Clean Energy Economy Forum: Sustainable Building Part 3 of 4

Ms. Moore: All right, everybody.
Thank you very much, and we're going to be getting started with
the second half of our program.
In a few minutes we'll be hearing from Xav Briggs,
who will be here to moderate our esteemed panel on financing,
which clearly is something that this crew wants to talk about today.
At this point in time it is, again,
my honor to be able to introduce Deputy Secretary Ron Sims from
Housing and Urban Development, a longtime leader in this field
that I imagine many of you know.
Deputy Secretary Sims is responsible for managing the
Department's day-to-day operations,
which is a nearly $40 billion annual operating budget,
and the Agency's 8,500 employees.
Deputy Secretary Sims previously served as the Executive for King
County, Washington, the 13th largest county in the nation,
and a metropolitan area of 1.8 million residents and 39 cities,
including the cities of Seattle, Bellevue, and Redmond.
While serving three terms, Sims was nationally recognized for
his work on transportation, homelessness, climate change,
health care reform, urban development,
and affordable housing.
His leadership in affordable housing in multiple community
and housing partnerships have funded 5,632 units of housing
during his 12 years.
Deputy Secretary Sims was named Leader of the Year by "American
City and County" magazine in July 2008,
and was recognized as one of "Governing" magazine's
Government Officials of the Year in 2007.
He has been honored with national awards from the Sierra
Club, the Environmental Protection Agency,
and the National Committee for Quality Assurance.
Sims joins Senator Edward Kennedy and California Governor
Arnold Schwarzenegger as recipients of the 2008 Health
Quality Award from the National Committee for Quality Assurance.
Sims and King County are also recipients of HUD's prestigious
Robert L. Woodson, Jr. Affordable Communities Award for 2005.
I would also like to note from the perspective of the
leadership that HUD has provided under the President's Executive
Order on Sustainability that their commitment to helping us
to support green practices in federal siting and how we can
best reflect the principles of the livability partnership to
help be good neighbors, and support sustainable communities
across the country where we operate has been absolutely
critical to the work so far.
Deputy Secretary Sims, it's my pleasure to cede the podium to you.
Thank you.
(applause)
Deputy Secretary Sims: It's great to be here this morning,
and I do wish to acknowledge -- I know several other speakers
you've had; you had Council of Environmental Quality Chair
Nancy Sutley, who is changing the world,
and Department of Labor Secretary Solis,
GSA Administrator Martha Johnson,
and obviously Ms. Moore who introduced me so graciously,
my dinner guests last night; we had a wonderful time talking
about how we were going to change the world,
the Associated Director Xavier Briggs from OMB,
and then also you're going to be hearing from DOE,
Department of Energy Director Arun Majumdar.
It is great to be here talking about sustainable buildings and
their importance in the world today.
It's really interesting because often you don't get an
opportunity to do extraordinary things.
You know, I've -- at my age I have looked and said, you know,
when are you going to have breakthroughs?
And I remember having a history professor who said,
"There comes a time."
I used to say, "But the time is now."
I had a big 'fro --
(laughter)
You know; a T-shirt with a striped fist on it;
I had a beard, Army boots, and I said, "Now is the time."
He said, "Not yet, not yet.
But the time is coming."
So we know that historically there,
for whatever reasons the public all of a sudden tries to quit
surfing, to find themselves and to embark on an absolutely new direction.
It is never easy because anybody who's been brought up in that
period finds out that the public's also really unsettled.
You can never get it quite right,
and yet there's a certain stick-to-itiveness.
You have that time.
You have more opportunities to make extraordinary change now
than ever before, because no one is willing to stop you.
Now think about that for a second.
I have three sons.
I love them, always have loved them,
I like them now because they're emancipated.
(laughter)
But, you know, I can remember when the first one was being
born and I was in the room, saying, "Go, Doug --"
I didn't know it was going to be a boy or a girl,
I just remember it was the Lamaze method and it was asking
men to go in to the birthing experience,
and I was walking down the hallway with this thing over my
head, a little bow underneath, and they said, "No, no,
Mr. Sims, it goes over your mouth."
(laughter)
But I got in the room, I was going, "Go, Doug!"
Instead of "Push, push."
"Go, Doug!"
And the nurses were going, "Go, Doug!"
And the doctor started saying, "Here comes Doug!
Here comes Doug!"
I told my wife, I was the most amazing coach she's ever had;
she says, "You were really annoying."
(laughter)
But I can remember when Douglas came out,
it was a throbbing umbilical cord, his eyes were not focused,
then nor now.
(laughter)
The doctor said, you know, do you want to --
gave me the scissors to cut the umbilical cord,
and then I got an epiphany.
I realized that the more umbilical cord,
maybe the better his chances.
So he almost became the first person in medical history to
have a four foot drying umbilical cord.
The doctor said, no, here, and then you had that microsecond of
terror and then joy of cutting it and the first breath.
I promised my sons their world would be better than mine.
Every one of them.
Made huge signs, they don't remember them,
but it was a commitment from a parent to someone who they would
love eternally and fully, that their world would be better.
And this is why you're here today,
because we have this incredible opportunity to create a tsunami
that re-changes how we build this country,
how we build our cities, and what we can do in them.
You only have a short window, but now is the time.
And think about it.
(adjusting the mic)
Think about it.
There we go.
When I look at metropolitan areas,
when I looked at urban areas, when I looked at where we work
and where we live, we have to be smarter now.
