Green building bonds, which are higher rated and could provide cheaper capital for green building projects, can correct the current market that prices mortgages, green building or nongreen, the same, stimulating the economy and repairing the planet.
The financial value of green buildings is well documented, from commanding higher rents, greater occupancy rates, and increased occupant satisfaction, to lower operating costs for everything from reduced insurance premiums and less energy utilized, easily resulting in an increased return on investment of more than 9% over conventional building. That improved balance sheet for green buildings translates directly into green buildings having over 30% fewer commercial mortgage backed securities defaults.
Green buildings are less risky, more profitable, with higher appraised value than conventional buildings that results in higher company creditworthiness, measuring the reduced likelihood of it defaulting on its debt, but today, green building does not receive a commensurate lower interest rate on its debt.
Net zero building is not only the pinnacle of green building, as a climate neutral edifice, but carries the highest creditworthiness, yet, accepting there are only a few verified net zero commercial buildings in the U.S., they appear to be paying the same mortgage interest rates as similar conventional buildings in those markets. Not to mention there is anecdotal evidence from the first LEED Zero projects that the required integrated process has reduced change orders by a magnitude of up to 90% resulting in dramatic reduced total construction costs.
There is no underwriting justification for lenders charging the same interest rates on mortgages secured by green buildings. It is dinosaur lending practices that force green buildings to subsidize more risky conventional buildings through artificially low interest rates. This unfair capital subsidy stymies climate progress by siphoning investment from profitable green building including net zero projects, for non sustainable carbon polluting projects.
Mike Italiano, a founder of the U.S. Green Building Council and today CEO Capital Markets Partnership, encapsulates the larger issue as,
“We have a narrow window of opportunity defined by IPCC’s 2030 deadline 420+ gigatons / $14 trillion carbon pollution reduction requirement to maintain commerce, national security and a habitable planet. Fortunately, highly repeatable, higher-rated Green Property Bonds can rapidly deploy the available investor capital to timely make the pollution reductions with the highest credit rating for net zero.”
And yes, there are green bonds in the marketplace, but they finance almost any positive environmental impact, not specifically green building, and with no widely recognized standard many have been criticized as greenwash. There are federal government associated multifamily green bonds offering better pricing and higher proceeds, but the federal government is not facile enough to command this space effectively. Today there is a nascent (.. and admittedly uneven) commercial green building mortgage backed securities market; although several offerings were hugely oversubscribed.
New and powerful ways are needed to address the existential environmental problems plaguing the planet. The private sector can seize on that opportunity. What is needed is a mechanism through which owners of buildings and the capital markets deal with the problem of asymmetric information through market signaling about the value of green building. Green building bonds can be a key and very large part of the solution.
Do not underestimate the force that a change in green building can be. Real estate has been and remains the largest sector in the U.S. economy, and a reduction in the cost of capital through mortgages securitized with green building bonds, would not only be a dynamic shift in the economic underpinnings of the real estate industry, but create jobs, invest in existing buildings, and more, with the resultant fixing of the planet. Churchill’s wisdom seems pertinent, “this no time for ease and comfort. It is time to dare and endure.”
The consensus underwriting standard for green building bond finance can be one giant leap for mankind advantaged by owners to issue higher rated green building bonds, opening the door to trillions in private capital for debt on green building, including retrofits to green buildings, that will reduce carbon pollution and repair the planet.
If you are skeptical there is a precedent. In the 1980s, the commercial real estate business in the U.S. faced a credit crisis when hazardous substance cleanup liability lawsuits caused banks to stop lending and the solution was a consensus standard for the Phase 1 environmental site assessment that had the effect of mitigating the risk to banks giving rise to the multi Trillion Dollar commercial mortgage backed security industry.
Domestic green building, from LEED to Green Globes, has been hindered by a lack of capital. The matter is even more acute when seeking financing to green the more than 5 million existing commercial buildings in the U.S.
An effort for cheaper capital for green building is now being driven by building owners. A coalition is coming together and beginning to plan for a NYSE market launch. If you are interested in participating in the Coalition Ending Subsidies Preventing Net Zero Buildings, #cheaper-capital-for-net-zero, contact me at firstname.lastname@example.org.
A robust private sector green building bond market can fund the repair of the planet.