1. Commercial Real Estate Finance:
Going Green
Dan Kastilahn
Urban Habitat Chicago
March 5, 2008
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2. Topics
 Traditional real estate finance in the capital markets
– Portfolio lenders
– Securitization – (CMBS)
– Underwriting 101
 Why green commercial buildings?
– Corporate Sustainability Initiatives
– Benefits of Energy Savings
– Rents & Occupancy
– Developers/Owners/Property Managers
 How does “green” affect financing?
– Lenders & Property Insurers
 Investing in green commercial real estate
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3. Real Estate Finance
 Portfolio lenders include:
– Commercial Banks: regional & national
– Life Insurance Companies
– Pension Funds
 Balance Sheet loans for long-term holds
 Conservative underwriting to mitigate risk
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4. Real Estate Finance
 Securitization
– Commercial Mortgage-Backed Securities (CMBS)
Industry
 2007 Issuance: $230 billion of pooled commercial
property loans
 Industry has seen a recent drop-off in issuance, but is
anticipated to self-correct; will likely stabilize closer to
$100 billion in annual issuance
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5. Real Estate Finance
 Securitization
– Benefits:
 Risk is pooled, tranched and sold off as bonds of
varying quality; investors pick and choose their level of
risk
 Frees up cash in the capital markets to make more
loans on commercial property
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6. Real Estate Finance
 Underwriting 101:
– Revenues
 Premium rents for premium properties
– Class A vs. B/C; NNN vs. Gross leases
– Expenses
 Fixed
– Taxes, insurance
 Variable
– Utilities, Common Area Maintenance (CAM)
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7. Real Estate Finance
 Underwriting 101:
– Capital Items
 Capital expenditures
– Investments into building infrastructure (roof, systems,
HVAC)
 TI/LCs
– Tenant Improvements (new tenant vs. renewal)
– Leasing costs (broker fees; new leases vs. renewals)
Revenues - Expenses - Capital Items = Cash Flow!
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8. Why Green Commercial Buildings?
 Commercial Buildings:
– Account for more than 71% of the nation’s
electricity consumption
 Account for 40% of total energy use
 This number increases to 48% when the energy
required to fabricate the building materials is taken into
account
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9. Why Green Commercial Buildings?
 Commercial Buildings:
– Consume 12% of the United State’s water
– Generate 30% of all greenhouse gas (GHG)
emissions
– Up to 30% of new and remodeled buildings
experience acute indoor air quality (IAQ)
problems
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10. Why Green Commercial Buildings?
 Approximately 60 billion sf of existing commercial
space
 2006 study by USGBC found that owners can save
$.90/sf, on average, in energy and other costs by
retrofitting older buildings
 80% of corporations now consider “sustainability” a
near-term business issue and are willing to pay a
premium for environmentally-friendly space
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11. Why Green Commercial Buildings?
 Study conducted by Economist Intelligence
Unit (EIU) showed that:
– More than half of all companies surveyed (of
1,250 total) listed energy-efficiency as one of their
top priorities
– Buildings are responsible for almost 75% of a
company’s total GHG emissions
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12. Why Green Commercial Buildings?
 Study conducted by Economist Intelligence Unit
(EIU) showed that:
– There is an implicit connection between share price &
commitment to sustainability: “…companies that
recorded 50% growth in share price over the past 3
years prioritized social and environmental goals and
were more profitable on sustainability than those
companies whose share price declined by more than
10% over that period.”
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13. Why Green Commercial Buildings?
 Benefits of energy savings
– Green buildings can reduce energy costs by up to 30%
according to the US Dept. of Energy
– A McGraw-Hill study found:
 An average expected decrease in operating costs of 8% - 9%
across the industry
 A predicted average increase in property value of
approximately 7.5%
 Average expected increase in Return on Investment (ROI) of
6.5%
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14. Why Green Commercial Buildings?
 Rents & Occupancy
– Study done by UBS concluded green buildings
are expected to achieve:
 3% premium on rents
 3.5% increase in occupancy
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15. Why Green Commercial Buildings?
 Rents & Occupancy
$45
$40 $5
$10
$35
$30
$25 Operating Costs
Rents
$20 $36
$30
$15
$10
$5
$0
Traditional Property Energy-Efficient Property
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16. Why Green Commercial Buildings?
 Tenant attraction & retention
– International tenant rep firm, Studley, launched a
Sustainable Real Estate Practice group in response to
tenant demand
 Olivia Millar, a Studley LEED AP and head of the new practice:
“A couple of years ago, it was folks who had a ‘green’
core mission. Now, you’re seeing a lot of people who
want to go green because they’re concerned about
recruiting top talent, providing a sustainable work
environment and increasing productivity.”
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17. Why Green Commercial Buildings?
 Developers/Owners/Property Managers
– ProLogis, the world’s largest developer of
distribution/warehouse properties, has committed
to LEED certification for all new US projects
 Why? => Building to certification standards can extend
the life of its buildings and broaden the sustainability
agendas of its tenants
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18. Why Green Commercial Buildings?
