NEW YORK, NY - As the credit crunch makes it harder than ever to obtain financing from len-ders, some real estate players say an environmentally friendly portfolio may offer builders an advantage in securing funds to develop new projects. "In general, financing anything is really difficult, given the credit crunch," said Robert Politzer, president of Greenstreet Construction Inc., a New York-based builder with a New Jersey office in Princeton. But given the growing popularity of green building, developers who do not have green projects are at a competitive disadvantage, he said. "It would be easier these days to interest a potential funding group, whether a bank or private equity, in building a state-of-the-art green building than a conventional building project."
Because of the benefits of green building, such as energy efficiency and reduced operating and maintenance costs, "you're going to see increased tenant demand," said Jim Lutz, senior vice president of development at Liberty Property Trust, a Malvern, Pa.-based commercial real estate developer that recently completed its first LEED-certified New Jersey project in Mount Laurel. LEED, short for Leadership in Energy and Environmental Design, establishes criteria for the design, construction and operation of sustainable buildings under the U.S. Green Building Council. Higher demand means higher occupancy rates at green buildings as compared to conventional buildings, so "a lender who's concerned with making sure that the loan gets paid back is going to see it as a less-risky investment," Lutz said.
But while a green component may help to attract interest from lenders, it ultimately does not determine whether a building gets funded, experts say. "It's much more subtle, how building green influences financing," said Michael Saltzman, a partner at Newwork, a Newark-based real estate development company. "It's more of a secondary factor." Less than two months ago, Newwork closed on nearly $17 million in financing from PNC Bank for The Richardson Building Lofts, a 67-unit, 86,000-square-foot, LEED Silver-proposed apartment building on Columbia Street in Newark. The project, which is the conversion of a former jewelry factory, broke ground Oct. 22, and is expected to be available for occupancy by next summer, Saltzman said.
"If a deal came into us that had green attributes, we'd be excited to see it, and we'd consider those as part of the overall underwriting," said Bill Lashbrook, senior vice president of real estate finance at the East Brunswick office of PNC Bank, which has held in-house discussions about developing a green financing program. The bank noted in its internal documents that Newwork had applied for LEED certification for its project, though Lashbrook said "the deal stood on its own merits," including the property's location in Newark, where PNC is looking to invest, and the current strength of the rental market.
The challenge of arranging financing for a green project lies in assessing the value of the building, Lashbrook said. "In real estate development financing and construction financing, the target is always to create enough value in the project so that [the] owner has the ability, whether it's through refinance or the sale of the project, to repay the bank," he said. But "we haven't seen these properties trade in the market, so we're not really sure how the market has come to value them."
Many lenders helping to fund green projects are betting when the real estate market rebounds, such properties will bounce back faster than other types of buildings, said Lindsay Napor, executive vice president of Ecological Development LLC, a New York-based real estate developer working on two green residential projects in New Jersey. "People think when the market comes back ... there will be a bump in value in those properties," she said.
Ecological Development has secured $90 million in financing for green projects in New Jersey in the past two years, and is working on obtaining money for two others, Napor said. Rather than seeking loans from banks, Ecological Development has worked with real estate funds; real estate investment trusts, or REITs; and private investors for financing. "Real estate funds and REITs are still fairly well-funded," said Anthony Sblendorio, the firm's chief executive officer. "There's still a desire by funds and REITs to deploy that money."
Hampshire Generational Fund, for example, has made an equity investment in Ecological Development's 89-acre green luxury residential development on Mine Brook Road in the Basking Ridge section of Bernards. The project, slated to begin construction in the spring, will include 12 LEED-rated single-family homes, organic agriculture and manmade wetlands for a stormwater treatment system.
The equity stake marks the first time that Hampshire Cos., the Morristown-based real estate investment firm that administers the fund, has committed capital to a green project, according to principal Robert Schmitt. "We liked the green concept," he said. "We think it's where the future is going to be for development."
Hampshire is paying for improvements and entitlements for the property from its equity capital, Schmitt said, but the costs for land acquisition and construction will be far more substantial, he said. "That definitely hinders our flexibility with the capital structure for this project," Schmitt said. The firm most likely will fund those costs through lines of credit set up with lending institutions prior to the crunch, rather than seeking new financing, he said.
It is uncertain whether Hampshire, which committed to the project in February 2006, would have made a similar investment during the current credit crisis, Schmitt said. "It'd be a tougher deal to commit to today," he said. Still, "going forward, we expect to increase the number of green buildings in our portfolios," he said. "They are buildings that are growing in value, because they are buildings that tenants want to occupy."
Source: njBiz.com