November 7^th, 2007

By Yeves Perez, Editor In Chief

San Diego, CA - Earlier this year, Dallas Kachan of cleantech.com attended a Green Building conference in New York, which asked builders and financiers “What’s the real ROI of building green?” The conclusion: a so-called lack of reliable data is hampering the growth of green building, according to investors, real estate developers, design engineers and many others. Kachan also quoted in his article this comment: “People are building green today on perceived value, not hard numbers,” opined David Wells of the greentech group at venture investor Kleiner Perkins Caufield and Byers, one of the few investors at the sparsely-attended event presented by events company Financial Research Associates. Wells also stated, “You can’t count on a return on investment.” Oh really.

So, in response to Mr. Wells’ strong statements and statements by many others, The Eco Investment Network, Bruce Kahn of Citi Smith Barney, and I set out to educate Green Investors about the ‘true’ Economic State of Green Building in the U.S. and what they should know about investing Green Building. I found it interesting that the conference Mr. Kachan attended focused on “builders” and “financiers” to answer questions in “roundtable discussions” and “impromptu conversations” and that many of them were “unclear of the real costs and real returns of building green”. Our Strategy for November is simple...

To properly educate investors, venture capitalists, real estate developers, and others, we first asked The Green Building Industry’s Top Analyst and New York’s Green Financial Advisor to do the educating and on November 19^th, take Green Building to newer and bolder heights. And Second, we asked: Garrett Koerner, a Real Estate Tax Advisor and Owner of EquityGreen.com, John F. Wasik, a Personal Finance Columnist for Bloomberg News, Jan P. Schalkwijk, a CFA Principal and owner of JPS Global Investments, and Greg Reitz and Steve Edwards for ReThink Development, to answer the same tough questions Harvey Bernstein previously answered for this article and not everybody agreed with each other

(See: Read what the Professionals had to say further in the article).

“Those that invest (in Green Buildings) understand the advantages of green design—from the health benefits and the resource (energy, water, etc.)conservation. Both of those save $$ for owners, and those concepts have traction now in the marketplace,” said Harvey Bernstein, Vice President of Industry Analytics, Alliances and Strategic Initiatives for McGraw-Hill Construction in a recent interview with Yeves Perez, Founder of the Eco Investment Club. Bernstein then added,

“However, that is the part of the population that has been exposed to that level of education, and the reality is that we as “information providers” still have our work cut out for us in reaching those investors who aren’t as aware of how the market is shifting. It’s an exciting opportunity, though, to be helping to push what is now a fully emerging trend to one that becomes standard”. The complete interview with Mr. Bernstein will be featured at the end of this article. Mr. Bernstein had also commented on the touchy “ROI” questions saying, “Our Commercial Green Building SmartMarket Report has shown that (Green) building owners expect decreases of operating costs between 8% and 9%, average increases expected of around 7.5% in building values, an ROI improvement of 6.6%, occupancy ratio expected to increase by 3.5% on average and rent increasing by three percent on average”.

As stated in an earlier press statement, Harvey Bernstein of McGraw-Hill Construction and Bruce Kahn, Citi Smith Barney’s Green Financial Advisor, will come together to explore this riveting topic and these industry leaders will discuss Economic Forecasts, the current state of Green Building, the principles of Investing in “Green” and current Industry Trends, all of which will be held above the Manhattan skyline at Citi Smith Barney’s Park Avenue offices. I find it unfortunate that ‘Eco investors’ are unaware of the truths regarding the nation’s fastest growing building sector and am appalled that the media did not consider “valuable studies” related to green building as newsworthy earlier this year.

Case in point: Around mid March, I come across Ron and Tammy Schwolsky, a married pair of Green Estate Agents for Ewing & Associates Sotheby’s International Realty based in Los Angeles. Tammy is a Certified Green Building Professional and after 4 years of learning and living the green lifestyle, Ron became a Certified Ecobroker. "Changing the world one home at a time is our passion and we hope that we can be of service by helping others ‘go green’ too," says Ron Schwolsky. Then in April, another newsworthy story that was under-published, Roger Ewing, President of Ewing & Associates Sotheby’s International stated, “that the company promises to bring a new sense of environmentalism to the real estate sales community”. Now, Ron and Tammy didn’t educate me to ‘go green,’ however he did expose me to an insightful quote referencing a study that I didn’t know existed:

^{"U.S. Home buyers like their houses 'green' and are willing to pay a premium for that, according to a recently published study. Buyers are willing to pay 11% to 25% extra for environmentally friendly homes." - 2/11/07 LA Times}

This information shocked both the Eco Investment Club members and myself, and I was also shocked to discover that the study was released in January, and that the Los Angeles Times released the story on some crappy daily “junk” newsblog! With the looming upheaval of the real estate market beginning to peak in February, you would think Meredith Artley, Executive Editor, for latimes.com and Los Angeles Times Interactive wouldn’t allow this to happen. Especially, with Green building being as hot as it is and how the paper has been on such rocky standings. However in the fashion of true environmentalism, Ron & Tammy were excited to be able to use their business as a tool for positive change and to assist their clients in creating the best value in what’s probably their biggest investment.

