Green Financing is Available, Just Not From Banks

WASHINGTON, DC-The recession relegated financing for green retrofits to the backburner--at least in terms of public industry discourse--but that doesn’t mean that landlords have abandoned such projects. Most large building owners are pushing forward with energy efficiency projects and even building overhauls by hook or crook, as commercial banks are unable to fund such projects. Panelists at the Urban Land Institute’s annual conference, now in its last day, talked about the problems landlords face--along with their, sometimes, makeshift solutions--in pushing forward with these projects.

One issue is that not all tenants are inspired to seek out such measures, said Cavarly Garrett, vice president at JP Morgan. “We don’t see tenants demanding energy efficiency, but when we take the proactive step of offering a discussion on the subject we see individuals step forward to find out how their companies can participate.”

Not all tenants can be characterized as this passive. Charles Leitner, chairman of Rreef, countered he sees significant tenant demand for energy efficient retrofits, especially when the operational savings translate into rent reductions. “I can tell you that Deutsche Bank, as an occupier of real estate, is driving change through the system because of its demands.”

In some cases, tenants want change but receive little support from their landlords, Russ Landon, managing director of Keybank, said. “It is all a function of leverage.” He told of a building where his firm occupied two floors, which counted for very little with the building owner. “Our intentions were large but our ability to enact change was very small.”

Whatever the source of the demand driver--tenants or landlords--panelists were in agreement that financing options for investments are limited.  For the most part, landlords must pay for these retrofits out of cash or their operational budgets. “I work with a lot of low-leveraged properties with good cash flow so I can slip in projects under the radar to see how they go,” Garrett said. The ability to remain low-key is important because not all--or even very many--projects are straightforward in ROI. In one building, she said, hands-free faucets were installed but it was difficult to track whether they were saving water. “Getting engineering to buy into these projects is always my first fight, then getting them to scrub the data so we can track it is my second,” Garrett affirmed.

Landlords should not expect commercial banks to step in with financing for these projects, William Lashbrook, SVP with PNC Bank, said. “I have concluded that commercial real estate lenders are not going to provide a solution for green retrofits,” he added. There are several reasons for that, he continued, starting with a disconnect between a bank’s portfolio term and the lending term. “Our time horizon is much shorter,” he said. Another issue is how to incorporate such improvements into a building’s valuation. “That is a challenge because there is not enough data on this,” Lashbrook said.

That said, the panelists did see some hope for future financial solutions. “Equity is going to have to be the solution,” Leitner said. “No lender is going out on a limb on this. The risk has to be taken by equity.” Banks may also be a source of such funding, Lashbrook added, but from the corporate commercial side. Another potential source will be providers of green technology, especially if they are backed by venture capital or private equity,” Leitner said. “They are the ones with the products and they now realize that they will need to provide financing if they want to see any use.” He added that the industry is just starting to see this with solar panels.