Greenbuild 2012 - Finance Session
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Transcript of Greenbuild 2012 - Finance Session
Financing (Green) Buildings
Chris Pyke, USGBC James Finlay, Wells Fargo
Chrissa Pagitsas, Fannie Mae Nils Kok, UC Berkeley & GRESB
Why are owners building/retrofitting green buildings?
! Increased net income & sales price
! Increased demand from tenants and institutional investors
! More and stricter environmental regulation
! Risk-mitigation strategies Source: Eichholtz, Kok and Quigley (2012)
What is EEF? IT DEPENDS!
! Generally: ! Energy Efficiency Financing (EEF) is capital ($$)
used to construct or retrofit properties to use less energy than conventional buildings
! There is no one definition of EEF
EEF can be… ! A lower interest rate ! The provision of more debt than allowable under
conventional underwriting ! A different appraisal or property condition process ! A certification or label disclosed to investors
Who can use EE Financing? 1. Single Family Residential: 1-4
units. Generally owner-occupied. Value <$1M.
2. Small Commercial & Industrial: Small owner-user. Value < $2M.
3. Medium Comm. & Industrial: Larger owner-user/part owner-user, local investor. Value $2M to $10M.
4. Large Commercial & Industrial: Multi-tenant leased investment Value >$10M.
5. Multifamily: 5+ units, affordable &market rate, rental apartments, condos & coops. Value $1MM to $200MM+.
6. Special purpose: Gas station, fast food, hotel/motel, theater, data centers. Value $1MM to $20MM+.
7. MUSH: Municipal, University, Schools, Hospitals. Value $1MM to $300MM+.
What is the financing process?
Final permuta-on of financing tool
Available sources of capital to the owner
Needs capital to acquire a property; refinance an exis-ng
property; or, make improvements to an exis-ng property
Owner
Lender provides Debt
Lender sells MBS
Lender holds Loan
Investor provides Equity
Investor holds Shares
Owner uses own Cash
How do our organizations fit in?
Final permuta-on of financing tool
Available sources of capital to the owner
Needs capital to acquire a property; refinance an exis-ng
property; or, make improvements to an exis-ng property
Owner
Lender provides Debt
Lender sells MBS
Lender holds Loan
Investor provides Equity
Investor holds Shares
Owner uses own Cash
Wells Fargo & Fannie Mae
GRESB
Connecting the EEF pieces ! Wells Fargo: How appraisals impact EEF ! Fannie Mae: Example of a Green Loan and Green
MBS combination ! GRESB: What investors want to see regarding
sustainability of portfolios
Wells Fargo Environmental Loans & Investments
Money flows to investments
when there is a clear and
measurable risk adjusted rate of
return.
Define the Investment Risk High Risk
Corp. Junk Bonds
OK
Low Risk U.S.
Treasury
OK
Unknown Risk
??? Not OK
Environmental Loans & Investments Financing is not the problem, poorly defined risk is the problem Compelling motivation by owners is lacking, there is always owner risk, “skin in the game” Rewards for investing in upgrades are: 1. Hard, quantifiable – Simple cost savings 2. Soft Qualitative – Risk, quality, reputation; health + productivity 3. Reversion – Added value at sale EE risks/benefits are complex, tools and experts lacking, specific hurdles vary by tribe
Environmental Loans & Investments Risk rungs during the development cycle 1. Idea in the shower 2. Ink on paper - - - - - - - - - - Appraisal Values 3. Entitlements - - - - - - - - - - - - As-Is Value 4. Vertical construction - - - - - - - At Completion Value 5. Stabilized occupancy 6. Stabilized history (3 years) - - - Stabilized Value
Construction lending/investment is “special”
Owner
C level Exec
Opera/ons Staff
Occupants
RE agent
Appraiser Banker Loan Underwriter
Chief Credit Officer Government Examiner
§ As Proposed value is about the future § As-Is value is about now and past performance
The Mortgage/Investment Chain - all of tribe must agree
Appraisal Management Firm
Appraisal Reviewer
• Have due diligence documentation package ready
• Know members of your tribe
• Value beyond cost savings: risk, reputation, value at sale
• High Performance building management clarifies risk, creates data, adds value
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Conclusions
Fannie Mae Mission and Portfolio ! Fannie Mae provides liquidity, stability and affordability
to the secondary mortgage market ! Multifamily Guaranty Book of $190B ! 3.8M rental units
! Includes Market Rate, Affordable Subsidized and Affordable by Area Median Income (AMI) properties
! 20% of U.S. Mortgage Debt Outstanding for Multifamily*
*As reported by Federal Reserve as of Q2 2010
What is “Green Financing” to Fannie Mae?
