Two regulatory changes coming

No time to improve upon two excellent summations of upcoming rule changes regarding LEED and lead.

In the first, Green Building Law Blog summarizes the substantial changes and reinvigorated focus on carbon footprint in LEED 2009 at: LEED 2009–A Tweak or An Overhaul? : Green Building Law Blog. One excerpt caught my eye:

The reference standard allowed up to 2.2 gpm for these faucets so a change to 0.5 gpm was significant. Trouble is the International Plumbing Code mandates 0.5 gpm for lavatory faucets in public rest rooms anyway so these savings were illusionary for many LEED buildings. With the new rating system, this [water efficiency] loop hole is closed – the International Plumbing Code is now a reference standard. In addition, there is now a 20% water reduction prerequisite. The strategies we have been using to get 3 points will now just barely allow us to meet the prerequisite.

In the second, Jeff Echols tweeted about changes to EPA Regulations on lead paint. The immediate change is a new, more comprehensive brochure entitled “Renovate Right: Important Lead Hazard Information for Families, Child Care Providers, and Schools“. By 2010, additional training and certification will be required for all lead abatement projects, and several techniques will no longer be permitted. Curtailing the aerosolization of lead particles by requiring HEPA filters with sanders is one of the techniques affected. Additional information from Remodeling Magazine or from law firm Holland and Knight.

Green Underwriting Standards

Despite actively looking for these over the summer, I somehow missed the release of the National Green Building Investment Underwriting Standards.

The product of over 18 months’ work, and developed using ANSI-standards, the heavy lifting was done by (among others) Dan Winters at Evolution Partners, Mario Silvestri at Wachovia, and Steve Hoffman of Hoffman & Associates. Their work was backed by a blue ribbon collection of banks (if there is such a thing), NGOs, institutional investors, and governments. The project’s goal was to provide a financial context for various green and sustainable building initiatives. Designed to recognize increasing utility costs, tenant preference, and potential regulatory pitfalls, the Capital Markets Partnership “Green Score” should be used as an overlay within the existing underwriting framework.

More information is available in the actual standards and via Dan’s summary of the project, which appears in the 3Q 2008 Korpacz Real Estate Investor Report.

With college football taking a brief hiatus, I’ll try and read up on the standards and provide some additional feedback.

NAHMA LIHTC White Paper

I discussed the National Affordable Housing Management Association’s 2 page position paper on LIHTC stabilization yesterday. In general, I felt it accurately described the challenges (tax credits have no value, knowledge base and infrastructure at risk) but that it did not necessarily prescribe what is required for a full cure. Due to the collapse of demand, the only way to stimulate additional demand is to increase CRA requirements and perhaps accept credits as some type of collateral for TARP. Like shredding old bills, removing these credits from active trading might help reflate the market.

Fears of a growing LIHTC meltdown were echoed in an internal company call recently, in which it was disclosed LIHTC originations for 2009 are expected to be <15% of 2006. This is a pretty gutting forecast and I think it is fair to ask how LIHTC businesses and investments should be valued through 2012.

Regardless, please read NAHMA’s thoughts on stabilizing LIHTC and comment below.

EERE Webcast December 17th on State Green Incentives

The Department of Energy’s Technical Assistance Program will present “State Policies to Encourage Green Building Principles” via webinar on December 17th from 3-4.15pm EST.

Presenters for this series are:

Brian Lips, a policy analyst for the North Carolina Solar Center at N.C. State University and conductor of research related to the Database of State Incentives for Renewables & Efficiency (DSIRE). He will give an overview of state green government policies nationwide.

Chuck Sathrum, program manager at the North Carolina State Energy Office will discuss the N.C. Utility Savings Initiative, a comprehensive program to reduce utility expenditures and resource use in public buildings.

Angie Fyfe: Fyfe, manager of the Greening Government Program at the Colorado Governor’s Energy Office, who will discuss how executive orders encourage state employees to reduce energy consumption.

Background material can be found in the Energy Office Project Briefs.

Past webinars covered energy efficiency in data centers, solar PV financing, energy efficiency in improving air quality, and several state-level initiatives.

Whither LIHTC Part 2

The National Affordable Housing Management Association (NAHMA) issued a 2-page ‘white paper’ this week, “Stabilizing and Restarting the Residential Tax Credit Marketplace”, which was sent to various Congressional chairmen and ranking members.

I can’t find the document on their website, which seems an odd restriction for building legislative report.

The report identifies several challenges to the Low Income Housing Tax Credit program (LIHTC) that are familiar to regular readers. These dangers include:

1. Inability to close deals in the pipeline.

2. The reduction in credit value (from mid-80 cents per dollar to low 70 cents per dollar) requires increased equity contribution from the developer.