Providing this kind of information to Green Homebuyers during their first consultation is a job well done to educate first! Ron also exposed me to the Ecobroker certification program for Real Estate professionals for the first time, which requires successfully completing extensive training and exams. With this certification, Ron can greatly assist homeowners in technologies, products, and practices that provide greater energy efficiency, provide healthier indoor air, reduce water usage, preserve natural resources, and improve durability and reduce maintenance.

As for Tammy, she achieved the CGBP certification by passing the several courses and exams on principles of Green Building and the systems approach to the design, construction and operation of green buildings.

It is my goal as Founder of The Eco Investment Club, that every Eco investor whom ‘RSVPs’ and ‘attends’ the Nov.19^th symposium, goes home with a free copy of the ‘not-so-newsworthy to the LA Times’ study sent to my by William Zweigart of Imre Communications. I want attendees to go home as ‘educated’ winners and not scratching their heads, unclear of the real returns of building green. Don’t miss this exciting opportunity to learn more about:The Economic State of Green Building! Admission is Free! (Registration Required due to building security)To register, please Email ecoinvestors@gmail. Please use "RSVP NYC" as the subject of your email. In the body of your email, please list your full name, company name, and how you heard about us.

Read more about what the Professionals had to say in response to questions about Green Building…

Harvey Bernstein, Vice President of Industry Analytics, Alliances and Strategic Initiatives at McGraw-Hill Construction (MHC)www.construction.com

Garrett Koerner, Real Estate Tax AdvisorOwner of Equity Green, Utahwww.equitygreen.com

John F. Wasik, Personal Finance ColumnistBloomberg News (www.bloomberg.com)Author, The Merchant of Power, Lake County, Illinoiswww.dailywombat.blogspot.comwww.johnwasik.com

Jan P. Schalkwijk, CFA Principal, JPS Global Investments, San Diego,CA

www.jpsglobalinvest.com

Greg Reitz and Steve Edwards, ReThink Development, Culver City, CAwww.rethinkdev.com

YRP: In your opinion, what is the biggest hindrance to the Green Building Movement?

Harv: The fact that green building or sustainable design is still considered separate from design in general. As long as we think of green building as an add-on or feature, we’ll continue to keep it viewed as something separate, an additional cost. I also think the way we have traditionally built is a challenge – to realize the true advantages of green, we need to build in a collaborative way, with all the industry players at the table, and this is just a different way of operating. Finally, education is critical—though with each generation we see that shift occurring. Our children are growing up on green and expect nothing less.

Garrett: Transition – Time – and Education! Builders, architects, and developers need transition time to adopt and personalize their business model to the “green” movement. Governments on the federal, state, county and city level need time to adjust their policies (i.e., laws, zoning requirements, building permits, etc.) to encourage green building. Although the green movement has been around for a long time it’s only within the last couple years that it has started to gain traction with the general population. It takes time and resources to rethink and adapt existing/future projects to green standards, and to re-arrange business relationships and expectations. As architects, builders, developers and other players in the value chain become qualified and credentialed in the green movement; green building will progress at a faster pace.

John: Public attitudes and misperceptions are holding back this movement. Builders need to know how to sell the benefits. They're not pushing spa tubs and granite counter-tops anymore; they need to show energy savings and healthy interiors. As long as green building is seen as a luxury item for people on the West Coast, it won't succeed elsewhere. It has to be mainstream.

Jan: The initial cost of a green development may be slightly higher and there can be problems with permitting, which is tailored towards traditional building rather than green building. The opportunities far outweigh the hindrances, in my opinion.

Steve/ Greg: Lack of practical and experiential knowledge prompting the fear that Green Building costs a lot to successfully do.

YRP: When it comes to investing in Green Buildings:

A) Why do investors invest in Green Real Estate or Green Building?

