useful, if known, ways to improve energy efficiency. The nut graf, however is this section:

GreenBiz: OK. So after I’ve checked for incentives and when I go to my bank, what am I going to have to have on hand to show them?

Leanne Tobias: What you are going to probably have to have on hand is, first of all, a fairly detailed plan for what improvements you hope to undertake, the cost of the improvements, an energy audit which shows your existing energy use and your likely decrease in energy use after the installation of the improvements.

And then, most important, on the financial side, the lender is going to want to see that the cash flow from the building or some other form of cash flow is sufficient to repay the loan. So that part of it is analogous to what is asked for, for any commercial refinancing.

But in regard to some of the newer technologies that a developer might want to utilize, such as solar technologies or geothermal technologies, I think that the banking institution should be made comfortable with the improvements, the ease of installation and the likely effectiveness of the improvements after installation.

This is the challenge: no one really knows how much these initiatives can save. Municipalities and states are increasingly favoring projects with some sustainable effort, whether through faster plan review, extra points in the Qualified Application Process (QAP) for tax credit housing, or by mandating some type of LEED certification for buildings over ‘X’ square feet. The lenders I know still haven’t figured out exactly how to underwrite the benefits of operational savings, use of sustainable materials, or improved energy efficiency. To put it another way, Energy Star appliances cost more. On a 30 year, fixed rate mortgage, you have to offset that increased cost with savings on your utility bills.

Because these benefits are hard to quantify, there’s plenty of greenwashing in the financial industry. I’m looking at you Bank of America, and you, Enterprise. Which isn’t to disparage the efforts of these lending institutions, merely to point out that much of their contributions come in the form of investments previously committed or in the form of grants, which don’t directly help projects achieve financial sustainability. In the financial world, we know how to underwrite rents, we don’t know how to underwrite low-e windows.

More info to come as we explore the financing of sustainable projects.