Smarter with materials, smarter with designs.
In King County, which I love, it was a wonderful job,
I was honored to serve there as an elected official,
the one thing that we knew was that we could predict a whole
series of things by design.
We could predict morbidity rates by neighborhood design.
We could predict illnesses by the kind of home you lived in.
We could predict workplace stress by the design of an
office building.
All of those things had consequences,
and they always have.
Always have.
And now we have the data to know that we can actually make
people's lives better.
That we can reduce disparities in the outcomes of health care.
If all is said and we design neighborhoods different and
homes different, we could take individuals who now we know are
likely to have diabetes, just changing neighborhood design
reduces risk of it.
You can't tell a person who's obese go out and walk if the
neighborhood is not walkable.
You cannot tell children who are going to be,
have early onset or type II diabetes --
it's going to be greater now than ever before,
and it will break our health care system because we never
created a formula for what we call the impacts of type II
diabetes; all you've got to do is make sure they have a pathway
near the house and a park within a quarter mile.
Sensible, smart development design.
That's what you're going to be charged with.
You're no longer just building a building and calling it green.
You're no longer designing a home and saying, well,
this is a really nice house because it has -- you know,
allergen free and it doesn't have lead paints.
You're no longer talking about a community design that is
separate from the impacts it has on people's lives,
aspirations and hopes.
You're no longer -- you're defining them.
Architect, building and design has always,
always defined how we live, how we work, how we play,
and how we perceive ourselves.
In HUD we made a decision -- zip codes will be an address but
never a life determinant.
Which means that our money and our partners' money --
U.S. Department of Transportation,
Environmental Protection Agency, USDA --
are simply saying we will no longer stand back and say build
as you could, build as, you know, build how you want to;
we're going to simply say why don't we build smartly?
Why don't we, when talking about energy, self-sufficiency,
talk about how a green building can function as energy efficient
and still provide a good workplace for people.
A building that's dark inside depresses people, always has.
That's why people got out of caves.
(laughter)
Except in HUD, which is cave-like.
(laughter)
It was new brutalism, they weren't kidding,
as an architectural period.
(laughter)
But we know that light works with people, always has,
whether they're young people or seniors.
You design a school that is well lit with exterior light,
we know that children learn better.
Why?
We don't know; we just know that they do.
You know that when people can see the outside they actually
feel safer.
We know that people work better when light comes in.
So our buildings have to be designed different if we want to
be what I always call highly productive and smart and healthy.
So you have a chance to create a brand new future.
I mean, that doesn't happen very often.
When all of a sudden you're at the gold line.
You can win the Super Bowl!
You can wear the ring!
Because we are so close to being able to make a dramatic difference.
And that's why all of you are here, all of you are here.
So we want you to be excited because we want to change America.
We're the world's grand experiment.
Never before in human history has a country like ours existed.
All of us, all of us got here by boat, plane, or land bridge.
The only country in world history that arrived at an
economic and military power without a common gene pool.
We are the experiment.
And the real issue is whether we're going to be an enduring
experiment where people say we worked.
I remember going to a country where people were shooting at
each other all day long.
I'll never forget it.
They were shooting at each other all day long.
All 17 ethnic groups, all 17 ethnic groups and their friends.
I remember saying to them, "Golly; you all look alike to me."
I said I just -- and they started talking about a war that
started 3,000 years ago when they were nomads.
We've been able to resolve and arise as a great nation,
resolving our differences peacefully.
We've been able to become an innovative power in spite of
ourselves; more because we are a diverse group of people.
We've been able to have a functioning and emerging and
maturing democracy.
And the real issue is whether it will endure in the 21st century.
The most competitive century we have ever had, ever had,
where we have merging powers all over the world.
The question is whether we will work.
And now it's in your hands because how we live everyday;
the homes we live in, the places that we work;
if they are refined and responsible;
if they are sustainable, if they are green,
if they are clean and healthy; if we rebuild our neighborhoods
and rebuild our cities and rebuild our rural communities;
if we are smarter than ever with our materials;
if we are innovative and imaginative;
we'll get out of the caves we are now in and into the daylight.
It is your call.
Now, I always -- my life has been rich and full and wonderful
in so many respects.
And I remember this person coming into a meeting.
And it was a fundraiser, and it wasn't mine, thank goodness.
But it was a fundraiser.
And this person walked in, and he was walking right to me.
I'll never forget, he was walking -- I just knew.
I just knew.
I said oh -- and he was covered by the full (inaudible).
Head, shoulders, hands, shoes, feet.
I just knew he would come to me, and I was -- say, why, Lord, me?
And he got up.
And my father said to me, "Bud, don't ever think you're so
important you will not hug another person or shake their hand."
So he got up, I grabbed his hand, and I hugged him.
And I said, I don't even have Purell.
And he stood back and he says, "Is your brother Jim Sims?"
I said, "Yes."
He said, "Did Jim retire?"
I said, "Yes, he did."
He said, "Well, tell Jim that he saved my life by giving me one."
So I went, "Oh."
He said, "I was developmentally disabled, and still am.
Your brother believed that I could live independently when
nobody else did.
When nobody else fought for people who were developmentally
disabled, your brother did.
Tell him that I have been working as a taxpayer since 1994.
I have a life because he gave me one.
He pushed me and hugged me and yelled at me and encouraged me
and drove me.
I've been paying taxes and living alone since 1994.
I have a life."
So I went to my brother, I said, "James,
do you know a Hercules Johnson?"