Harv: Those that invest understand the advantages of green design—from the health benefits and the resource (energy, water, etc.) conservation. Both of those save $$ for owners, and those concepts have traction now in the marketplace. However, that is the part of the population that has been exposed to that level of education, and the reality is that we as information providers still have our work cut out for us in reaching those investors who aren’t as aware of how the market is shifting. It’s an exciting opportunity, though, to be helping to push what is now a fully emerging trend to one that becomes standard. Our Commercial Green Building SmartMarket Report has shown that building owners expect decreases of operating costs between 8% and 9%, average increases expected of around 7.5% in building values, an ROI improvement of 6.6%, occupancy ratio expected to increase by 3.5% on average and rent increasing by three percent on average. In our SmartMarket Report on the Greening of Corporate America, we looked inside the boardrooms of 190 of America’s largest corporate leaders. Nearly 85% of respondents were at the CEO or CFO level. Based on the research, green building will reach a tipping point in 2009 with 82% of companies greening at least 16% of their portfolios. Much of corporate America perceives green activities and green building as part of their growth strategies.

Garrett: Better return on investment…at least that’s the idea. If you compare green building versus traditional building, green building’s should have energy efficiencies, lower operating costs, healthier and happier tenants, which should translate into lower vacancy rates, more favorable bank terms because lending institutions tend to favor green buildings because they have a higher quality asset collateralizing their loans, lower interest rates, etc. All of these elements translate into a better return on initial investment as compared to traditional built structures. This is what makes Green Real Estate and Green Building attractive to investors. Not every green building will beat its traditional building counterpart in a head-to-head comparison. Every project must be evaluated independently…but for now, Green Buildings provide a lot of excitement and potential opportunities to the investment world.

John: They will see a return once public attitudes change. "An Inconvenient Truth" helped somewhat -- it earned Gore and the IPCC a Nobel Prize -- but it didn't sway Main Street yet.

Jan: There is a demand premium for green real estate over traditional real estate. As the real estate market is in a downturn, this premium has become increasingly important. With an oversupply of properties, developers can no longer rely on the general market to sell their properties, but need to rely on the uniqueness and desirability of their properties' features. Green is on top of the list, in that regard. To give you an example, Lennar is building about 2,500 solar-powered homes in California in cooperation with SunPower. Lennar officials say that they can sell these homes, priced at $450,000 to $600,000, at a sales rate 3 times greater than that of conventional ones in a down market.

Steve/ Greg: They invest because they initially feel it is the right thing to do, and then as they become more educated they invest because it is the smart financial thing to do. Green building projects are differentiated, have lower operating costs, are more durable, and are healthier for their occupants providing a strong case for sales and rent premiums.

YRP: B) What prevents investors from investing in Green Real Estate or Green Building?

Harv: No Comments

Garrett: Depends on the investment strategy. Right now, if you wanted to buy stock in a green REIT (Real Estate Investment Trust that owns entirely green/LEED buildings), you wouldn’t be able to because a green REIT doesn’t exist. There are hundreds of REITs that have green buildings, as a portion of their asset portfolio but there isn’t an all green REIT. Alternatively, if you have extra cash and want to invest in a green building project, where would you go? Unless you have an extensive Rolodex of green builders and developers, it might be hard to invest in Green Real Estate or Green Building. That’s why a forum like the Eco-Investment Club is a great idea. It brings investors and entrepreneurs with green building aspirations together.

John: It's simple. They think it costs too much and doesn't add value.

Jan: I think the downturn in investor appetite for real estate in general is to blame. When people become conservative due to market conditions they are not interested in anything different, which is perceived as riskier.

Steve/ Greg: Again, lack of knowledge around the costs and the benefits of green building. Also, not being able to find quality green projects to invest in that are being built by developers that have the practical green building experience.

YRP: What's the real ROI of building Green?

Harv: There’s a lot of debate about that, and the reality is that we have only really been putting these buildings up for a few years. I think we’re starting to do a better job of tracking that, but the research just isn’t there in a substantive way yet. As mentioned above, owners estimate it at 6.6%, but only time will tell.

Garrett: Again, it depends on what you want to measure and depends on who you ask. From an intangible perspective, how do you value healthier or happier tenants due to their occupation of a green building? Can you build that value into the rents charged to the tenants? It’s definitely a return on investment, from the tenant’s perspective, but how do you calculate that value in terms that you can evaluate? Who uses that information? Can it be used? From a financial perspective, hopefully cash flows are stronger, vacancies lower, ultimate sale price is higher…all of these factors play into the ROI analysis of the investor, builder, seller. Does increased marketability of a LEED building versus a standard, built-to-code structure increase ROI? Again, the real ROI is a function of each project and depends on who you ask.

John: I think it's much higher than conventional wisdom says it is. When you consider that green buildings are more durable, healthier and have lower operating costs over a long period of time - that should be part of the equation.