3. A small market made 40% smaller by the absence of Fannie and Freddie.

4. Banks and other tax credit holding institutions have no offsetting gains and experience a 10% reduction in value [Note: the tax credit period runs 10 years per project] each year the credits go unused.

5. No investors want or need tax credits, harming rural areas in particular.

6. State agencies rely on new projects and fees to fund operations and in some cases, provide general funding opportunities.

7. A sustained drought [Note: unspecified but MFG thinks 2+ years] will lead to a loss of expertise, investor interest, and professional infrastructure.

Most importantly, there is a risk that very little affordable housing will be built before 2012. If you assume that the financial institutions that drove the tax credit market for 10+ years will not show income before 2010, their current losses should carry forward well into the first part of the next decade. When combined with the long lead time to design and apply for tax credits, the lack of new product will be acute.

Unfortunately, most of the solutions proposed by NAHMA address supply rather than demand. The abject lack of demand is the crux of the problem and why lenders, syndicators, and developers are being crushed.

1. Provide either government guarantees or backstopping to unfreeze the current market in Tax Credits. As noted above, tax credits’ values depreciate over time. With the current lack of earnings in most sectors of the economy, those credits that are trading are priced at deep discounts. With the imbalance in supply and demand, there needs to be some modification to the use of credits that will preserve an orderly market.

[Note: There seem to be 2 goals here. One is a Federal backstop that would undermine existing guaranteed funds that are enhanced in some way. Secondly, NAHMA does not offer a solution to the 'imbalance'.]

2. Use existing enacted Federal Housing Administration lending programs to provide low interest “bridge” financing to permit new development to continue in markets with significant needs for more workforce and rural housing. FHA insured financing can be used where the loans are structured to permit new and rehabilitated developments and provide an option to use Tax Credits to take out the loan within one or two five-year terms. Initial loans could be structured as five-year financing with one renewal and no lock-ins that would permit earlier conversion if market conditions permit. These loans should be underwritten and administered through the State Tax Credit Agencies. The bridge financing would be designed to allow the properties to move to full Tax Credit status easily. This could occur either during the loan period or at the end of the loan period. The implementation of these bridge loans and subsequent Tax Credit compliance should begin either at the point of conversion from the bridge loan or year six, whichever occurs first, with a ten-year compliance period. Regulatory and compliance policies and procedures should be revised to allow investors assurance on tax credit compliance as the bridge loan converts.

[Note: Many deals have blown up because either the syndicator could not take or lay off the credits or, in some cases, the bank has refused to close. The problem is that most of the deals are underwritten aggressively so that there's not much room for FHA to make a credit-worthy decision. Now if we considered the FHA to be more of a 'soft second' lender, that would not be a problem.]

3. Address current tax and Securities and Exchange Commission regulatory policy to stabilize the book values, pricing and price volatility of Tax Credits. With the bulk of purchasers facing uncertainty in how purchases of new Tax Credits would be valued, the market is illiquid, and purchasers are risk averse. Greater certainty in subsequent valuation is needed.

[Note: I don't understand this proposal at all. Tax credits only have value to an investor to the extent they offset gains elsewhere. They have a defined benefit period and cannot be carried forward. Under Mark to Market principles, unused credits (for current or future years) should be valued at their current market price. The problem is there's no demand for the tax credits, not that there is uncertainty about valuation.]

4. Review current tax and regulatory policy with an eye to improve yield on Tax Credits. Policies should be developed that will allow the Federal Housing Finance Administration to place all “written down” and “written off” credits held by the GSE’s and other institutions in conservatorship with the Treasury, and allow the Treasury to hold the credits to maturity. This will prevent a “fire sale” in credits from undercutting the market. Methods to allow viable but unprofitable banks to place credits with the Treasury should be explored.

[Note: This is a good suggestion and should be enacted in concert with an increase in CRA requirements; eliminating the tax credits held by Fannie and Freddie and other institutions that accepted TARP funding would dramatically increase demand for tax credits to meet CRA regulations. If there is no demand for a product at any price, you must create demand by allowing it to fulfill other purposes. The traditional driver was CRA, but with so many CRA-subject companies combining or disappearing, that demand has slackened. Increasing CRA requirements for the survivors or eliminating old tax credits, would be one way to stimulate demand for fresh credits. Of course, what is not clear is what to do about the investments made in earlier tax credit rounds and whether that money is gone or must be returned by the developer or syndicator.]

5. A primary goal is to create new markets for Low Income Housing Tax Credits supporting affordable workforce housing, which continues to be in short supply in all major markets. Expanding the market in Tax Credits will permit expanded production both in the new construction and rehabilitation markets. Modifying current regulations to permit expansion in the market for Tax Credits is absolutely essential. 

[Note: Providing new and renovated affordable housing is the most important policy goal. It is not clear that the tax credit program can meet the demands for this product in the next 18-60 months. Ultimately what advocates of affordable housing want is more and better housing regardless of the funding source.]

