Strategies for Financing

There are many strategies to choose from when considering how to finance energy-related initiatives in your community, several of the options are outlined below.

Joint Ventures

A joint venture involves partnerships, either in financing or implementation or both

Public-Public Partnerships

These can be either across departments within a government, or across levels of government. Partnerships may involve giving budgetary recognition to non-energy capital and operating cost savings that result from energy efficiency. For example, low-flow showerheads reduce energy bills, but also save on expenditures for new water supply and treatment infrastructure. If all departments calculate their collective energy bills, and collaborate to figure out what energy conservation measures will mean to water and wastewater costs, then joint planning and financing opportunities may emerge.

Public-Private Partnerships

Local governments often rely on private capital to achieve economies that taxpayers and internal and intergovernmental barriers won't let them exploit. If up-front costs are a barrier to a project that generates an acceptable rate of return in the long term, look for private investors that may have an interest in the project. Offset funding may be an option. Some utilities, agencies or industries are required by law to meet certain standards (such as environmental or efficiency standards). If a municipality has lower-cost options for meeting these targets, they may be able to implement programs in exchange for funding assistance. For example, instead of costly upgrades to air pollution equipment at generation facilities, a utility might fund a van pooling program to achieve the same reduction in air emissions at lower cost (see inset).

Third Party Financing

While joint ventures imply shared responsibility for implementation, third party financing means bringing in an external party simply to pay up-front costs. There are a number of players that could be involved.

Energy Service Companies

Energy Service Companies, or ESCO's, are private firms that offer technical and financing services for energy supply and efficiency investments. ESCo's are a large and growing business in North America. They can put up the up-front money and split the annual energy savings with the government. In this way, operating expenditures savings are "capitalized". The local economy can even benefit from having government pay for ESCO services in the design of infrastructure, sharing in the capital cost savings inherent in energy-efficient design.

Financial Institutions

Many banks, trust companies and credit unions are starting to develop energy efficiency-related financial services.

Lease-purchase agreements

This is a rental agreement in which an Energy Service Company or utility rents equipment, and perhaps related services, to the municipality. At the end of the lease, the municipality can buy the equipment at a nominal cost.

Fees and Taxes

User Fees, Surcharges and Surtaxes

User fees, surcharges and surtaxes are often considered as merely a means of recovering costs. However, they can also be designed to create incentives for preferred activities. Most public opposition to additional charges can be alleviated by designing them to be revenue-neutral and keeping the costs and benefits within the same sector or user group. For example, Ontario's "feebate" system uses surcharges on inefficient cars to finance refunds to buyers of efficient cars.

Development Cost Charges

These are explicit charges by the municipality or region that serve both to cover the up-front costs of servicing new growth, and, if properly designed, to encourage preferred patterns of development (see Part II, Energy Ideas for Municipal and Regional Infrastructure and Facilities).

Property Tax Changes

An important long term energy efficiency investment is the geographic "de-averaging" of property tax rates. From sewer lines to bus routes, the costs of providing services to low-density neighbourhoods are higher than for dense ones. But they're buried in uniform taxes. Besides improving efficiency, charging homes and businesses in proportion to the costs they incur will help to re-vitalize core areas.

Profit and budget control are powerful forces: if an energy efficiency measure makes or saves money, there must be a way to finance it. The challenges are measuring the savings properly and creating incentives for working together.

Introduction

Michael Geller and Harold Kalke build communities and buildings with innovative, 'sustainable' features. Bob Rennie has sold more residential real estate, mostly condominiums, than anyone else in Canada. We brought the three together to discuss the future of energy efficient and 'sustainable' residential developments in British Columbia, and what could be done to encourage more environmentally-conscious residential infill in BC's communities.

A cornerstone of most attempts to improve both the energy performance and the environmental and social 'liveability' of urban centres is to increase residential density. But while it's one thing for a municipality to zone and to encourage increased residential density in Official Community Plans, it can be another to actually attract developers with the vision and sensitivity to infill areas in ways that add real value both to energy performance and urban liveability. Finding residents willing to trade-in some of the perceived luxuries of suburban living can more difficult again.