Jan: I don't think there is one real number that can satisfy that question. As with any other investment, it is dependent on the particular assessment of the project in question. Steve/ Greg: No Comments

YRP: Do you consider Green Building to be its own industry, separate from conventional building, at this point? If not, what will it take to get Green Building recognized as its own industry?

Harv: Right now, our society makes it that way, but there are some owners—like the federal government and PNC bank and others—that don’t, and that’s creating a market shift. And I think that’s the answer, the more leaders we have, and the more that integrated design and construction becomes entrenched in the mode of operation for construction industry professionals, then we will see it be incorporated into the standard building design. My youngest son is a perfect example. His education as an architect in college right now is about designing buildings inherently in a sustainable manner, and that’s not a separate course. Its just part of how design has shifted. Both my sons grew up with recycling and caring about the environment. My other son has been studying civil engineering. The two of them represent the future designers and builders of our future. Both approach it from a sustainable perspective.

Garrett: Yes, for now. Green building and the green industry is still relatively small compared to the building industry as a whole. It is still somewhat of a niche market but its gaining traction. However, it’s hard too imagine the green movement not becoming the standard for future building projects. In my opinion, the day will come when building projects will have to be built to some green building code. It not only makes good business sense but it makes good environmental sense, which is a responsibility we all have, to some extent, as human beings living on this planet. At some point, Green Building will be the industry, with conventional, built-to-code projects the exception. Obviously, we have thousands and thousands of conventional, built-to-code buildings in this country…we aren’t going to just tear them all down and build new green buildings. It will take some time for the green movement to run its course.

John: Unfortunately it is. Mainstream publicly held builders need to embrace it. I saw some Lennar homes going up in the Bay Area and thought, "this is it, this is the wedge," but the homes were too expensive, starting at $1 million-plus. I know that's not a lot of money for the San Francisco area, but it's still more than three times the price of the average U.S. home. It needs to be integrated into tract home developments, condos, resort areas, urban infill and nearly any kind of structure with a roof on it.

Jan: I think it is its own industry as it is different from traditional building and is so in a certified way. There will come a day that green building standards will be the norm and then the distinction "green" will fade. So, yes, it's a separate industry now, will be a bigger separate industry in the medium term future, but will not be a separate industry in the long-term.

Steve/Greg: Yes (for now), but it is morphing into the conventional building industry which is a good thing. I think there will be green building specialists and product suppliers but I don’t feel it will be its own separate industry.

YRP: What is currently needed to support the Green Building Movement?

Harv: Education is always needed and leaders who can demonstrate the successes. We finally have some good baseline data and that will continue to increase, so we can try to pin down the cost argument, but it’s ultimately about perception, and you can throw as many numbers at a person as possible, but that’s not what really convinces most people. So, word of mouth is extremely powerful, and information that is presented in that way—the mix of the data with the right messenger—will help accelerate green building. Our newest SmartMarket Report on The Green Homeowner: Attitudes and Preferences for Remodeling and Buying Green Homes research shows that 28% of homebuyers hear about green homes via word-of-mouth and that 85% are more satisfied with green homes which is why they recommend them.

Garrett: Demand. I don’t want to oversimplify my response to this question but to some extent, if the demand for green building or green building services is there, the market will respond. If enough home-buyers, tenants, investors, etc. choose to be interested in and buy green, the building industry will eventually respond and provide those alternatives and opportunities.

John: 1) A national awareness campaign similar to the "Got Milk?" campaign. How about "Got Green?" 2) Tax incentives need to be given to builders and homeowners that consider the total structure and site. At present, the tax breaks available for alternative energy and efficiency products are paltry and piecemeal. They are also due to expire soon. If leaders are truly committed to energy independence, they need to target buildings, which consume 30% of all energy and the lion's share of resources. 3) Utilities need to be brought into the equation on a local, regional and national level. They need to provide incentives to home and building owners to produce what Amory Lovins calls "negawatts" -- energy savings through efficiency. 4) A comprehensive national energy policy that creates jobs, new infrastructure, affordability, new companies and research similar to the Apollo program. This has been proposed many times by many parties from The New York Times' Tom Friedman to the Sierra Club. Everybody has to be on board with this and set some targets. It's a win-win proposition for every constituency, but why isn't anyone selling it like that?

Jan: I think the USGBC is pushing the movement forward nicely. Municipalities should be better educated on "green" and the rules and regs need to be amended to be more accommodating to green building.

