By Joseph
Dobrian
The man who
pushed the building industry to go green now wants to push the capital markets
in the same direction. Mike Italiano, president and CEO of Market
Transformation to Sustainability and founder of the U.S. Green Building
Council, says he hopes that some sort of green-buildings-based security will be
rolled out this year.
The commercial
mortgage-backed securities (CMBS) market collapsed well in advance of the
general stock market crash of 2008, and industry observers still have doubts
about its recovery. However, some experts hope that growing interest in
sustainable development might help sustain a recovery. There’s talk of
organizing green building securities: bundles of loans on commercial buildings
that have achieved LEED certification or some other standard. The new
securities will look like traditional CMBS, Italiano says, and will be made up
of mortgages on real estate whose performance as an asset is demonstrably
enhanced by green features.
“Our
organization has been working with investment banks and rating agencies to find
out how to initiate green building securities,” Italiano reveals. “We’ve put
together a green building value rating system, identifying the major risk factors
that green buildings address, and our research shows that all else being equal,
investors will buy green securities. Green buildings are motherhood and apple
pie now. We don’t have a prospectus yet, but we’ll be looking for green
building assets that we can securitize.”
Potential
investors in such a security, Italiano says, will be shown how the
sustainability features of the mortgaged properties will enhance their value.
Each mortgage in the package will be separately rated with a green value score.
“This is an
idea that other publicly traded companies could use,” he adds. “A real estate
investment trust like Liberty Properties, that owns so many LEED-certified
buildings, could put together a value score and use it as a selling tool.”
Scott Muldavin,
president
of the Muldavin Company, a consulting firm, and author of Value Beyond Cost Savings: How to Underwrite
Sustainable Properties, believes
the CMBS market will come back because those securities are efficient vehicles
for buyers who like to invest at varying levels of risk. However, he sees a
fundamental disconnect between the CMBS market and advocates of green
development.
“There’s no
reason why a property with sustainable features can’t get a loan that would be
part of a CMBS,” he says. “A mortgage on an existing green building that’s
performing well would be a valuable part of a CMBS bond.
“However, the
CMBS market is not structured to deal with the initial decision about
construction. Construction loans are not part of the CMBS profile. Back in 2005
and 2006, some construction loans were securitized, and it led to disaster,
because the risks on a construction loan are so much greater than on an
existing building. Similarly, if you’re borrowing money to green up an existing
building, that’ll be higher risk, with different amortization terms. It’ll be a
smaller, unsecured loan rather than a whole mortgage, and thus also not part of
the CMBS profile.”
What investors
need to understand, says Muldavin, is that if an individual building can create
value by being green, it’ll have better access to capital regardless of whether
or not it’s part of a green CMBS. But a rating agency or a lender can do
nothing special for a building unless that value can be identified and priced.
Lenders, he notes, are followers, not crusaders.
Not everyone
agrees that creating value by being green is a foregone conclusion: “When it
comes to sustainability issues, money doesn’t care,” warns William Green,
managing director of Tannery Brook Partners (Charlotte, N.C.), “and many
green initiatives add costs that don’t translate to higher rents. At this point
there’s no evidence to support the idea that LEED-certified buildings have
higher incomes, trade at a better cap rate, or run more efficiently.”