So how can a municipality attract the 'right kind of developer?' Is there money to be made from sustainable buildings? What are 'green' or 'sustainable' developers looking for, and how can their buildings be sold to people? In this feature, we ask three leading figures from BC's building industry to discuss the barriers and opportunities facing beneficial urban densification.

In late September 2000, Geller, Kalke and Rennie came to the Yaletown offices of Compass Resource Management to discuss their needs, objectives and ideas for encouraging 'greener' residential infill in BC's communities. The following notes have been prepared from what turned into a remarkably animated and wide-ranging discussion.

Making Money from Sustainable Buildings

How can a developer make money from 'sustainable' buildings?

Throughout the interview, Geller, Kalke and Rennie alluded to a number of strategies that a developer could adopt to both create value and promote sustainable objectives. Though not a comprehensive survey of the range of possibilities open to developers, this does serve to illustrate how developers with different strengths and experiences can approach the sustainable building market from various angles.

Create a premium product for individuals who are willing to pay

In the first strategy, the developer builds a very high quality building employing cutting-edge sustainable building principles. This need not necessarily involve complex technical or 'gimmicky' features, since the target market is a niche segment of informed, environmentally aware and affluent residents or occupants who seek out and can afford a premium product. Such a clientele understands that the long-term energy savings accrued in the building will ultimately offset the increased capital cost, and appreciates the wider social and environmental benefits such buildings can offer.

Harold Kalke has made a success of such an approach, and he broadcasts his uncompromising attitude of simply building the best building he can.

"I don't have any time for trying to get CMHC or Hydro or any municipality... to give me bonuses for something that I want to do as a developer," he says. "I focus on the occupant ... It's a privilege, I should say, to be able to spend extra money to set apart this product from any other product in the marketplace."

In terms of community context, a premium sustainable developer may need to be prepared to allocate resources to promote other 'sustainable community' objectives to balance the affluent niche group who are providing the funding. In the case of Victoria's Shoal Point development, for example, the developer of a premium sustainable building spent a further $1million on promoting wider community development, including nurturing local sustainable businesses and providing on site low-income housing units.

The challenge for a developer adopting this strategy is to ensure that there is sufficient available 'target demographic' to make the undertaking financially viable.

Sell sustainable 'baby steps' to a mainstream market

A second strategy, proposed by Bob Rennie, is what we could call the 'baby steps' approach. In this strategy, the developer's target market is a mainstream one that could be 'sold' on certain readily understood sustainability features that can be offered at little or no premium but that are nevertheless perceived as being valuable by the client.

"The problem that municipalities have is how do you get a broader demographic, how do you do it downtown with a ten percent premium [instead of a much higher one]?" Bob asks. "To just target the demographic that's there now, I don't think there's enough in each community without an awareness program".

As a realtor, Bob sees 'sustainable' features as being only as worthwhile as they are perceived to be by the market. "[You need] to demonstrate to the consumer what he's got, [if not] then don't bother putting it in because he won't know he's got it. I want everything you've got in the building demonstrated. ... it's liveability, it has to be saving money long term, it has to be fresh air, it has to be something that's very tangible and real... it's like I'm buying a Volvo because it's safe."

Create a "public good" product, supported by institutional funds, for a niche market

A third approach is to work with organizations prepared to take risks and 'leave some money on the table' in order to find the 'right thing' to do to nurture the sustainable building market. Since the benefits associated with sustainable buildings are often public benefits, public institutions (such as federal/provincial/local governments, universities) may be in a position to support such an approach. Other potential partners could include companies with a vested interest in emerging sustainable technologies (eg equipment manufacturers or energy service companies) or organizations that may benefit from the association (eg corporations, NGOs etc).

As a 'public good' product, such projects may incorporate other features that would be outside the scope of the premium developer. For example, Michael Geller's Burnaby Mountain Project has backers who are interested in trying new things to help others discover which technologies and design approaches work and which don't. Rather than a single building, Geller is helping to develop a whole community, aimed at mixed income residents, in a way that incorporates features that may or may not be presently supported by a market. For example, all his residential units have composting toilets; some have a grassed layer of earth on the roof to help buffer stormwater flooding peaks. [features of sustainable buildings]

However, Geller is also keen to maximize the value of the property he's developing. Novel features will be introduced only if he believes that they will be recognized, over the longer term, as having value. Michael explains:

"I, like Harold, spend a lot of time listening to people telling me about all the quote, energy efficient, or sustainable features that I should be incorporating into our community, and I constantly try to apply what I'll call the 'Bob Rennie Test' to every one, which is, 'is this ultimately going to repay itself, or add value?' Because if it won't, if it's going to deter marketability, no matter how noble it is, we'll be very reluctant to go ahead with it".