 Developers/Owners/Property Managers
 Jack Rizzo, MD of global construction: “We see a
growing preference among customers to lease
space in buildings that have been developed with
environmental efficiency in mind.”
 ProLogis became the 1st real estate company in the
world to join the Chicago Climate Exchange (CCX)
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19. Why Green Commercial Buildings?
 Developers/Owners/Property Managers
– Property owner Steve Ludington’s “as-is” 50,000
sf flex building on West Kinzie St., just minutes
from downtown Chicago
 Monthly heating bill (w/o tenants): $7,000
 Translates into $.14/sf/month
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20. Why Green Commercial Buildings?
 Developers/Owners/Property Managers
– Mr. Luddington’s 26,000 sf facility, also in Chicago, with a
geothermal heating system installed:
 Monthly heating bill (in winter, fully leased): $650
– = $.03/sf/month
 Monthly bill before geothermal system installed: $3,000
– = $.12/sf/month
“The tenants get a bill for hundred bucks or
something…it’s almost a joke. They can’t believe it”
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21. Why Green Commercial Buildings?
 Other incentives:
– Tax credits for certified buildings
– Lending perks from financial institutions
– Expedited permitting from state and local
governments
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22. How does “green” affect financing?
 Lenders
– Banks have been quick to embrace the green
movement (for their own space), but slow to
adjust lending policies or to create a financial
model that quantifies benefits like:
 Improved worker productivity and health
 Recruiting advantages
 Government incentives
 Energy Savings
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23. How does “green” affect financing?
 Lenders
– “Sustainability” is not a property type
– 90% of the lending risks for green property are just
fundamental real estate risks:
 Location, location, location
 Market dynamics
– Comparable properties & submarket occupancy
– The greater lending environment: cap rates & interest rates
 Financial strength of borrower
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24. How does “green” affect financing?
 Lenders: Progress is being made
– Wells Fargo has surpassed $1 billion in loans for LEED
certified buildings
– Bank of America announced a $20 billion environmental
initiative that includes green lending practices, but details
are hard to come by
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25. How does “green” affect financing?
 Lenders: Progress is being made
– New Resource Bank (San Francisco) offers customers
green commercial and residential loans.
 Financial programs offer more money at lower costs to the
borrower through lower interest rates and higher loan-to-value
(LTV) ratios on certified properties.
 The bank currently has more than $100 million in assets
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26. How does “green” affect financing?
 Insurers
– Insurance companies support green construction
as there is generally less risk in “green” properties
with:
 State-of-the-art technology
 Higher appraised values
 Provide a healthier work environment
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27. Investing in green real estate
 Green Building Finance Consortium
– A research project launched to create a roadmap for
investors and lenders to value sustainable property
– Founder Scott Muldavin: “…even 18 months ago, the
whole [green building] field was dominated by the
public sector and the private sector had very limited
involvement. None of the analyses of cost-benefit
looked at it from the perspective of how people who
have money in real estate think about real estate.”
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28. Investing in green real estate
 Green Building Finance Consortium
– Rating systems (i.e. LEED) have marketplace
value, but lenders and investors need to look
beyond the rating system to property’s individual
sustainable features in order to assign value from
a financial perspective
Not all LEED buildings are created equal!
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29. Investing in green real estate
 Investor interest, evidenced by the growing
number of “green funds”, has been fueled by
increases in:
 Government regulation
 Tenant interest
 Energy costs
 Pressure on corporations by shareholders to address
sustainability
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30. Urban Habitat Chicago
www.urbanhabitatchicago.org
 Questions?
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31. Urban Habitat Chicago
www.urbanhabitatchicago.org
Sources and Articles:
1. Burr, Andrew C. “In Green Realty He Trusts” CoStar Realty Information, (1/23/08).
2. Burr, Andrew C. “CoStar Green Report: The Big Skodowski” CoStar Realty Information,
(1/30/08).
3. Burr, Andrew C. “CoStar Green Report: CBRE Says Industry Slow to Accept, Adopt Green
Practices” CoStar Realty Information, (9/12/07).
4. Burr, Andrew C. “CoStar Talks Finance with Green Building Finance Consortium’s Scott
Muldavin” CoStar Realty Information, (9/5/07).
5. Burr, Andrew C. “Stock Prices Linked With Sustainability, Survey Finds” CoStar Realty
Information, (2/27/08).
6. Burr, Andrew C. “For Studley and ProLogis, Opposites Attract Green” CoStar Realty
Information, (9/12/07).
7. Cortese, Amy “The Greening of Existing Buildings – They Don’t Have to Be New” The New
York Times, (1/26/08)
8. Drummer, Randyl. “REITS Buying Into ‘Green Premium’”, CoStar Realty Information,
(10/17/07).
9. Pardy, Sasha. “Retail Industry Will “Walk the Talk” of Green Building in 2008”, CoStar
Realty Information, (12/5/07).
10. “Green Downtown Office Markets: A Future Reality” CB Richard Ellis, Summer 2007
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