I read an interesting article in this past Friday’s Commercial Mortgage Alert about a nonprofit group which is promoting the use of mortgage-backed bonds to finance apartment complexes with environmentally friendly features. I wanted to share it with all of you. I hope it gets you thinking about ways green building is changing the industry and efforts people are making to bring back public debt into the market through securitization.
The effort is part of an initiative by Washington DC-based Capital Markets Partnership to encourage sustainable building. The group is working with a number of insurers, government agencies, pension plans and fund managers involved with commercial real estate.
Under the bond plan, the lender would originate a private or agency multi-family mortgage in the range of $70-$100 million. Bonds backed by these “green building mortgages” would be created and sold to investors unstructured and unpooled. Ratings would be sought for at least some of the bonds.
For each securitization, the Capital Markets Partnership would issue what they call a “green” score, between 25 and 100, to evaluate the degree to which the property’s cashflows and overall value are enhanced by factors such as energy efficiency, water/waste reduction, proximity to public transportation and renewable power sources on site.
The idea behind the partnership’s initiative is that commercial real estate investments with higher “green” scores should perform better than those with lower “green” scores. Research has shown that buildings with environmentally-friendly features operate more efficiently, attract higher-paying tenants, and produce more income in the long-run. Mike Italiano, CEO of the Capital Market Partnership, said about 10 loans are in the pipeline and the first sale of the “sustainable building” securities could occur within the next 6 months. The group plans to expand to other commercial properties down the road.
This is certainly an interesting concept, but I foresee a number of issues. Firstly, sustainable building is becoming the status quo. A developer would be foolish not to include green features in any new development. With green building the norm, “green” scores will hold less value. The next issue has to do with actually coming up with the “green” score. How can you accurately determine the actual value created by including green features in a building. This is an ongoing issue with sustainable development.
What do you think of this concept?
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