Now, you don't ever forget the name, Hercules.
So he said, "Oh, yeah, I know Hercules."
I says, "Hercules wants to thank you for believing in his life."
My brother smiled.
The day before, there were three questions written on the ink board; three.
And my oldest brother looked and me and he said,
"I'm going to die, aren't I?"
I said, "James, you are going to die."
There's a lot of things you want to tell a sibling,
and that is not one of them.
And I wouldn't wish that on anybody on this planet.
His eyes pled for a different answer.
His face, his hands, everything wanted a different answer.
But he had a metastasized cancer,
and the end was absolutely certain.
My brother's journey is complete, absolutely complete.
And at his service, all these people came and talked about how
this one guy just believed in the impossible,
believed he could change, believed he could influence,
believed he could create.
Believed and believed and believed.
Well, there's a higher authority in this room that's given you
one more day, one more week, one more month, one more career,
because your job is not done.
You've been allowed the richness of a gift at the most
magnificent time in America's history.
The question is whether the grand experiment will work for
the rest of the century.
You've got to be smarter than ever.
You have some kid who just wants to be in a better neighborhood,
and you're going to build it and he's going to be healthier and
she's going to be healthier because of it.
You've got a person that's going to go in the workplace and say,
oh, wow, this is fabulous, fabulous,
because they can see and they'll have light.
We're going to change our economies because we're going to
have sustainable buildings that are efficient and cost
effective, because we are not yet done changing the world.
So all I want to tell you is you've got one more day,
one more week, month, and year to change the world.
And I hope you are ready, because the talent and skill in
this room can change the world.
So believe in yourselves.
Grab all that expertise and all that passion -- all of it.
And harness it.
And don't change the world for me,
and don't change the world for yourself.
And don't change the world for the next generation.
Change the world for my granddaughter and her generation.
She is perfect, but I want her, when she smiles,
to look back and say, the most talented generation ever known
to human kind got the job done and created an extraordinary
world with extraordinary opportunities.
On behalf of Secretary Shaun Donovan, build well.
On behalf of the President, I am thankful that you're here.
On behalf of all the HUD employees that, everyday,
go to work and say, I hope somebody is listening,
I hope you are listening.
Please rebuild us.
Please get us to be sustainable.
Please believe in green, energy efficient housing.
Please believe.
And we will endure all the century.
Thank you very much.
It was an honor to be here tonight.
(applause)
Ms. Moore: Thank you.
Thank you.
It is now my pleasure to introduce our second panel of
the day on the topic of financing,
innovative finance in particular.
And I know that this is a conversation that a lot of you
all were having during our break and that came up significantly
during the panel that was moderated by Administrator Johnson.
I would like to point you again to the bios that you have on
your chairs -- for full bios of the leaders from the industry
who are with us today.
We have Ken Hubbard, Executive Vice President at Hines,
Herman Bulls, CEO of Public Institutions at Jones Lang
LaSalle, and Jeff Eckel, who is the President and CEO of Hannon Armstrong.
And it's now my pleasure to introduce you to the panel's
moderator today.
Xavier de Souza Briggs, Associate Director for General
Government Programs at the Office of Management and Budget,
which is a part of the Executive Office of the President here for
all of you who aren't familiar with our world of acronyms yet.
Xav is a -- let's see -- an Associate Professor of Sociology
and Urban Planning on leave at the Massachusetts Institute of Technology.
A former community planner, Dr. Briggs' award-winning
research is about democracy, inequality,
and racial and ethnic diversity in cities in metropolitan regions.
He is the editor of the Geography of Opportunity and
author of "Democracy as Problem Solving: Civic Capacity in
Communities Across the Globe."
It examines efforts to lead change on unsustainable urban
growth, regional economic restructuring and the healthy
development of the next generation,
drawing on cases in the U.S., Brazil, South Africa, and India.
His latest book is "Moving to Opportunity: The Story of an
American Experiment to Fight Ghetto Poverty" with co-authors
Susan Popkin and John Goering.
Briggs is founder and director of two innovative online
resources -- the Community Problem-Solving Project at MIT,
and Working Smarter in Community Development.
A former faculty member in public policy at Harvard,
he has designed and led major leadership development strategy
and other training programs for change agents in the public,
private, and nonprofit and non-governmental sectors.
Let's see.
He's been an expert witness in a civil rights litigation,
and in the public sector, he ran the Clinton Administration's
Urban Policy Research and Development Unit at the U.S.
Department of Housing and Urban Development in the late 1990s.
He is a member of The Aspen Institute's roundtable on
community change and other advisory groups,
and his views have appeared in The New York Times, solon.com,
National Public Radio, and other major media.
Briggs holds an engineering degree from Stanford, an MPA
from Harvard, and a PhD in sociology and education from
Columbia University.
And we are very lucky to have him here today to lead this conversation.
Dr. Briggs: Good morning, everybody.
I expected the one sentence intro,
so forgive us for that long one, but very generous by Michelle.
I am thrilled to be a part of this.
I want to welcome the terrific panelists we have with us.
I want to hear from them as much as we can,
and as I understand it, there's already been a healthy sort of
Q&A exchange with the audience.
There's tons of expertise here.
We want to get to you just as quickly as we can.
I'll just make a quick framing remark or two.
You're not here to hear from me.
By any measure, the commercial marketplace broadly defined,
including when I say that I'm thinking non-residential
broadly, for some purposes, I'm also thinking multifamily
housing, by the way, in terms of its characteristics,
building structure and what not and finance.