Renewing focus on the low hanging fruit

Green Building Law wrote a good post promoting pink over green (i.e. insulation over solar photovoltaic systems). Similarly, CSM ran an opinion piece entitled “Green homes: solar vs. energy efficiency” that came to a similar conclusion. GBL (and I) agree that CSM didn’t seem to try very hard in their search for solutions, writing that “Policymakers say energy efficiency doesn’t have out-of-the-box solutions that are easy to mandate or incentivize.”

Regular readers may recall that this site discussed weatherstripping just a few weeks ago as part of an ongoing discussion of complexity-free solutions.

The current incentive structure, while it has the added benefit of promoting R&D and other desirable benefits, typically sells short more reliable and well-known solutions that could be installed by soon to be displaced skilled but non-professional tradespeople. Single family home energy audits cost several hundred dollars ($400-700 seems to be the going rate in the DC area) but per unit costs would be significantly less and could actually be performed by on-site service teams. So long as there is a difference between interior and exterior temperatures, using an infra-red imager will allow you to see cold spots and intrusions without a blower door. I can do it and I’m about the most unskilled person allowed on sites.

My firm has investments in about 230,000 units nationwide in a little over 2,100 apartment communities. Because most of our projects participate in the LIHTC program, we are subject to the QAP process, in which states mandate certain minimums to receive tax credits for affordable housing. If these requirements (occasionally incentives) could be included in market-rate housing, the impact would be both immediate and widespread. To put that 230,000 unit number into perspective, there are 5 states with fewer than 260,000 households (2000 Census).

The way to improve efficiency is to educate owners and lenders, and use effective policy tools to promote the best comprise of timing, cost, and achievement. Eventually, home inspections will automatically include an energy audit. It is up to policy makers and lenders to speed that date.

Three points toward a trend

Galley Eco Capital fleshes out a recent NYT article on pension fund investments in sustainable buildings. Noting that the article said little about groups such as CERES or Business for Social Responsibility, GEC recommends that general partners have some information about their portfolio’s sustainability at the ready.

Without providing a timeframe, GEC says simply ’soon’. Given the hellacious market conditions, most GPs or LPs are probably just trying to keep above water (or no more than 3″ below the surface). Certainly I’ve become much more skeptical of GP claims about pending payments and improved performance. Until we finish triaging portfolios, I’m not sure we will see an increase in portfolio reporting requirements. Once that process is complete, probably by 2Q 2009, we’ll need to start working on financial stabilization or exit strategies for properties. At that point, I think there is a tremendous role for sustainable analysis to play.

In that vein, here are a couple of articles inspired by recent postings at Globest.com. Globe Street is terrible about their paywall, so I’ll link directly to the source material where possible. CalPERs announced on November 30th that its real estate partners reduced energy consumption in 2007 by 13%, partway toward their goal of a 20% reduction in energy use by 2009. The primary vehicle is the Hines Green Development fund, which currently has $725mm for promotion of sustainable real estate holdings. The methods identified by CalPERs are standard steps any responsible owner should be taking such as low-flow and sensor-operated fixtures, recycling programs, and preemptive, onsite water treatment.

The more important (and actually reported) article discusses a new CA law mandating utilities to maintain an Energy Star Portfolio Management Database for all non-residential properties in CA. Contained in Assembly Bill 1103:
1) Requires electric utilities, beginning January 1, 2009 and upon the written request of the owner or operator of a nonresidential building, to provide the owner or operator monthly energy consumption data for the building in a format that is compatible for uploading to the US Environmental Protection Agency’s (EPA) Energy Star Portfolio Manager.
2) Requires electric utilities, beginning January 1, 2009 and upon the written authorization of a nonresidential building owner or operator, to upload monthly energy consumption data for the building to ESPM.
3) Requires an owner or operator of a nonresidential building, on and after January 1, 2010, to disclose to a prospective buyer, lessee, or lender the ESPM benchmarking data and scores for the building.

Writes Globest’s Brian K. Miller:

One year from January, anyone looking to buy, finance or lease an entire building will be entitled to obtain the building’s Energy Star Portfolio Manager benchmarking data and ratings. The Energy Star program rates buildings on a scale from 1 to 100 against other buildings within its class. Buildings within the top quartile will be eligible to be recognized as an EPA Energy Star Building and can use the “Energy Star Label” to communicate its energy efficiency to tenants, lenders, and other stakeholders.

Obviously buyers and owners do this kind of comparison already, but with the addition of the Energy Star scoring, all parties will be in a position to both analyze and act upon energy efficiency opportunities rather than passively accept the consumption rates.

My East Coast bias won’t allow me to say that most initiatives begin in California, but by sheer market size, these requirements or requests for information are likely to start moving east in the next 18-36 months.