Some clever financiers are giving a sustainable twist to venerable financial vehicle. GreenbuildingsNYC describes how a commercial real estate firm is putting together a totally green real estate investment trust. It won’t be traded publicly, but this seems like a promising sign for a sustainable approach to real estate: The prospects for the first completely green Real Estate Investment Trust, or REIT, are closer to becoming reality. A well-known pioneer in the commercial real estate industry has registered an offering with the SEC for a REIT called Green Realty Trust, Inc. As reported first by CoStar Group, Rob Hannah, CEO and co-founder of TSG Real Estate, a Chicago firm, has made what appears to be the first foray into an all-green REIT. There are other REITs that have a significant number of green properties in their portfolio, such as Liberty Property Trust (NYSE:LRY), which has 21 green buildings in its portfolio of about 700 properties. There are also several private real estate funds, such as the Rose Smart Growth Investment Fund and the Revival Fund, that have been launched within the last two years whose mission is to invest in either new or existing buildings that meet green criteria.
Green Realty Trust has devised an investment strategy that aims to meet the need of increasing demand by commercial users and tenants for green standards by increasing the supply of green buildings for lease. According to its prospectus, targeted investments include green properties that (1) are certified under the Leadership in Energy and Environmental Design (LEED®) Green Building Rating System; (2) satisfy criteria for energy and environmental design under other established environmental rating systems; or (3) are properties that it intends to develop, re-develop or renovate for subsequent certification as green properties.
The REIT has set up a Green Advisory Council made up of industry experts that will provide analysis on possible acquisitions. According to the CoStar article, Hannah plans to focus the REIT’s acquisition efforts on existing buildings rather than new construction to try and narrow the list of direct competitors. The Rose Smart Growth Fund is also pursuing a green conversion strategy. The CoStar article does a good job of pointing out the challenges involved with focusing on existing buildings by drawing reference to a study by RREEF:
Investors have shied away from large-scale green retrofits partly because many green cost benefits, particularly regarding energy conservation, are measured over 20 or 30 years, far longer than the typical investor’s holding period. And the conversion process is no walk in the park, especially with tenants in place. According to the RREEF report, ‘Many of the points required for [LEED] certification are more easily attained when the building is empty, especially for older buildings. If a building has tenants in place, the renovation costs can pale in comparison to the value of income lost during renovations and the costs incurred to re-lease the space, even if at a higher rent. Tenant lease restrictions may also limit an owner’s ability to relocate tenants to undertake the renovations.’…
Such challenges may actually be a bonus to the Green Realty Trust’s affiliates. According to the prospectus:
We believe that there will be a significant opportunity in our ability to offer services, including design-build through our Green Advisory Council and financing to enable our tenants to achieve tenant-improvement (LEED for Commercial Interiors) certification. For example, we may engage the businesses that members of our Green Advisory Council represent to advise our tenants how to build-out their leased space in environmentally-friendly ways, help finance their green improvements and teach them best practices for incorporating sustainability in their corporate environments. Providing these services to our tenants directly or through our affiliation with Green Advisory Council members will enable us to generate higher rental income from our properties and will provide greater tenant attraction and retention. Green tenant finishes make traditional commercial spaces less of a commodity and more closely identified with the entity that occupies the space….