But, by any measure, we've seen impressive growth in both green
building, both the new construction side and in working
with existing buildings to promote energy efficiency,
and other dimensions.
One could argue, I think, of building performance,
whether it be water consumption or other sorts of indicators.
In this area of innovation, which we think holds so much
promise for the economy and for the environment,
the federal government and the public sector, more broadly,
has been a leader in a number of ways,
and I don't mean to so much emphasize the accomplishment of
it, but just to know it is somewhat unusual.
In many areas of innovation, government is trailing,
some cases significantly trailing the private sector,
at least in adoption of certain practices.
And in this area, it seems to be the opposite.
Just a couple of statistics, and these will compliment the broad
overview I think you got from Martha Johnson this morning.
GSA alone, for example, currently has 48 lead certified
owned and leased buildings, about 150 more working towards
accreditation, according to best available data,
the federal government as a whole has about 240 lead
certified projects with another nearly 3,400 pursuing
certification, and at least 14 federal agencies at this point
have policies to promote the use of green accreditation systems
in their buildings.
That's just the federal piece, and we know we have a long way to go.
Clearly, there are a host of attractive,
appealing factors to this marketplace,
public-private marketplace, including an array of perceived
benefits of green buildings.
And I'm going to turn to the panel in just a moment and get
their take on some of these, everything from operating costs
advantages, building value advantages, occupancy rates,
and so on.
And yet, the sense is that we have a number of barriers to
face, as well, and it's particularly true --
it seems to us so far if one looks at retrofitting or other
work on an existing building portfolio,
as opposed to new construction, it feels to us like we're at a,
still at a much more nascent stage,
and it's not entirely clear -- though,
we'll hear from the panel and want to hear from you --
where the top opportunities are to accelerate progress,
and for the federal government, for example,
to play as powerful, as constructive a catalytic role as we can.
I think this audience knows the broad data on the footprint in
the U.S. alone, buildings both non-residential and residential
account for nearly three quarters of electricity
consumption, 40% of overall energy use,
nearly 40% of carbon dioxide emissions, a hefty share, 15%,
of all potable water consumption.
A host of technologies, some mature,
some emerging from smart lighting to cool roofs and more,
exist to address that footprint, and more and more are coming on
the market all the time.
My previous employer, MIT, is certainly working hard on all of
those, as are other universities and private research
institutions, as well, and I think we'll talk more about
those in the next panel, the technologies.
But appropriate financing and incentives, more broadly,
strike us as very important to help determine the growth of
this sector, its maturation, and, very importantly,
it's ability to create good jobs.
Likewise, it seems to us that the federal, the state,
and the local levels, the capacity that connect the parts,
and really that's the one piece of the intro that Michelle was
kind enough to read about my background that I want to pull
on for a moment, I've been doing a lot of thinking over the years
about collective action, about putting together the financing
tools, the institutional capacity,
the incentives at the local level,
not just the national level, a lot of interest in how those
parts either come together or don't.
For example, at the regional level or at the local level,
it seemed to us that the capacity to convert those pieces
and connect them, including skilled labor,
with appropriate kinds of financing will also matter,
as well, for the maturity of this sector and for its ability
to contribute to both the jobs picture and the overall
environmental picture for the nation.
So, again, I want to welcome the panel.
I want to start with a broad question,
get a few quick takes here before we open it up,
and I guess my first question, gentlemen, is this,
and we'll just start at my immediate left and go down,
if it's okay by you: What are the top things we should be
solving for in this space?
What are the top barriers you see that you think need
addressing, and where could the federal government,
in particular, you think, play the most helpful role?
Mr. Eckel: That's a big question.
Dr. Briggs: That is a big question.
Mr. Eckel: I'm Jeff Eckel with Hannon Armstrong.
Hannon is a 30-year-old investment and merchant bank
that works only in carbon neutral or negative
transactions, mostly energy.
We have financed 2.5 billion of energy savings performance
contracts for the federal government,
half a billion of that for GSA, and there's some specific things
in terms of the federal government of what it can do right now.
And I've looked at this from both the federal building stock,
as well as the commercial office building stock.
On the federal building side, we surveyed the 16 super ESPC
contract holders in the last week in anticipation of this
meeting to get their view on what GSA can do,
what the government can do better.
This is a -- ESPC business has been around for 15 years and
actually works pretty well.
It's got its issues.
The general sense of the ESCO community was GSA is doing much
better in the last four years than it has in the prior,
let's say, six or 12 years in this industry.
Part of that is the organic growth of GSA moving from being
just the nation's landlord to being a responsible landlord of
the nation's buildings, but also the new administration has
framed the issue.
That said, I'll say this in a positive way, the agency, GSA,
has the most potential to do a lot of projects in the near term.
And there's two specific recommendations that came out of
our survey.
The first is that the stimulus funds that GSA got,
I think it's 5 billion, could be much more impactful if it was
used to leverage projects.
What we're seeing are $10 million projects that have
$1 million of private sector financing and $9 million of
stimulus funds.
It should be flipped around.
There is no shortage of financing for ESPC contracts.
And really, if you have the ability to use the stimulus
funds, mixed use with private financing,
you can do much bigger projects, much deeper savings,
do things like combining it with electric vehicle programs.
There's a gentleman from Johnson Controls here who can speak to
that more sensibly.
That said, GSA has done that very well at the GSA White Oak
facility in Silver Spring where the Food and Drug Administration is housed.
