Greening the Middle Class

By Robert Roth, Green Envy Development Going green is everyone’s responsibility. This appears to be the most commonly marketed message. However, within the field of green building, specifically, the rules of the game currently favor the rich and poor over the middle class. This applies to property developers and end users alike. Cash is kingAt the developer’s level, the rules of the game are currently stacked against most green projects, even with the best of intentions or novelty of concept. Much of this difficulty can be sourced in the challenge in financing a green development project. The current state of our capital markets and accessibility of construction lending are under considerable distress.  Aspirations of the highest achievements in green construction and design draw no favor over standard development concepts in the hearts and minds of debt and/or equity capital contributors and their risk evaluators, who may likely have an unbearable amount of distressed real estate-related assets currently on their books. No new construction loan commitments can be issued—whether green or not—until capital is sufficiently freed up and lender principals are confident that their next construction loan venture is assuredly sound. This would demonstrate a market preference for private equity—and to a lesser extent, non-institutional debt financing—to finance a green construction project, which further implies that cash is king, probably more than ever. What about all of the recent government incentives for green projects? The vast majority of such green building government incentives deliver their greatest effect on “project readiness,” which soundly favors a cash-heavy development group. In order for a project to be fairly deemed as ready, the development team must have most or all of the following development milestones in order, prior to applying for government project financing assistance: 1.    Control of the land. This may assume that the subject property development site has already been purchased, or is under contract to purchase—which requires a minimum of a 10 percent earnest money deposit, per industry custom.2.    Approved building plans. An architect typically charges 8 percent to 15 percent of the total hard cost budget for their building design and submission of building plans to the appropriate building authority, which is likely to be several or many millions of dollars. A substantial portion of the architect’s work is complete by the time building plans are generated, submitted and approved, and therefore, so too is the better part of the architect’s considerable fee.3.    Mobilized vendors. Third-party vendors, including attorneys, will also require funds on deposit or retainer for their services in connection with the given development project upon project readiness. Time is money. The government’s efficiency in acting on requests for funding may be time consuming and an administrative burden, even for projects demonstrating readiness.  This time delay can expose the project to real estate market shifts, and impact returns on investment.Collectively, the initial financing of this project mobilization effort is termed as “seed money.” So, while government funds may be available for green development projects, it takes money to get money in this high-stakes quest for all things green.The ends of the spectrumEnd-users, which include either renters or purchasers of green properties, also tend to be economically polarized, when it comes to accessing green properties. Luxurious, green condo projects are appearing in greater numbers in the more desirable neighborhoods around the New York City area. Currently, the rich can rent or buy green properties whenever they want, regardless of any additional cost for green construction design or materials. Supply and demand are more or less in sync, as this is a more “organic” market condition at play for high-end demographic users. This trend may find its origin in the need to offer a fully differentiated product for placement into a saturated local condominium unit sales environment. Owning a luxury, green condo unit may even be considered a trendy status symbol for those who can afford it. The list is long on contemporary celebrities (Ed Begley, Jackson Browne, Brad Pitt, Leonardo Dicaprio, etc.) and their less famous financial equals who covet the perception that they are beautiful, yet sensitive to worldly environmental concerns. Owning or even developing a green property is a function of this phenomenon.Conversely, affordable housing has dramatically been coupled with government funding on green housing projects. The inventory of affordable green housing is increasing artificially as a result of government subsidies and other incentives. Even a cursory review of the American Recovery and Reinvestment Act of 2009, which was signed into law on February 19, 2009 by President Obama, would suggest that the current administration has placed special emphasis on its stated interests in providing financial assistance for green development projects, while concurrently providing housing for the lower socio-economic demographic in these affordable housing state-sponsored initiatives.The quantity of inventory of affordable housing will swell considerably once the provisions of the recently signed stimulus package take effect. Therefore, the supply and demand is not as relevant for affordable housing. However, inclusion of the middle-class appears to be limited in this particular item of recent legislation.Furthermore, much of the middle class—which is where most Americans would be classified—would likely be ineligible for green affordable housing, due to their incomes. In addition, financing green projects for a middle class end-user in mind is not currently encouraged through our financial system or government funding projects, save for a few less substantial back-end incentives for property developers, such as NYSERDA (New York State Energy Research and Development Authority). However, these relatively minor incentives for green features do not result in an increased inventory of properties that are to be marketed to the middle class. There is neither enough of an incentive here, nor is there a pool of funds sufficient to get green construction projects off the ground.An alternativeWhy not make a substantial pool of funds available for development projects, and at project inception—as opposed to project completion—once specific and objective accomplishments are achieved or credibly applied for in green buildings?  LEED (Leadership in Energy and Environmental Design), Energy Star, Green Globes, Passive House and other approved and legitimate green building rating systems should be the basis for government-sponsored funding. There should be a screening process by the same government agency that issues these funds to place some incentives or project financing for those sites that make application for an approved green building standard. This would cut across socio-economic classes, and better apply and implement the benefits of green building, generally. As an incidental benefit, it will likely serve as a catalyst to a real estate and construction industry rebound.  No industry affects the economy and the environment as much as real estate and construction. No greater potential exists to ignite a real estate and construction industry boom than green building. No accessibility or application of green building should be impaired as to any specific socio-economic class.  Once we modify our means and rules to encourage green building projects for all developer and end-user types and classes, it will be a true wonder to witness just how far green buildings can spur our economy and benefit our planet in the process. Robert M. Roth, Esq., is a property developer with Green Envy Development Group Inc.—the development firm of the Silhouette, a four-story, four-unit condominium project in Brooklyn designed to meet both LEED Platinum and Energy Star certifications—a mortgage broker with Exclusive Capital Consultants and an
adjunct professor at CUNY Brooklyn College, where he teaches real estate courses and a newly launched Green Business Course