Market Mechanisms for Financing Green Real Estate Investments. Dwight Jaffee and Nancy Wallace Presentation to Conference on Green Building, the Economy, and Public Policy December 3, 2009. Energy Consumption and U.S. Real Estate. Starting point: - PowerPoint PPT Presentation
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Government Interventions to Stimulate Energy-Efficient Investments
Building codes:– Primarily apply to new construction;– Prescriptive in nature, do not encourage innovation.
Disclosure certificates:– Will raise sales prices based on certificate or benefit;– But are the required investments NPV positive? – Do they stimulate energy-efficient investments?
Government subsidies:– Certainly limited with current fiscal deficits.
Overall, there are certainly benefits, but limited.
Private Market Failures that Inhibit Energy Efficient Investments
Three key steps in investment process:1) Identification of worthwhile investments;2) Computation of comparative NPV;3) Mortgage market funding of investments.
This identifies two frictions that inhibit energy-efficient investments in commercial real estate:– Limited information on efficient investments;– Limited mortgage loan funding of
– Loan to value ratio (LTVR, say 65%);– Debt service coverage ratio (DSCR, say 1.25);– Both ratios based on net operating income (NOI).
Energy costs disappear inside NOI:– With triple net lease, tenant pays own energy bill.– Standard ARGUS software has no energy input.– Lenders see no trace of energy costs.
Result is that loan rate, size, and default risk determined by NOI, LTVR, DSCR alone.
AKA as PACE (Property Accessed Clean Energy). States now allow jurisdictions to create voluntary,
individual, clean energy assessment districts.– Energy loans have same seniority as property taxes.– Greatly lower interest cost, expands availability.– Available for both residential and commercial.
But same information requirements still exist:– Cities must have means to evaluate investments.– Commercial lenders must be satisfied that NPV > 0
Conclusions Existing U.S. buildings require significant energy
saving investments:– Current government actions helpful but limited.– Market failures appear to inhibit private actions.
We focus on informational frictions that impede the recognition of investment opportunities by property owners, tenants and mortgage lenders.
Our prototype Monte Carlo simulation tool indicates it is practical to develop scores that measure the impact of alternative energy investments on property rents and NOI.