We have financed about 100 million out there.
And it's currently evolving plans that are very aggressive,
I think, for St. Elizabeth's conversion for Homeland Security.
The other constructive thought out of this group,
there were a few unconstructive ones,
but GSA funds should be used for new construction with ESPC's, as well.
That had been a bit of a gray area, but it's now much clearer.
GSA actually did the first new construction with ESPC project
back in 2000, the federal courthouse in Gulfport,
Mississippi, very high performing building because of that.
White Oak and, I think, St. Elizabeth to some extent
will be examples.
GSA has by far the single biggest opportunity within the
federal government to do new construction with ESPC's to
again go bigger and deeper in the energy efficiency.
I can come back on commercial office buildings.
Why don't I let my colleagues have a shot.
Mr. Bulls: Thanks a lot.
Well, I'm going to take it up more to a policy level in terms
of what GSA can do.
We heard one of our earlier speakers talk about the fact
that there are so many standards out that you don't get the
economies of scale that the private sector would like.
That you could implement programs on a national basis in
an efficient manner.
So the first thing I will talk about is just one of the things
that -- by the way, I am with Jones Lang LaSalle,
we're an international real estate firm.
And my group, the Public Institutions Group,
focuses on federal, state and local government and colleges
and universities helping them solve real estate problems.
And it's real interesting, just to show you how important this
topic continues to be, about six years ago when our new chairman
came on, we were looking at energy and sustainability as
just kind of an over-on-the-side.
We're a very, very large investor.
We've got about 40 to $50 billion invested on behalf of
pension funds and high-net worth individuals.
We initially looked at this as, yeah,
this will be something we can check off.
And what we have seen is that this has become one of our
fastest-growing areas for our company.
We're the largest facilities manager for corporate clients as
well as these investor clients, but we'll come back to some of
the differences between those two client sets.
But if I think about kind of the policy type initiatives that can
take place, the first one comes down to some type of
certification process for buildings to --
so consumers are aware.
We've got the great consumer financial regulatory passage
through the Congress and now what about something in terms of
buildings and energy.
So, you know, we've got Energy Star, we've got LEED ratings,
but there's no common requirement that anyone does anything.
And what we have done on our tenant representation where we
go out and help organizations find space,
we have made that a critical part of the analysis of
buildings that we provide to potential tenants so that they
can look at the impact that energy and sustainability on it.
And the other one is, you know, regulatory standards.
Each state is going out doing the same thing.
One of the other panelists spoke earlier about the fact of
perhaps there being some requirement.
We talked about green -- green regulations to perhaps mandate.
And obviously we're in America, we like choice,
we like to let the private market talk when it can,
but sometimes the private market,
particularly when it comes to this area,
may need a little focus because it really comes down to return
on investment.
And then the last is economic incentives.
Those of us in real estate know how successful business
improvement districts have been.
Tax incremental financing.
These are all things that developers have followed in
order to put the marginal money in,
into an area perhaps where there is no value,
they put the money in, then the bonding is used up front,
bond financing is used up front to put infrastructure in,
and then because of the value creation,
the tax rate goes higher and therefore there is funds to pay.
So sounds like I'm talking about PACE, right?
So the same opportunity exists economically.
It has shown that it can work.
And those are just some ideas.
Mr. Hubbard: Ken Hubbard.
I would suggest that I have three hats.
One is with Hines, which is a commercial owner of real estate.
I've been with the firm and the family for 36 years.
Second hat really is for the Urban Land Institute.
I've been active there and with Jonathan Rose we head up a
sustainable initiative for the Urban Lands Institute.
And then more recently a third hat which is Green Print,
and I mention it because it's encouraging.
Green Print is a start-up, nonprofit,
made up of financial institutions that are looking to
reduce their carbon footprint and increase their value.
Interesting notion as to how it has moved through the
marketplace maybe starting with architects and developers,
on to the brokerage community and out into financial institutions.
So any ways, three hats would give you a little perspective of
where I'm coming from.
What I wish we were talking about was all the technology and
innovation that ought to be unleashed in the market,
and I know our next panel is going to do that.
But, for example, at your institution, MIT,
I'm told there is a battery, a lithium battery under
development right now of unlimited life that can store
energy at night and release it in the building during the day.
Those are the kinds of obvious ideas that we'd like to see more
money going into; that they're possible.
But they're not going to happen until we start to finance in the
commercial sector and retrofit our buildings to improve energy efficiency.
Lots of great things are going on.
We can buy a building and without investing a penny,
we have the confidence we can probably increase the energy
efficiency or reduce the cost of that building upwards of 20%
just through good, careful management.
So all of you in the room that are in the commercial sector
know the great things that we're doing.
But you ask for one thing: It's purely financing.
Cities can solve most of the issues.
Ask an issue the answer typically is going to be a city
as it relates to sustainability save one, and that's financing.
And the private sector hasn't figured it out.
I mean, we all know capital right now is constrained.
It views financing what should be a very simple concept,
you are financing the energy cost savings,
they're predictable over a period of time,
you ought to be able to calculate your return of capital
and your return on capital within that period of time.
And guess what?
That capital is not being unleashed.
And I think if I were to pick one that is the role of the
federal government.
And we in the private sector are really agnostic.
I mean, it can be in the form of guarantees.
It can be in the form of tax credits.
It can be in the form of, you know, capital gains.
It can take whatever form it takes.
But right now financing retrofit improvements in buildings is
viewed as a high-risk investment for banks,
for insurance company and other investors.
