Green Building Bonds as a Game Changing New Source of Capital

Regency Centers Corporation, a publicly traded REIT, completed the sale of $250 million of “green building bonds” on May 14, 2014.

Proceeds from these corporate bonds will be used to fund “eligible green building projects” including the acquisition, construction, development or redevelopment of projects that will pursue LEED certification. 

Regency is an owner, operator, and developer of grocery anchored neighborhood and community shopping centers. With 332 retail properties, the REIT's portfolio encompasses over 43.9 million square feet located throughout the United States. The REIT has 17 LEED registered projects since 2009 (7 of which are under construction) and 7 of which have been certified.

Regency described this source of capital as an opportunity to support an important market as investors seek more socially responsible investment options. This bond issuance also confirms Regency's commitment and long term view on sustainability, as evidenced by its greengenuity© program, which is the REIT's “commitment to do all that is practical to reduce its environmental impact in developing and operating shopping centers.”

Only days before the green building bond sale, on May 12, 2014, Regency was honored by the U.S. Department of Energy's Better Buildings Alliance as an inaugural Green Lease Leader, leading the market by incorporating lease clauses that help overcome market barriers and align tenant and property owner interests to save energy in commercial buildings.

These green building bonds are more specifically 3.75% ten year senior unsecured notes due on June 15, 2024. The interest rate for these green building bonds was lower than other similar, but non-green building bonds offerings by REITs. While bond financing can have higher transaction costs than oft used mortgage backed loans, even in large dollar amounts as in this instance, it is significant that there was strong market demand for these unsecured bonds that drove the lower interest rates.

Green building bonds are a new investment vehicle in the U.S.  Until recently green bonds had been issued by the World Bank raising funds from investors to support World Bank lending for projects “that seek to mitigate climate change or help affected people adapt to it,” but while ‘green’ the bonds were not limited to ‘green building’. Since 2008, the World Bank has issued over $6 Billion in green bonds through 65 transactions and 17 currencies. And while several European business entities have issued similar green bonds, this transaction is the first in the U.S. exclusively for green building.

In November 2013, Bank of America issued the first ever U.S. bank green bond, but again its purpose was not limited to green building. The funds of the debenture are being used to finance renewable energy projects such as wind, solar and geothermal. Funds are also being used to finance energy efficiency projects such as lighting retrofits, district heating, co-generation, and building insulation in residential, commercial and public properties. The bank acted as underwriter on Regency’s deal.

As investors seek socially responsible investment options, green building bonds present a game changing opportunity for financing green building. Green building, which arguably offers higher value collateral and reduced risk, will be advantaged by bonds as a cheaper cost of capital all while saving the planet.      

Destiny USA Reaches the Green Bonds Finish Line

I apologize for the recent hiatus here at Green Building Law Update.  If you want to see what I have been up to, check out ClaimKit ( 

Now, on to green building legal news.

You may recall that in 2011, I published many, many articles on the Destiny USA project.  Here's a quick summary of the Destiny USA story

In 2007, the developer of a large-scale mall project received $228 million from a federal Green Bonds program in exchange for installing green building and renewable energy technologies.  The developer recently revealed the many of the green technologies will not be incorporated as promised. 

As reported by Rick Moriarty, the Internal Revenue Service (IRS) notified the Syracuse Industrial Development Agency on March 17 (2011) that it would be auditing the Green Bonds issued by the Agency to the Destiny USA developer. . . .

If the IRS were to determine that non-compliance occurred, then the Destiny USA project could have lost hundreds of millions of dollars in estimated tax breaks.  

One year later, the IRS has come out with a ruling on the Destiny USA's compliance with the Green Bonds program: 

The IRS notified the Syracuse Industrial Development Agency Thursday that it has closed its audit of the bonds “with no change to the position that interest received by the beneficial owners of the bonds is excludible from gross income” under federal tax code.

In other words, income received on the bonds will continue to be exempt from federal income taxes.

The ruling also permits the release of $2.3 million that the developer had been required to hold in reserve. If the IRS had found the project out of compliance with the terms of the green bond program, it could have seized the $2.3 million as a penalty.

The IRS ruling fascinates me.  By finding the Destiny USA project complied with the Green Bond requirements, the IRS essentially conceded that the Destiny USA project simply had to promise to deliver green technologies in exchange for the Green Bond financing.  In a February 2011 letter to the IRS, the Destiny USA developer argued that the legislation simply required a promise to deliver the technology:

On February 21, 2010, Syracuse Post-Dispatch reporter Rick Moriarty published a story that disclosed the contents of a draft letter addressed to the IRS by the Syracuse Industrial Development Agency.  In the letter, the Agency and developer first divulge that many of the green building and renewable energy features that were promised as part of the Green Bonds program will not be included in the completed project.  The letter blames the economy for changes to the project. 


The letter then moves to the crux of the compliance argument.  The Agency and developer assert that actual installation of renewable energy systems was not required.  Instead, the letter claims the developer was only required to make promises related to renewable energy and LEED certification in order to qualify for the bonds. They conclude that the financial benefits of the Green Bonds program and the forfeiture of the Reserve Account do not depend on actual achievement of the green building and renewable energy goals.

