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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2010

Go Green, Get Green

Environmentally friendly buildings may help property-owners survive

While there are mixed opinions about whether the economy is rebounding, there continue to be ominous projections about certain sectors, including commercial lending and the health of banks with significant commercial mortgage portfolios. For lenders and property-owners, however, there may be a light at the end of the tunnel, and it is green.

In fact, green-design and -construction standards are becoming the new norm. Green buildings can increase business opportunities for all players in the commercial real estate field, including mortgage brokers.

According to the U.S. Green Building Council (USGBC), commercial buildings account for almost half of all U.S. energy consumption and almost 40 percent of carbon-dioxide emissions -- exceeding even that of the transportation industry. Properly designed and constructed projects can help assure property-owners and their lenders of sustainable buildings that reduce energy consumption and achieve operating savings.

To help their clients, commercial mortgage brokers should understand green-building trends and standards. From the USGBC's Leadership in Energy and Environmental Design (LEED) certification program to financing through Property Assessed Clean Energy (P.A.C.E.) bonds, property-owners can succeed, even in today's market.

Green benefits

The USGBC developed and administers the green-building rating system known as LEED, which has become a worldwide standard used to addresses climate change.

Through LEED, the USGBC certifies new construction, core-and-shell construction, commercial interiors and existing buildings as being energy-efficient and sustainable. LEED criteria include minimum standards for site selection, water and energy efficiency, materials, and other building aspects.

Property-owners and their lenders have flexibility in selecting criteria that suits a building's needs -- and the owner's pocketbook. The owner can elect the level of certification it expects to achieve, from certified, silver, gold and platinum.

Further, commercial property-owners find that building green and achieving LEED certification not only has environmental benefits but also is good for business. According to a 2008 CoStar Group study, LEED-certified buildings have 4.1-percent-greater occupancy rates than nongreen buildings. Plus, green-building landlords can command higher rents -- on average, $11.33 per square foot more than nongreen buildings.

To be sure, building green can be more expensive than standard building costs. But property-owners can reduce or eliminate the excess costs of complying with green-building standards by value-engineering during the design phase.

Offsetting these costs are documented savings of employees' loss of time from work and performance issues because of indoor-air and other health concerns in nongreen buildings.

Further, having a certified-green building may also help property-owners with their exit strategy. This is because future buyers, especially institutional investors, are increasingly demanding that buildings they purchase be certified.

To that carrot, public policy adds a stick: This past October, President Barack Obama released an executive order requiring federal agencies to reduce greenhouse gases yearly and requiring federally owned and leased properties to comply with green-building standards.

Bills also have been introduced in the House and Senate this past year to reduce greenhouse-gas emissions. The House, for instance, passed House resolution No. 2454 -- the American Clean Energy and Security Act of 2009 -- this past June (see The House bill includes mandates for reducing energy use in buildings and developing national energy-efficiency codes. At press time, the Senate had not voted on the bill and was preparing its own, similar bill.

Keep up the P.A.C.E.

In a time when there is little new capital available from banks and other lenders, property-owners may wonder how they can achieve the benefits of green building. One answer may be through money a P.A.C.E. bond can provide.

These bonds are debt instruments that lend money to property-owners to retrofit existing buildings to make them more efficient or to add renewable-energy systems. A P.A.C.E. bond is a lien on the property that can be paid back over time -- typically 15 to 20 years -- through an annual assessment on an owner's property-tax bills.

At least 16 states have passed or introduced specific legislation to allow financing districts to provide this capital and to make the lien senior to other liens, including mortgage debt ( The requirements and qualifications vary by state and locality.

Although most loan documents will require lenders to consent to a voluntary assessment, the advantage to lenders in allowing a P.A.C.E.-bond lien to be superior to its mortgage lien is that the collateral becomes arguably more secure. With cost and operational savings, a green building likely will have a competitive advantage against a comparable nongreen building.

Further, neither the lender nor the borrower has to fund the green improvements out of their own pockets. In most cases, the cost of P.A.C.E.- bond debt can be passed through to tenants.

Mortgage brokers who know about P.A.C.E. bonds can help their clients learn more about these programs and facilitate this financing for specific properties. Further, in states and municipalities that have not yet passed such legislation, property-owners, lenders and mortgage brokers can advocate for its adoption.

•  •  •

Sustainable design and the greening of the economy will lift many sectors, not the least of which is commercial real estate and mortgage lending. 

Property-owners who think green will have an advantage in operating, leasing, refinancing and selling their buildings. Also, green retrofitting may be just the help brokers, lenders and borrowers need to deal with the distressed commercial real estate market. Getting certified through the LEED program and financing via P.A.C.E. bonds could carry them through.


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