And that capital has not yet been unleashed.
Most of you sitting in the room, you know,
quickly know a lot of the specific problems.
I don't think we have to go through them on the panel,
but it's the first lien issue, et cetera, et cetera, et cetera.
But if I were to pick one issue for smart people like yourself
to be thinking about it would be how do we finance these
improvements and how does the federal government enhance that?
Dr. Briggs: Ken, thank you.
And thanks to Herman and to Jeff also.
Just a quick follow on or two with a clarifier.
And also I think to give the audience a sense of questions
we're grappling with.
I think everyone coming here should have a sense of, sort of,
what we're sort of working through even though many
discussions lie ahead.
On one hand, I hear you about mitigating the risk,
changing the calculus to some extent whether it's directly
affecting the cost of capital.
Some other things we've talked about,
residential side and nonresidential is performance
data, the kind of market-making information base for making
investments and so on.
I wonder in your reference to technology, though,
I heard you sort of invoking the technology frontier and how it's
important, the emerging technology side;
were you thinking financing tools specifically for adopting
some of these really path-breaking,
in some cases they might be higher risk technologies?
Or was that simply a reference to how much the picture is going to change?
Mr. Hubbard: We would love to be doing it.
I think the facts are that, you know, retrofit investments,
the average payback according to McKinsey is 1.2 years.
You're not going to be financing very many innovative techniques
with that limited --
Dr. Briggs: Amount of capital.
Mr. Hubbard: Right.
It's just too short right now.
Dr. Briggs: Jeff, and then we'll come to Herman.
I have a couple of questions, too, about the points you made.
Go ahead.
Mr. Eckel: Okay.
On the commercial office building sector,
while we're not doing federal ESPC business,
we've been working with the Clinton Climate Initiative on
the existing building retrofit --
it's got some horrible acronym -- Commercial office building problem.
Bill Clinton has famously said we can really get at this
greenhouse gas problem by going after commercial office
buildings in the 40 largest cities.
If financial structuring were an Olympic event, and it's not,
Hannon Armstrong would have gotten a gold medal.
We've come up with so many structures.
Ultimately, they don't work.
And, you know, this is a little bit technical,
but it's the heart of the issue we see in the commercial office buildings.
The first problem, the problem is a (indiscernible).
If a building doesn't have a mortgage, it's not a problem.
Anybody -- if a building doesn't have a mortgage the owner
obviously can pay for the efficiency.
That's essentially what Wien & Malkin did with the Empire State
Building with the Johnson Controls retrofit.
But if it does have a lien, the first thought is, well,
PACE should work.
PACE might work in the residential sector if Fannie and
Freddie are told that you will buy loans that have below --
PACE loans on them if they're below, say,
50% Energy Star Rating.
That can work.
But that's going to take a long time, I believe,
to sort out between the administration and Fannie and Freddie.
So if you turn to the commercial office building market,
here's the problem with PACE: You don't have Fannie and
Freddie as the impediment anymore.
What you do have is generally a negative covenant in the
building loan agreement that says the owner will not put any
-- will not take any action that will diminish the first lien holder.
Now, if the community raises property tax, that's fine.
The lien holder is diminished, but the owner didn't do it.
This negative covenant, I think, kills the concept.
So then you say, okay, well, we need a junior lien.
Senior lenders aren't going to give junior liens.
In commercial mortgage-backed business,
it's very hard to find the lender.
So really you have to go to an unsecured deal,
which that's anathema to real estate lenders.
But there is, and this may trigger on the technology
question, we worked this out at Rockefeller Center with Tishman
Speyer and a very clever Johnson Controls engineer when we were
working through this problem in 2007 before Tishman Speyer had
its issues.
You can't perfect your security interests without fiddling with
the lender.
So that's off the table.
What you can do is dial back the savings.
There is technology to simply erode the owner's savings on
lighting, healing, cooling investments you've made.
And it can be done remotely, it can be done without the building
owner being able to control it.
It doesn't give you perfect security for getting your assets
back and getting collateral to pay off a defaulted loan.
What it does is it reduces the incentive to the owner to not
pay you, because otherwise, if you're unsecured and you've got
no collateral, no credit, you're not going to get paid.
So this is all you can do.
Now, 2007, I think we were going to have some lenders interested
in that structure.
Things were a little sportier back then.
2010, zero interest.
That's where I think we have a market failure.
If the administration wants to promote commercial office
building energy efficiency, then this is a really clever use of
the DOE loan guarantee, or alternatively the SETA Loan
Guarantee program.
Two issues, and they're huge issues for OMB and for DOE.
The loan guarantee statute says the U.S. government shall be
senior in the structure.
Well, you're not going to be senior in the structure.
That might work for renewable energy facilities,
we've got a loan guarantee working for a geothermal project.
It's not going to work for building efficiency.
And DOE is looking for 80% or 64% leverage.
It needs to be 100% leverage.
And that -- but that's 100% leverage on only the obligor
credit risk.
The performance risk, the equity in the deal in essence comes
from the energy service company who's guaranteeing the savings.
We've made every mistake in the book in trying to figure out
commercial office buildings.
I'm absolutely convinced this is the only solution left.
And I'm frankly not optimistic that it can get past the DOE or
OMB can get over the issues.
They're big, big knots.
But I don't see anything else happening in the near term,
other than mandatory building ratings, building star,
whatever, which then caused first mortgagees,
when a transaction happens, to increase the mortgage for the
amount of the energy efficiency savings.
