Bankers are beginning to warm up to 'green lending'

(This article originally ran in Finance and Commerce, Minneapolis, MN, another Dolan Media publication).

Earlier this month, Wells Fargo Bank made a pledge to lend at least $1 billion in the next five years to enterprises that promote protection of the environment.

On Wells Fargo's list of lending candidates were new building projects that reduce energy consumption, use recycled materials and provide safer, more productive workplaces.

That part of the pledge will catch the attention of developers and investors eyeing the sustainable design approach.

The emerging green building discipline promises long-term cost savings and healthier environments, but it still constitutes only a tiny part of new development. Standing in the way of its growth are higher perceived costs, unfamiliar techniques and an uncertain market.

Wells Fargo spokesperson Stephanie Rico said the company will consult community and environmental advisers over the next several months to finish the details of its broad environmental commitment, but she said the company sees the $1 billion commitment as a floor and not a ceiling. We want to help lay a positive foundation.

Corey Brinkema, director of the Green Institute, a Minneapolis- based nonprofit that researches community environmental issues, praised Wells Fargo for adding financing and marketing heft to the green design movement.

Brinkema's organization showcased the green model by developing a pair of successful office and office-warehouse buildings, the Phillips Eco-Enterprise Center, in 1999.

Building credibility and market knowledge will help reduce some of the hurdles for a design discipline that has been stuck on the fringes of commercial development.

Brinkema and several other sustainable practitioners and lenders agreed that the Wells Fargo campaign will provide an important boost to the movement's credibility, but Brinkema added that the pledge reflects a financial marketplace that's steadily warming up to green building.

Financing actually isn't the major stumbling block right now, said Brinkema, pointing out that projects like his have developed a persuasive bottom-line case for sustainable design.

One of the best pieces of financial evidence provided by the Green Institute is the 30 percent annual reduction in energy costs in green buildings compared with new buildings designed to simply meet codes.

Those savings come largely from a geothermal heating and cooling system, and a tight building envelope that minimizes air infiltration. Both are mature technologies that can be obtained at little additional cost.

Many green design elements add little or nothing to the project's cost - including toxin-free paint and surfaces.

The outcome is a building with a comprehensive green design but at a cost that's only 3 percent higher than a traditional building - a $150,000 premium on a total $5 million development, Brinkema said. That's far below the 10 percent to 15 percent green premium that the market has anticipated.

Even with that kind of evidence, would-be green developers are still likely to find a cool reception in their lender's office unless they bring a resume filled with experience in the new - read riskier - approach to development.

Norman Sellers is national vice president of Citizens Bank of Vancouver, which is providing construction lending for Dockside Green - perhaps the largest North American green development.

The Dockside is a 23-acre, mixed-use project that is about to get started on a contaminated site near Vancouver's harbor. The lead developer is Vancouver-based Windmill Development Group, which has developed a hefty portfolio of green residential and commercial projects.

And that was important to Sellers.

Projects that use technologies like geothermal heating and cooling have higher development costs and, consequently, narrower margins for lenders, he said.

In that case, financial institutions will want to see the capability of the developer, to see a track record of successful development in this field, Sellers said.

That means the developer must be familiar with environmental technologies, the market and its leasing opportunities, and the regulatory landscape.

[Windmill has] demonstrated that they can develop this kind of project, and that makes it easier for me to handle the risk, Sellers said.

Developer Gary Christenson, who is new to green projects, is breaking ground in Boise, Idaho, on an 11-story downtown, multitenant office tower, a rare speculative green project.

Christensen is a veteran in the local development business, but he became a born-again sustainable activist over the last several years. His first green project is designed to reduce energy costs by 30 percent to 35 percent, provide a safer, healthier working environment and deliver more savings through flexible modular designs that he believes will reduce tenant turnover.

He won his Wells Fargo bankers over to that vision, including vice president of commercial mortgages Tony Sciortino, who was impressed by Christensen's tireless pursuit of good design as well as better performance and cost controls.

But persuading the project's appraiser was another matter.

By the nature of the business, an appraiser is always looking backward, and that creates a problem for a project that's different than what's been done, Christensen said.

Despite a lot of persuasion and endorsement from his bankers, the appraiser still judged the project would return 8 percent to 10 percent less than Christensen forecast, a decision that forced a significant hike to the project's reserve.

Even with that premium, Christensen said he will lease the 184,000-square-foot building at or below costs for comparable new buildings in Boise, thanks to savings related to materials and processes and to a coordinated development effort that brought engineers, architects and contractors into the plans early.

Leasing brokers are also crucial to the success of the green building movement. But most of them aren't on board yet, according to Brinkema.

Brokers tell me that they want to understand this, but so far, we haven't seen any of them come through our buildings, he said.

Brokers are crucial because they will carry the story about green benefits to potential tenants, and there's a lot to learn about that story: from utility savings to a productivity premium for tenants whose employees work better and feel better in a naturally lighted, toxic-free environment.

Data is slowly growing that demonstrates those productivity benefits, which Brinkema said will be green design's greatest financial advantage over time.

But like much of the sustainable building industry, that story is still developing. It is tantalizing, but it's not affecting much of commercial building yet.

The public probably needs to see more than anecdotal evidence of those effects; they'll need to see real demonstration, said Wells Fargo's Sciortino. But to do this kind of project, you have to be committed. This is exciting, but you can't say these concepts have been embraced by the mainstream yet.

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