! Green Financing is capital (loan proceeds) that may result in: ! Reduction of operating costs for owner ! Reduction of utility costs for tenant ! Reduction of loan risk for lender ! Improvement of property quality for everyone ! Preservation of affordable / work force housing for Americans
! Through the investment in Energy and Water Efficiency improvements, at the time of: ! Refinance of an existing Fannie Mae loan ! Acquisition of a property with a new Fannie Mae Loan that is
subsequently sold to Fannie Mae ! addition of Supplemental loan to an existing Fannie Mae loan.
Cycle of Financing Owner • Acquires or Refinances
Lender • Underwrites loan & orders reports
• Provides primary financing
Fannie Mae • Provides secondary financing • Securi-zes Loan into MBS
Investor • Buys MBS based on informa-on disclosed
Servicer • Manages Asset for life of loan
Confiden-al -‐ Internal Distribu-on
Green Refinance Plus Terms ! Affordable Subsidized Multifamily Rental Buildings ! Acquisition/Rehab and Refinance deals ! 4-5% additional loan proceeds compared to
Fannie Mae’s regular DUS Affordable Preservation execution
! Lower DSCR (1.15x) ! Higher LTV (85%)
Connecting the Green Financing Components Green MBS: Fannie Mae discloses a green financing solu-on or a green building cer-fica-on enabling MBS investors to deploy their investment dollars to support energy and water retrofi[ng.
Green Financing
Green Building
Cer-fica-on
Green Loan: Fannie Mae provides secondary market liquidity allowing the financing of energy and water efficiency improvements or to support proper-es with a green building cer-fica-on.
Refinance
Acquisi-on
Supplemental
Green Property: Owner improves property or obtains/maintains green building cer-fica-on.
Energy & Water Efficiency Improvements
Green building cer-fica-on by third-‐party (e.g. LEED, Green
Communi-es)
Examples: Green MBS
! Has US Green Building Council’s LEED certification Platinum level ! Building design is 35% more energy-efficient than code requires.
! Financed with Green Refinance Plus ! Financing provided for property improvements including replacing old inefficient gas-fired furnaces and installing energy efficient lighting
Green Financing Product Enhancement
Green Building Cer-fica-on
What is GRESB? GRESB’s added value
¡ Measure sustainability performance at portfolio level ¡ One approach and one methodology for listed property companies and
privately managed funds ¡ Aligned with international reporting frameworks (Global Reporting Initiative,
EPRA, INREV) ¡ Used as a due diligence and engagement tool by institutional investors
“GRESB’s mission is to enhance shareholder value by evaluating and
improving sustainability practices in the global real estate sector”
22
GRESB data used by 38 (global) investors…
23
…and GRESB is supported by All major industry associations across the globe
Supporting members • Association of Institutional property investors in the
Netherlands (IVBN) • Association of Foreign Investors in Real Estate (AFIRE) • Australian Council of Super Investors (ACSI) • British Property Federation (BPF) • Danish Property Federation
• Property Council of Australia (PCA) • Real Property Association of Canada (REALpac) • Responsible Investment Association Australasia (RIAA) • United Nations Principles for Responsible Investment (UNPRI) • Association for Real Estate Securitization (ARES)
24
About the GRESB Survey • The basis for the benchmark
• Online survey, 35 questions • Explicit link to Global Reporting Initiative (GRI) and EPRA/INREV
Best Practices Recommendations
• Methodology of GRESB scoring • 8 aspects, focus on environmental performance • Management & Policy vs. Implementation & Measurement • New Development section for pure-play development funds
25
GRESB Methodology & Scoring The scoring of individual questions in the GRESB
Survey is based on the relevance of the topic to investors, with a strong focus on Implementation & Measurement. A selection of questions is scored based on a respondent’s primary property type. As such, GRESB takes into account the unique characteristics of a property type not only in benchmarking, but also in the scoring of Survey questions.
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Measuring sustainability performance GRESB Four Quadrant Model
How due diligence and engagement works
Financing (Green) Buildings
Chris Pyke, USGBC James Finlay, Wells Fargo
Chrissa Pagitsas, Fannie Mae Nils Kok, UC Berkeley & GRESB