Dr. Briggs: Could we stick on the nonfederal -- granted,
the much vaster portfolio -- for a moment and sort of follow up on this?
Earlier you had made the point about GSA leaving on the table
some opportunities to leverage ESPCs to leverage more private
financing in its projects.
For us, as you can imagine, I'm very much speaking with an OMB
hat here, U.S. government has an unrivaled cost of capital,
more than we can use it, above and beyond things like appropriation --
Mr. Eckel: You and I have had this discussion before.
Dr. Briggs: Right, right; so --
Mr. Eckel: As a taxpayer, the U.S. government shouldn't use
firms like us.
You should be using your 3% treasury to do all of these
energy efficiencies.
Dr. Briggs: When we can --
Mr. Eckel: Do it.
Dr. Briggs: Right.
Mr. Eckel: You don't.
Dr. Briggs: Well, granted, fair enough.
This is one of the things that we're working on.
Number two, it's a different calculus, it seems to me,
for state and local governments that are fiscally strapped in a
host of other ways, in some cases cannot take on any more
debt in terms of the opportunity to think about ESPCs and the
next generation of beyond commercial office space,
for example, and at the municipal, hospitals, schools,
partnerships, it seems to me, that have not yet been imagined
even that we could accelerate.
On this point, and Herman, I wanted to bring you back in,
you highlighted a couple things, among them certification and the
benefits of a signal to the consumer.
And for want of a better shorthand green requirements,
requirements are not, to say the least, universally popular.
I wondered what you had in mind, to the extent you thought
through the kinds of requirements,
how one might phase in, what would be a smart way to sort of
approach that if one went down that road,
in ways that are constructive for this sector.
Mr. Bulls: Right.
Well, generally to the extent you can have something
voluntary, you've got less friction, that's always good.
And perhaps if there were even just some consistent guidelines
to start with.
And you don't go down the regulatory,
and obviously California has gone a little farther where
they're actually requiring owners to, you know,
post energy costs in these types of situations.
So I would think wholeheartedly for the consumer's perspective
to be able to look at a building and be able to give some idea.
Let me explain the problem, which you probably understand
from a private owner's perspective in an investment building.
Utility costs are a pass-through.
So those costs, there's no incentive whatsoever,
other than for the common area, where the owner is paying for it.
But for, you know, the vast majority of the energy expense,
it's passed right back through as an operating cost to the tenant.
So the tenants, in the short term,
are probably not going to be too excited about taking on more
costs because it's going to just go right back to them in essence.
Then on the other hand, if you have the ability to have a
longer view toward the problem, it's no different than one-year
budgeting that we go through, it's no different than Wall
Street that we've got to have a profit every quarter.
We're looking at short-term indicators,
metrics to decide what it is we're going to do.
So if a building owner does a capital expense,
and most of these are capital expenses,
that is not passed through to the tenant.
So that basically becomes an increase in the basis in the building.
And even though it may result in lower energy costs and that
should make that building more attractive in the market,
that's a round-about way to getting there and most owners
are not willing to take that risk, as Jeff said.
Speaker: -- audience in here --
Dr. Briggs: I'm sorry, get folks in.
Brief comments welcomed, as well,
but let's get in as many voices as we can.
So please keep it brief, and questions to any or all
panelists, starting up here.
Audience Member: My name is Howard (inaudible).
I'm on the (inaudible) panel.
(inaudible) really get over the valley of death from technology,
to get to your very point about (inaudible) capital market and
also the investment (inaudible) --
Audience Member: We can't hear --
Audience Member: We all face this issue.
So to get at this point (inaudible) on this very issue.
And a variety of colleagues on both sides of the aisle have
been pushing and pushing (inaudible) the green bank to do
exactly on the private sector side (inaudible) government
sanctioned entity to do exactly what you're describing (inaudible).
And so I would ask the panel to comment about (inaudible) need,
not just because of this economic/financial downturn,
but this is an aspect of the capital markets that is a vacuum.
And why not fill that vacuum with what the brand of green
bank (inaudible).
So I'm interested in the panel's comments about addressing this
challenge (inaudible) with the creation of green bank,
supported by the administration and perhaps (inaudible).
Dr. Briggs: Thank you.
In the interest of time, we'll log that one.
Let's get just a couple more, and then we'll hear from all the
panelists and wrap up.
In the back, yes.
Audience Member: (inaudible) key variables (inaudible) electricity is going
to go 60% (inaudible) from the EIA projections when they don't
jibe with what local utilities say they're going to do.
You need two things.
We need to force local utilities to tell their customers that
their next ten years what rates (inaudible).
I'd like to know how the finance package review something like
that (inaudible).
Dr. Briggs: Thank you, and thank you for being brief.
Let's have one more over here and then we'll turn to the panel.
Audience Member: (inaudible)
Dr. Briggs: Um-hmm, okay.
So it's about financing those costs, including the federal --
Audience Member: (inaudible)
Dr. Briggs: Okay.
Let me start -- we'll start with Ken and work our way back.
Mr. Hubbard: Let me try to give a --
Dr. Briggs: We had green bank, energy prices and then the capitalization.
Mr. Hubbard: I couldn't possibly answer all those questions,
but I'm going to try to give a response which is a little bit
more general.
And that is from a building owner's perspective today,
you have two times you can probably include retrofits
within your building; it's when you acquire it or when you go to
refinance it.
But once your capital structure is in place,
your options are very limited, and this is what I'm asking that
we all give more thought to.
