Green Buildings Expected to Receive Lower Financing

WASHINGTON, DC-Today few lenders place much significance to a building’s green status – whether it is LEED certified or not – when putting together financing for the project. Even Wells Fargo, a bank that has financed a number of green buildings, does not have special criteria in place for these projects, according to comments made by James Finlay, VP – Commercial Appraisal Manager, at the bank at Real Estate Media’s RealShare Green Building conference, held in Washington, DC recently. These buildings do tend to receive competitive financing, he said, but that is primarily because they tend to be trophy or class A status projects.

Finlay is not alone in his assessment: also speaking at the Green Building conference were Steve Gossett Jr., VP of development for Transcend Equity, and Nicholas Stolatis, director of Strategic Initiatives for TIAA-CREF Global Real Estate. “There is no direct correlation between financing and green development,” Gossett commented during his panel session on green building finance, a statement echoed by Stolatis, who was sitting on the same panel.

It may be, though, that the industry is asking the wrong question. It’s not whether or when green buildings will receive more favorable financing. Rather, as many are beginning to suspect, the question is when lenders will begin to judge buildings that are not green as being functionality obsolete and thus riskier.

“At this point it is my experience green buildings are receiving the same financing they would get for any high quality building with a good tenant,” Jim Amorin, president-elect of the Appraisal Institute, an association headquartered in Washington, DC and Chicago, tells GlobeSt.com. “What I think will change is that lenders will start assessing a premium on financing for any building that is not designed to green standards.”

He likened it to when air conditioning was first introduced. “At first buildings that came equipped with air conditioning were seen as luxury developments. But within a short period of time any building that didn’t have it was considered functionally obsolete.”

Already there are signs this is beginning to happen, at least among the tenant community, says Julia Wilhelm, a San Francisco-based broker with Studley. When LEED standards and buildings were first introduced, only a certain type of tenant insisted on locating in a LEED-certified building. These firms usually were financial services companies or law firms – especially those with sustainable practices. “Now, though, we are seeing demand for LEED space from all segments of the economy,” she tells GlobeSt.com.

There are also indications, though, that green buildings are getting some edge in the financing they receive right now, says Aleka Skouras Eisentraut, a real estate attorney at the Oakland-based law firm Wendel, Rosen, Black & Dean who has worked on numerous green building projects, including negotiating green leasing agreements. “I understand that Shore Bank Pacific provides favorable loan to value ratios for green building projects,” she tells GlobeSt.com. “Additionally, large commercial banks, including JPMorgan Chase, Bank of America and Citibank are working on green building lending products.”

There are several examples of favorable lending/credits for installing energy efficient upgrades, such as the Clinton Global Initiative, which provides for loan pay-down at the rate of reduced energy costs, she continues. “Finally, because green buildings — and their owners — are perceived as lower risk, there are also several insurance companies offering incentives and credits for green buildings. For example, Fireman’s Fund offers a premium discount for LEED certified buildings, an endorsement for LEED certified replacement construction, as well as credits for LEED building property damage and CGL insurance, with a worker’s comp product to follow. Zurich offers a discount for insuring LEED certified buildings for mold coverage.”

Ultimately, Eisentraut concludes, lenders will always look at the experience of the builder, as well as the market for the project, in determining lending policies. “But those lending institutions that are active in the green building area may better understand the inherent benefits of green projects so may be able to provide more favorable or creative lending products.”