Steve/ Greg: It is gaining a lot of steam in the office sector. Now the home building and home remodeling industries really need to buy into it. The LEED Certification system becoming more well known, branded, and ubiquitous will also help.

YRP: Do you foresee any legislative actions for 2008 that will assist the Green Building movement? Harv: All the initiatives at the state and local levels are having tremendous impact in shaping how people see green building. Right now, government has played a powerful role—within their own building portfolios and through action affecting school buildings and even sometimes, commercial buildings—at bringing about that change. The effort by the states, then is forcing the federal government to turn its attention on green building outward. I think green building has the advantage of being something of the ‘low hanging fruit’ in the climate challenge, and I think more legislators will start to see that as the mayors and some governors already have.

Garrett: Hopefully. Being an election year, energy/ global warming/ solutions/ gas prices will be a major topic of conversation among all the candidates, which directly and indirectly affects the building industry. I am not sure what is on the legislative docket from a federal perspective but I do know that the Green Building movement can experience tremendous growth from localized, individual initiatives. If your city or county hasn’t pursued green building initiatives, write your city council or attend meeting and make your voice known. Most cities these days are changing their laws, zoning requirements and/or permitting process to require that some sort of green initiative be implemented in the building process. As cities and counties adopt, states will also begin adopting. A lot of times people look to the Federal government for a top-down approach, but the power of a bottom-up, grassroots approach should not be overlooked.

John: The current energy legislation snaking through the House and Senate is the best hope. After that, the Climate Change package expected early next year. Rep. John Dingell had some interesting proposals for Carbon Taxes, but I think the proceeds should go right into alternative (not corn-based ethanol) energy and research.

Jan: I think climate change legislation in CA and other states will have positive effects on green building. I am not an expert on the 2008 legislative agenda. Steve/ Greg: Carbon caps on a larger state and federal level and green building incentives and requirements on the municipal level.

YRP: What is the most significant factor propelling the Green Building Movement forward?

Harv: Frankly, I think personal passion and a sense of responsibility to future generations. I know most people will say the rising energy costs—and don’t get me wrong, that’s been an important driver—but the ethic, the conversation around this movement is different. And you’ll hear many people talk about how consumers are stupid and don’t change behaviors and only shop with their wallets, but then how do we explain the growth of Whole Foods or the hybrid car. There are messages resonating with the public, and we can learn from those examples to tap into what motivates and drives people to make those more socially responsible decisions. I think our tragic weather and other natural disasters have played a part in that movement as well.

Garrett: Publicity. The more green projects that are built and publicized, the more the public will be exposed to green alternatives and it will help to propel the industry.

John: A class of folks loosely referred to as "Cultural Creatives." These are mostly educated, upper-middle class professionals, artists and activists. They are embracing green building and hopefully setting a trend. I thought green building would have caught fire by now, but it hasn't because most Americans are mired in a housing bust that will last for years. No matter what the McGraw-Hill green building survey says, there will not be much growth in this sector this year until some huge inventories of unsold homes wind down. It may be 2009 before the market gets back to normal. No one is more disappointed in this development than I am. I was writing a book on green building that went poof after the crisis hit. Now it's a book on what caused the downturn.

Jan: State governments and certain sections of the population are becoming serious about addressing climate change and energy independence.Steve/ Greg: Climate change and the fact that green building actually makes economic sense as well.

YRP: How can developers gain the support of investors for their Green Building projects? Harv: No Comments.

Garrett: By being able to explain and articulate the benefit of a particular green project (versus built-to-code or any other viable alternative) in terms that investors can understand (i.e., additional costs, additional rents, sales price, vacancy rates, lower operating costs, interest rates, lower maintenance, etc). Investors want to place value on all the options of a green project and then compare that to their investment and then figure out their return. If you can explain all of that to your investor and work out terms that are agreeable to everyone, you will be in business.

John: They must sell the benefits the way consumers want them presented. They also have to make Green Building a chic consumption item. I know this sounds crass, but it has to be hip. Nobody's going to do it solely to save energy or to reduce CO2 emissions. It has to be a cultural meme. It has to catch on like a new fad and keep going into every town in North America. Developers need to know about paybacks, total cost accounting and savings in resource use over time. The numbers are there, they just have to start plugging them into their production models.

Jan: Well, it is difficult to find money in this market. Transparency and conservative projections are the best way to approach would-be investors.

Steve/ Greg: They need to be brought together. There are lots of investors interested in environmental causes but real estate development is done on such a local level that the two never cross paths. There should be a real world or virtual forum for these two to meet and mutually benefit each other…

YRP: Hence the creation of the Eco Investment Club! Where Green Dollars Fund The Green Movement!