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This article was originally published on Huffington Post. Written by Roger Platt | President at USGBC
I recently observed that a "refreshing free-market breeze" is blowing in the direction of green buildings and green communities. I summarized part of that trend in four words, "Our Investors Require It." Now I'd like to offer another four-word business case.
Most private sector money used to construct green buildings comes from mortgage lenders, not equity investors. So this time I want to focus on exciting, new demand for green buildings coming from the lending community.
"Our Lender Values It"
Equity investors seek to enhance their properties' long-term value. Simultaneously, their mortgage lenders are interested in reducing risk. A lender's primary risk is the borrower's inability to repay the mortgage or the potential to default on specific terms and conditions. Mortgage lenders evaluate debt-financing requests through this lens - to mitigate risk, lenders look for a property to generate steady, positive cash flow over the loan term. Properties also need to withstand economic fluctuations, market competition and the natural "aging" or obsolescence of the property. With leading lenders around the globe, "certified green collateral" plays an important part when calculating mortgage risk.
Now, as never before, green buildings are recognized as high-quality collateral and, therefore, an important variable to reducing risk. A new study from the University of Arizona makes this case with graphic clarity. Professors there mapped the "relationship between sustainability property features and corresponding commercial mortgage default risk."
Their findings reveal that commercial mortgage loans with collateral consisting of buildings certified as ENERGY STAR® have a lower likelihood of loan default when compared to non-ENERGY STAR buildings. Where the collateral is LEED-certified, default risk is significantly lower than non-LEED-rated buildings.
This research echoes a working paper by Professor Nils Kok, with colleagues Piet Eichholtz, Rogier Holtermans and Erkan Yonder, that shows pricing advantages for both commercial mortgages and corporate bonds issued by U.S. REITs since 2000. There is also the 2013 University of North Carolina research report that found lower default rates for residential energy efficient buildings with an ENEGY STAR rating.