And I know I'm being pretty simplistic here,
but the capital's got to come in,
and it's got to act like equity, which means it's not secured capital.
But it's got to have returns that are closer to what we're
used to paying for debt.
I can't tell you how often bright people come in my office
with a great solution and then you find out its cost is 20% or
more coming in the form of equity.
And then I've got to go back to the tenant and say to the
tenant, look, I've got a great deal for you,
they're not going to like it, because the cost of capital is too high.
So I think whether it's a green bank, great idea.
Whether it's a form of a federal guarantee, terrific idea.
Capital gains, other forms of tax credits,
whatever enables this capital to come into this market today is
going to be a great stimulation going forward and bring us to innovation.
Mr. Bulls: I'm going to talk just about the financing end of it,
got a little experience there, as well.
And if you -- speaking of the Fort Carson and the projections
and what are the utility costs going to be.
Now, when a lender looks at a project,
even though they don't want to own it,
they've got to look at it as if they're going to own it one day.
And unfortunately over the last five or six years,
that's happening more often than lenders would like.
So the great MBAs who come out and everything is going to
automatically go at 2.5% forever,
and of course your NOI is going to continue to go up,
your expenses are going to go up lower,
and boy that looks good on the pro forma.
So your idea of seeing what the energy costs are going to be,
it would be probably good for transparency to have that happen.
But I've got to tell you, lenders look at that now.
They look at every conceivable part of the underwriting process
is certainly underwriting the real estate in terms of its
physical characteristics.
You're underwriting the market and part of that market is the
competitive product that is there,
the economic base that is there, the infrastructure that is
there, and that includes, you know, the costs of utilities.
And then the last thing you're underwriting is the sponsor,
you know, what is their experience,
what is their reputation, what is it that they can do.
So by proxy, that information is out there,
and the smarter lenders are certainly looking at that.
And what happens in good times when you start asking those
types of question, you go down to the next lender and we all
know what happened to the conduit market that we had in
this last debacle that we were in.
And the accountability there has to be that the lenders can't
just be playing with OPM, and we all know what OPM is,
is Other People's Money.
And there's not accountability there.
So part of that occurs and we've just got to get a little more
continued discipline in the financial system.
And that works on what Jeff said,
therefore the money's not available because the risk
profile doesn't come around.
Mr. Eckel: On the green bank, whether it's SETA,
whether it's taking a DOE loan guarantee program and creating a
green bank, I testified at the Senate subcommittee on this --
the energy committee, sorry, not a subcommittee --
and I was initially against it being what I think is a green
bank already, is Hannon Armstrong.
But since the crisis, there are market failures right now.
And I would just hope that OMB provides good oversight to make
sure the green bank doesn't become a green monster that
consumes the entire private sector in this business.
But if it can fill market failures, I'm all for it.
Ten year price of electricity, in terms of federal ESPCs,
we'd love to see a realistic price.
We're bound by the same ESPC contract rules as the bases are.
And feed-in-tariff, in essence we have a production tax credit,
investment tax credit or treasury tax grant that
substitutes for a feed-in-tariff.
A feed-in-tariff is infinitely easier to finance.
Although we have made great progress with a treasury tax
grant, if it gets extended, it's a pretty good program.
It's not perfect, but it's a whole lot better than what we
used to have of dealing with one or two tax equity investors and
getting health for ransom.
Dr. Briggs: Thank you.
Thank you, Jeff, and everybody.
One last --
Audience Member: (inaudible)
Mr. Eckel: The government can do what it wants to do.
There has been some -- the way it's written,
it says the government will be the only senior lender.
Now, under the 1705 Program, it's 80% government,
20% unsecured.
It's been interpreted as, okay, there are two senior investors
and they share collateral.
The process really ends at OMB for the final decision on a loan guarantee.
I think asking OMB to take a subordinated or unsecured
position, you know, you know the answer to that.
Dr. Briggs: It's tough.
(laughter)
Mr. Eckel: But there's no reason why it has to be tough,
other than institutional memory says this is the only way we can do this.
Mr. Briggs: Well, it's no reason it has to stay fixed; right?
There's a set of concerns that relate to credit reform and
whatnot and the way we looked at project financings and we will
absolutely look at this, I promise,
it's not as though it need be fixed forever.
There are often equities that OMB has protecting the federal FISC.
And, you know, considering the precedent setting value of these
things, that are not as obvious to a project sponsor or to the
-- someone who, let's say, champions change.
But we want to be, that's why I'm frankly here today in this conversation.
We want to be very much a part of the conversation about
innovation and what it's going to take to unstick the market.
So we look forward to continuing this.
I also want to let you know, and everyone,
on the point we were talking about earlier,
cost of capital and whatnot.
Please don't mistake a lack of sort of public announcements in
some of these things for a lack of discussion and analysis and
conversation with Capitol Hill.
We have a lot before the Congress right now.
We're not only looking for what we can do administratively in
lieu of new legislation, we're also in conversation with legislators.
But we have a lot on their docket, to say the least,
on a host of different fronts, financial reform having just
been completed.
So look for more in the weeks and months and, you know,
and years ahead on this thicket of issues we talked about from
cost of capital and creative sort of market triggering moves,
whether it's loan guarantees, tax policy or other,
standard setting, certifications,
things that will signal the marketplace and are eager to
work with you and to hear more good ideas.
Let me thank everyone.
Please join me in thanking the panelists again.
(applause)