"Green" buildings can attract international investors and realize early returns if they can demonstrate long-term savings and other benefits, proponents in the financial sector say.

In these early days of green, or environmentally friendly, construction, it's been widely understood that the long-term pain of higher upfront costs generally pays off in the long term. Features such as energy efficiency and high air quality help reduce operating costs and keep occupants healthy and happy.

However, a recent panel on green real estate, hosted by the University of Toronto's centre for environment as part of a series on environmental finance, addressed ways developers might bring future savings forward in order to capitalize in the here-and-now.

Jamie James, a partner with Windmill Development Group, said a disconnect exists between those who pay the upfront costs and those who ultimately benefit from savings down the road.

Image courtesy of Windmill Development Group
Windmill Development Group, which specializes in green projects, is at the forefront of the sector in Canada with the Dockside Green development in Victoria.

"The developer has no financial interest in the building after the last unit is sold," he said. "So, how do you align that extra cost so you can get a better-performing building?" Windmill, which specializes in green projects, worked with financiers in 2004 to establish a mechanism for advanced incremental funding for its mixed-use Acqua+Vento project in The Bridges development in Calgary.

The same year, Windmill teamed up with Vancity credit union for its Dockside Green mixed-use development in Victoria.

Windmill has also worked as a consultant to Tridel, the Toronto developer that established a similar mechanism with the Toronto Atmospheric Fund for multiple condominium projects.

James said advanced incremental funding brings future savings forward so these can be capitalized upon, in order to persuade developers to commit more dollars early on.

Advanced incremental funding involves a financial partner issuing a loan to the property owner. The owner is assessed on a monthly basis in order to repay the loan within a predetermined period - in Tridel's case seven years - and this is passed on to tenants or unit- holders through a fixed cost on common element charges. After payments are completed, benefits from energy efficiency accrue directly to owners and occupants.

"It's a three-step process," James said. "The developer specifies the energy-efficient equipment that needs to go into the building, and that extra cost is put on the loan."

However, the loan advance only occurs after the building is built and steps are taken to validate a building's modelled energy performance.

"If you project a savings of 31/2 to four cents a sq. ft. per month that would have otherwise been assessed to each unit on the utility charges for gas and electricity, then the cost of the loan will be about half of the scale of the projected savings," James said, adding that loans are modelled on energy prices at an initial, fixed point in time.

Another solution put forward was the notion of an environmentally based real estate income trust.

Innovest Strategic Value Advisors CEO Matthew Kiernan said his company is preparing to launch what it believes is the world's first green fund for REIT securities, in collaboration with Sydney, Australia-based Perennial Investment Partners.

Image courtesy of Windmill Development Group
Calgary's Acqua+Vento project in The Bridges Development.

"It's an obvious idea whose time has come," Kiernan said.

In 2003, Innovest conducted a research project for the U.S. Department of Energy and the U.S. Environmental Protection Agency, ranking 100 REITs according to the aggregate energy and environmental efficiencies of the properties in their portfolios.

"The REITs where the underlying properties were more energy efficient indeed outperformed their peers by something in the order of almost five per cent per annum," Kiernan said.

"If energy costs are roughly 30 to 40 per cent of the operating costs of commercial real estate, and you can get an edge on that factor, that translates into a competitive advantage and cost savings."

Kiernan said energy costs are a significant component of overall commercial real estate costs, and REITs that are strong environmentally also tend to be well managed and thus a superior investment.

Real estate, traditionally a local activity, is happening increasingly on a global basis, bundled into large security-like investment portfolios, Kiernan added.

Wayne Proulx, national manager for energy and environmental services with GWL Realty Advisors, said the real-estate industry is responsible for nearly one-quarter of all the energy consumed globally and creates more than one-third of emissions, so anything developers can do to reduce their environmental footprint and associated costs is good for business.

"In Toronto, we closed the Enwave deep lake water-cooling deal for Commerce Court. That alone will save 11 million gallons of water, 5,000 tonnes of emissions and 5.9 million kilowatt hours of electricity a year."

Kiernan said these kinds of savings are significant to owners and tenants because they are the ones who ultimately occupy the premises and pay energy and related expenses.

"If I can truly partner with my tenants, who are spending billions of dollars across the country in managing their costs, it will improve the value of their business," Proulx said.

"If I can show them that I'm looking after their staff through health and safety and environmental governance, the employees will want to remain in that building and our tenants will stay on my property. If I can maintain a higher level of occupancy and a higher level of net revenues, it goes to value. It's really a simple model."

Lawrence Booth, a professor of finance with the University of Toronto's Rotman School of Management, did not attend the panel session but said in an interview that vehicles such as green REITs could appeal to people who purchase ethical funds.

However, he added that he doubts the market on its own can drive a large-scale move to green investment.

"I don't think it's going to make a huge difference. People may be willing to invest, say, one per cent of the yield on another investment, but it's not going to make the sort of differences that would make green or alternative energy economic. Investors say they're green, but when it comes down to hard cash, very often they put their money somewhere totally different."

Booth expressed uncertainty about the notion of advanced incremental funding through loans.

"Possibly 10 years down the line, the condominium unit is going to be more valuable because it has lower electricity bills. The question is, how long do people own condominiums? If somebody expects to live there for four or five years and then sell it, they're not going to see any savings. All they're going to hope for is that the value of the unit goes up and they will be several years closer to when the loan's paid off."

Booth said he thinks savings in electricity should be capitalized or included in the value of the condominium itself, in the same way that monthly condo fees can affect a unit's value.

"A purchaser would do a search-for-title and look at the condominium association balance sheet to evaluate the unit, and see the association has a loan per-unit that is secured by these future electricity savings. They would see the debt hidden in their association fees."

Booth said large-scale investment ultimately requires public demand for green buildings, coupled with political will.

"It's going to take a change from the denial that global warming is real and scientifically proven," Booth said. "Once the U.S. decides that this is real, then you'll see the momentum building behind technology that may make all this viable.

"Canada is just not a significant enough player to change the technology, to make it cheap enough. In order to make these things go, you're going to have to have a change in government in Washington."

(Saul Chernos can be reached at chernos@businessedge.ca)