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Green Risk Relief
August, 2012
Proposed Fund Would Offer Assurance to Appease Lenders
By Barbara Carss
Green buildings rely on deep pockets. The frequently cited business case emphasizes long-term operating savings and a host of intangible bonuses from marketing cachet to heightened worker productivity, but upfront costs continue to present a barrier for developers who don’t have the resources to self-fund a project.
“There are structural issues in how we finance things and that becomes a real obstacle,” Jonathan Westeinde, one of Canada’s recognized pioneering green developers, told delegates to the recent Canada Green Building Council (CaGBC) annual conference, held this year in Toronto. “There’s more than enough design expertise. There are more than enough new products. The whole idea of sustainability in the building market has been a huge catalyst to innovation, but, at the same time, the finance mechanisms used to finance real estate haven’t changed in 60 years."
Drawing on his experience as founder of Windmill Development Group; Vice President of Ledcor Renew, a new venture targeting upgrades to existing buildings; and Chair of a Commission for Environmental Cooperation (CEC) Task Force on green building, a NAFTA-inspired, Canada-U.S.-Mexico collaboration, Westeinde outlined his frustrations with the lending status quo and promoted the Task Force’s proposed loan guarantee pilot program.
UNEVEN CONTRIBUTIONS
He argued that governments are not contributing proportionally to the rewards they reap from a more sustainable building stock, which include resource conservation, waste and carbon emissions reductions and a healthier populace. “It’s been largely an initiative where the private sector is taking all the risks when we all know that the public is a bigger winner,” Westeinde said.
Nationally, there are fewer incentives available than a decade ago, while other provincial and municipal programs – notably Ontario’s green energy focus – can propel flawed decisions in order to secure funds.
“We do silly, short-term things when dealing with both existing buildings and building new because that’s how we get rewarded,” he asserted. Meanwhile, lenders predominantly look to the value of the existing asset and prioritize short-term paybacks rather than the prognosis for enhanced value through long-term returns.
“It comes down to the security conundrum,” Westeinde reasoned. “As a developer or an owner of a building, it still motivates me to build the cheapest thing I can.”
In contrast, he described a Ledcor Renew project now underway in which the building’s owner, a pension fund, eschewed the cost minimization formula to focus on how the building could make the most money. Ultimately, it was the ability to self-fund a more comprehensive redevelopment program that gave the owner the flexibility to stray from the conventional path.
“In most of these cases, they can’t go anywhere else to get financing,” Westeinde observed.
SCALING UP PROGRAM DELIVERY
The CEC’s pending pilot is similar to Canada Mortgage and Housing Corporation’s (CMHC) longstanding mortgage guarantee program and is supported with research Westeinde’s green building Task Force produced back in 2007. That study, Green Building in North America, modelled and compared ‘business as usual’, ‘green’ and ‘deep green’ forecasts for economic and environmental performance in new and existing construction in various sectors.
“In the residential sector, in particular, there are no excuses,” Westeinde reported. “There’s no reason why we can’t be lowering our carbon emissions and making money doing it.”
He commended the incentives and financing tools that have supported green development to date. This includes: municipal initiatives such as the Toronto Atmospheric Fund and City of Vancouver’s loan program; green mortgages; green construction loans and energy service company (ESCOs) contracts. However, he also pointed to the limitations of small scale public programs that often come with onerous application and reporting requirements; ESCOs’ bias toward the improvements that will maximize their own profits; and a general lack of expertise in lending institutions.
“It’s a bit of a black art in terms of figuring all this out,” he mused. “Green mortgages are being used more as a kind of marketing concept than as a tool in the marketplace. Most of them are getting dumbed down a bit and are really more of a preferential interest rate.”
As proposed, the CEC pilot would build on the demand for more widely available tools that could be delivered across the country or, indeed, the continent, while consolidating piecemeal incentive programs. “What happens if we took all that money, put it in a pot, and used it differently?” Westeinde asked.
The plan calls for a $10-million fund that would then be used to guarantee loans for green construction, thus leveraging $30 to $50 million of private capital. “It’s an entity that is essentially going to be underwriting it [loans] to the bank,” he explained.
With a working title of the North American Green Loan Program, he forecasts the pilot launch date for the fall of 2012 or spring of 2013.
“Of the three Ministers of Environment, Mexico and the U.S. are far more interested than Canada right now,” Westeinde conceded. “But two [Canadian] government agencies are sitting there with money in the bank for reducing carbon footprint and don’t know what to do with it yet.”
For more information about the Commission for Environmental Cooperation’s Green Building Task Force, see the web site at http://www.cec.org/Page.asp?PageID=1293&SiteNodeID=341
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