In one of the most serious economic downturns in recent history, as major financial institutions clamp down on loans and lines of credit, some pools of money remain that can offer capital support for sustainable projects.

This article takes a look at three such operations that offer potential sources of capital through various methods, from those who connect developers and investors to those who oversee direct-funding pools.

Making connections
Sustainable projects appear to be gaining a leg-up in the financial community, according to Lisa Galley, principal at Galley Eco Capital, LLC, based in San Francisco, California. In the future, projects that are not built based on the triple-bottom-line balance between people, planet and profit may be considered the riskier investment.

“A property may need a risk-premium adjustment if it is not built sustainably. That hasn’t happened yet, but it is getting more currency amongst institutional investors,” Galley said. “Green capital—debt and equity earmarked for the development of new sustainable buildings or the green retrofit of existing buildings—is definitely on the rise, albeit with an uneven distribution of capital types.”

Galley Eco Capital seeks to connect developer with investors as several national and regional real estate investment pools have established green real estate funds—in theory adding up to a few billion dollars in earmarked capital—with a business plan of providing equity capital to sustainable real estate. Each program has adopted its own set of criteria regarding socially responsible approaches that they use to vet potential developments. On the debt side, the availability of earmarked funds for lending on sustainable real estate has not been growing as fast.

Galley Eco Capital provides a suite of integrated financial services to real estate investors who are using “green” initiatives and strategies to improve the value of their assets. The firm looks at all the capital questions and issues that a developer will encounter when they bring a green real-estate deal to market.

“We use our background as investment analysts, former investment bankers and our ability to structure capital to put together transactions,” Galley said. “Typically, the groups we talk to and work with are trying to create certified green ­investments.”

Their expertise applies to everything from new mixed-use and commercial/industrial developments to adaptive reuse of existing property.

“We place the knowledge that a developer would typically have to assemble from many different locations throughout the industry: tax knowledge, real estate investment knowledge, funding and financing information, the sourcing of partnerships,” Galley said. “Companies like ours are going to be in demand because it speeds up the time to market.”

When a project has been identified, Galley’s team of financial professionals examines the overall underwriting of the project, how it competes in the capital markets, what green strategies are proposed and then work to assure that the value of those strategies are quantified correctly.

“That means coming up with accurate rates of return and pay-back analysis of the upgrades or the components,” Galley said.

It also means making sure the developer is sourcing the maximum amount of tax credits and rebate incentives available. Meanwhile her firm maintains relationships with new and emerging green funds and tracks their investment programs. That allows her to provide excellent information to developers on what they look for in an investment, so that the developer can tailor the project to be received in the best possible light.

“We use our traditional banking and capital skills to structure partnerships to do business with those investors immediately by accessing equity capital,” she said. “If necessary, we can come in and ­assist to do due diligence, underwriting and closing services for those transactions as well.”

Separating truly sustainable projects from those that are more traditional developments that incorporate a few green elements is a challenge for a financial industry that likes to base its decisions on quantifiable data. How do you measure sustainablility?

Galley favors the concept of responsible property investment —the triple-bottom-line approach—which is socially and environmentally progressive while generating market rates of return for investors. But the concept is new space for most people. It is a space that is literally forming before their eyes.

“I think some SLDI (Sustainable Land Development International) members have a lot of experience in this area. They have been sustainable before sustainability was really a known term,” she said. “But this is really the first or second year that the institutional world has come out in a big way and started to express a preference for green investment.”

Most institutional investors she has worked with focus heavily on green-building certification, possibly because that is one place where there is some level of quantifiable measurement made possible through the Leadership in Energy Efficient Design (LEED™) program implemented by the United Green Building Council (USGBC). That system has gotten a lot of traction within the institutional investment community. It has name recognition and is something that financial professionals can point to and say they understand.

“For them, they want to see some sort of third-party certification,” Galley said. “However, I think there are many very good developments that could be sustainable that might not necessarily be certifiable under green building programs. In any event, the groups that I have been working with want these certifications.”

The hot discussion within the financial world is the establishment of standards. The concepts could be sold to banks and financial institutions which proponents feel will be the primary way to attain the buy-in and participation of the investment houses into sustainability.

“I would say to the members of SLDI need to be on the look out for this,” she said. “Right now the big movement in the finance world is of consortiums of groups trying to create such standard frameworks.”

Meanwhile some community and regional banks advance local loan programs, which take into account a real estate project’s green features. Where such programs exist, according to Galley, the most notable underwriting criteria centers on savings created by the level of energy efficiency of the project.

Not your typical bank
An example of a regional lender that performs a role quite different from banks that traditionally offer lending services and checking accounts is ShoreBank Enterprise Cascadia. With offices in Washington and Oregon, this non-profit affiliate of ShoreBank-Chicago is a mission-based, 501c3 lender, called a Community Development Financial Institution (CDFI).