I think it's fair to say the Green Bonds legislation was fundamentally flawed.  I can't imagine that the legislators would have been satisfied with a simple "promise" to deliver green technology in exchange for hundreds of millions of dollars in tax breaks.  

And so ends the Destiny USA debacle. 

Photo Credit:  Ben Sheperd

The Destiny USA Debacle: How Green Building Sausage is Made

I am publishing a series of posts on the Destiny USA Debacle -- the federally sponsored Green Bonds project that has failed to incorporate promised green building features.  To read all of the posts, you can select the Destiny USA tag to review all of the published posts on this topic.  Or check back later in the week for an e-book that includes all of the posts, plus bonus coverage.  

The Destiny USA dispute hinges on whether a developer complied with green building and renewable energy promises he made in order to obtain federal Green Bonds funding.   But what is the Green Bonds program and how did it come about?

In 2004, the United States Congress passed the American Jobs Creation Act of 2004, which is essentially a huge tax bill.  Section 701 of the legislation included a seemingly-innocuous provision titled the “Brownfields Demonstration Program for Qualified Green Building and Sustainable Design Projects.”  

According to Investopedia, this Section led to the United States Treasury issuing $2 billion in Green Bonds to support green building construction:

Green bonds in the United States got a major boost from an amendment to the America Jobs Creation Act of 2004. The amendment is officially titled the Brownfields Demonstration Program for Qualified Green Building and Sustainable Design Projects, but for those who prefer to have a little oxygen left at the end of their sentences, this has been shortened to "Green Bonds". It was designed to provide funding - in the form of $2 billion worth of AAA-rated bonds issued by the United States Treasury - to finance environmentally friendly development. The objective is to reclaim contaminated industrial and commercial land (brown fields), and encourage energy conservation and the use of renewable energy sources.

The Syracuse Industrial Development Agency was the bond issuer and sold $238 million of these Green Bonds in late February 2007.  Investors -- corporations and individuals who purchased the bonds -- received two benefits:  interest paid over the lifetime of the bonds, and tax-free status on the interest paid.  Because of the tax-free interest, Investors were willing to accept lower interest rates on the bonds.  The proceeds from the sale of these tax-free bonds were then provided by the Agency to the developer of Destiny USA in the form of a tax-free loan.

The taxpayer is also an important player in this scenario.  By waiving the normal tax obligation, the taxpayer is essentially investing in the developer’s project as well.  In exchange, the taxpayer is supposed to receive a public benefit in the form of a green building development on a brownfield site.  Who represents the taxpayer in this scenario?  The word “tax” should have tipped you off -- the Internal Revenue Service.  

They IRS is probably the most important party in the entire Destiny USA dispute. 

Photo credit: mjar81

The Destiny USA Debacle: The Biggest Green Building Policy Story to Date

I have been working tirelessly to understand the intricacies of the Destiny USA dispute.  It is quite a mind-bender, which I hope to illuminate for you in the coming days.  But I am sure of one thing:

This is easily the most important green building policy story to date.  

  • The dispute centers around a much ballyhooed Green Bonds program created in 2004.  I am going to do my best to avoid the political issues involved with the Green Bonds program, but if you are interested in that side of the story, I suggest you review this Boston Globe article.  
  • In its simplest form, the Green Bonds program works because both investors and developers get substantial tax breaks to create green building projects that benefit the public.  For example, it is estimated that the Green Bonds program saved the Destiny USA project upwards of $120 million.  
  • Tax breaks come at the expense of the taxpayer.  In exchange, the public benefit comes in the form of an environmentally-friendly project -- in this case, Destiny USA made promises about LEED certification and renewable energy features that reportedly will not be included in the completed project.  

The IRS is faced with a difficult question -- did the Destiny USA project comply with the Green Bonds green building and renewable energy requirements?  If the IRS rules that the requirements were not met, then the project could be penalized millions, the tax exempt status of the bonds could be stripped, and widespread litigation will likely ensue.  If the IRS rules that the requirements were met, then the developer and investors will retain the tax benefits but the public will reportedly not receive the benefit of the promised green building and renewable energy systems.  

In order to tell the story of the Destiny USA Debacle, I have written nine blog posts to be published in the coming days:

  • What is Destiny USA? - a review of the Destiny USA project as originally proposed.
  • How Green Building Sausage is Made - a review of the Green Bonds program that was passed in 2004.
  • The USGBC’s Role in Destiny USA - a review of the USGBC’s participation in the Destiny USA project and the Green Bonds program.
  • Why the IRS is Key - a review of the Bulletin issued by the IRS that will be essential in deciding this dispute.
  • Destined for Trouble - a review of disputes and litigation that have arisen from the Destiny USA project.  
  • May it Please the IRS - a review of the letter prepared by the local bond issuer to the IRS arguing that the project complied with the Green Bonds requirements.  
  • LEEDigation on Steroids - what happens if the IRS rules against the Destiny USA developer and strips tax-exempt status?
  • How to Avoid LEEDigation Liability - some thoughts on how contractors and design professionals could get dragged into the Destiny USA dispute; and how to make sure your company avoids this type of scenario.  

If you do not want to wait for each blog post, then please check back on Monday, when I will be publishing a full e-book that contains all nine posts -- plus bonus coverage -- of the Destiny USA Debacle.