In 2007, ShoreBank Enterprise Pacific, a rural-based, non-profit lender, merged with a similar organization, Cascadia Revolving Fund, which had a more urban-based mission, to form ShoreBank Enterprise Cascadia.

“I think we were the first two CDFIs in the country to merge,” said Mark Bowman, senior lender. “We had an existing relationship, similar missions, and were in a similar region; it was a good growth move and would strengthen our ability to serve others.”

 “We are not governed by state or federal regulations as are traditional banks,” he said. “That allows us to have a higher risk tolerance to do deals that traditional banks can’t do. It allows us to be creative and flexible in our terms and pricing.”

With multiple sources of funds—grants and low-interest loans, from foundations, private individuals, and government like the US Treasury, State of Washington and US Department of Agriculture—ShoreBank Enterprise Cascadia works with their more traditional financial brethren to support sustainable projects in the Pacific Northwest.

“We have relationships with banks, and entities like the SBDCs (Small Business Development Centers), that understand that there is a need for a capital investment in a particular entity, business or project, but the risk tolerance is too high for them to participate,” he said. “We do a lot of work around social equity issues and environmental issues, where we become partners with others in those areas to help on the front-end, craft and make deals happen quickly and properly.”

If a project surfaces in its early stages, ShoreBank Enterprise Cascadia can offer strategic planning advice and serve as a consultant to refine the project’s plan and take into account such things as location, markets, time frames, etc. Its primary role is to form partnerships with others to invest in the project.

“We’re not here to compete against banks. We’re here to support banks. We are invited to the areas that we serve by banks and others in the community,” Bowman said. “Or we may help a ­developer find a primary lender and we will take a subordinated role to help get the deal done, such as providing gap funding.”

The company’s services go beyond lending money, according to Bowman. It’s an ongoing relationship with the developer to make sure the project is successful and to provide other resources if necessary.

“When an applicant comes in, they may not be ready for lending, but they may need something that one of our partners can offer,” he said.

“We can readily pick up the phone and connect them with a partner organization that can bring value to that customer or applicant. We try to create a more holistic approach to improving our community.”

 It’s not simply about dollars. It’s also about partnerships. To be effective and to effect change in communities, urban or rural, it takes partners.

“The relationship doesn’t end when the dollars are lent out,” he said. “One of our goals is to see the developer as an individual and help their business build its strength and asset base. We want them to become resilient enough to move into traditional banking markets.”

In a larger sense, Bowman said that there is a growing awareness by both consumers and the government that it is no longer acceptable to buy products and services that do not promote a healthy and sustainable planet and allow business-as-usual to continue.

“This pressure has placed more dollars to the promotion of sustainable farming and forestry practices, green building, alternative energy, and recycling practices,” he said. “Even in a recessionary economy, there appears to be a higher percentage of foundation and government dollars appropriated to promoting healthy planet habits.”

Land-specific dealmaker
Based in Washington, D.C., Land ­Finance Group, LLC specializes in ­financing land deals around the ­country—one of the few companies with that particular focus, according to Kyle Poole, director of the investment group.

Working with two primary investors that are interested in financing raw land purchases, the company seeks opportunities to offer its funds in exchange for higher rates of return than typical bank financing. One of its primary products is bridge or interim financing for well-capitalized developments.

From the borrower’s perspective, the firm offers non-recourse land loans at approximately 50-percent loan-to-value. As all of the funds are private, the firm’s lending practices are not encumbered by the same rules that face regulated institutions and it is self-underwritten.

Combined, that leads to faster funding for the developer.

In a financial climate that has seen a serious reduction in available dollars from traditional sources, his company has drawn more attention from the market. Private funds are the only sources in some markets as bank financing is hard to come by, not only for raw land but also for horizontal construction.

Poole works with a database of 20,000 developers from across the country to whom he offers his services. The number of actual projects coming online has drastically diminished due to the economic slowdown    n, but the actual number of people seeking his services has increased.

“I must also say that previously, our relatively higher rates for private finance have kept some people away, but now that there is a dearth of bank financing, and borrowers are coming to us in droves,” Poole said. Our underwriting standards have become stricter, but we are still available and to that extent, we are a lifesaver.”

Further, from his perspective, it is a good time to finance land deals.

“The value of land has deteriorated by 50-percent and we’re lending 50 percent of that discounted value. So in a sense, we’re lending 25 percent of the value at this time,” he said.

A generalist in nature when it comes to the types of projects it finances, Poole said that Land Finance Group is interested in getting involved in more sustainable land development deals. He is especially optimistic toward that end because of the political climate in Washington, D.C. expected to occur in the aftermath of the presidential election. No matter who wins, opportunities may present themselves at the governmental level. For example, new laws could provide favorable tax treatment that could change the industry dramatically.

“We feel that, in the ‘green’ or sustainability area, there will be some great opportunities under a new administration,” he said. “One can almost sense these opportunities in the air.” SLDT