As more organizations begin to adopt a "social responsibility" culture, or otherwise become more inclined to 'lead by example', more opportunities may arise for developers interested in promoting sustainable features to obtain support in this way.

'Play up' minimum requirements to a mainstream market

A fourth strategy requires the least commitment by a developer, but may nevertheless help to promote public interest in sustainability features that may ultimately lead to enhanced value in the market. It involves simply complying with legally mandated minimum requirements, but advertising them to clients as qualities of the building. Although this may be exploited for cynical purposes, this at least has the benefit of introducing clients to the vocabulary of sustainable building properties, and may ultimately lead to prospective buyers discriminating on this basis, thereby adding value to the market.

Bob Rennie sees this approach as a vital part of creating awareness in the general market for residential buildings.

"somehow, [we need to be] getting developers to talk about the little bit of sustainability in their development," he says. "there is value [in this], and the consumer does want to be told about these things, but softly."

Managing Risks, Promotion and Education

Are there risks associated with sustainable developments? And if so, how can they be managed?

As with any emerging market, there are new risks associated with sustainable buildings that need to be managed in a way that reflects the priorities of the developer and any financial partners. Risk management options naturally depend on the developer's choice of sustainable strategy outlined above, but may include:

Cream skimming

In this strategy, the developer offsets some risk by being among the first to tap into a particular limited market segment. If, for example, only 1% of the market would be interested in paying a particular level of premium, then the first player to enter that market has a natural advantage.

Clearly, this approach inherently exposes the developer to the risk that the market isn't strong enough to justify the investment.

Learning from others' experience

Conversely, a strategy of copying cutting-edge projects may still enable a developer to capture market niches but can reduce risks by learning from mistakes of those doing entirely novel things.

Developers, Harold Kalke suggests, have, like other industries, become caught in a rut of doing a predefined series of tasks, and in doing so have lost the ability to look at the market in new ways. Where Geller and he innovate and find new and better ways of doing things, he hopes others will follow:

"What we really need in the development industry, and in places like Nelson and all over the place, is examples," he says. "Innovative examples of, like, little break-out things. Because developers are very good at copying things. What I want to do is drive around Michael's thing at SFU and copy. Really, that's all I want to do."

"You want me though, to experiment and be the first one to find out whether the market will pay for things like composting toilets in every bathroom," jokes Geller.

"Particularly that!" Kalke agrees.

Sharing risk with partners

Clearly, the more willing project partners are to assume risk, the less developers need to assume themselves. In the case of the Lillooet solar pool, for example, the developer was able to raise funds from local companies who could both see the business case, and who had their own interests in promoting the use of local alternative energy.

Taking advantage of special 'sustainability' development benefits

Developers' risk can be somewhat offset by taking advantage of particular government or local authority programs that aim to support sustainable initiatives.

Bob Rennie puts it this way: "[A developer has to ask,] is there enough of that conscious demographic to warrant the extra expense? If not, if you get the municipality or City to offset with density, or something they give you to recognize that you're educating them what the requirements should be, and that you've met some of it, so you can now bring in a much broader demographic because it's not costing them any more…[otherwise] our profit margins are so narrow here, you just have to up the price -- you can't pass it on.

How can developers promote sustainable buildings?

The group proposed a number of ways in which sustainable buildings could be sold to clients.

Precedent

Supporting Harold Kalke's view on the importance of showcase examples, Michael Geller notes from experience the power of precedent in creating clients' awareness of novel building features:

"Interestingly, after Concord Pacific did its presentation centre and demonstrated all the wonderful technological features they were putting into their units, they changed the public perception, I believe, towards technology. And I think that Bob's client built on that in the residences on Georgia, whether deliberately or not, they benefited because Concord suddenly got people asking about technology cable, [and other novel features]. People came into Bay Shore and the first thing they wanted to know was about our Internet capability!"

Identifying sustainability 'hot buttons'

Bob Rennie has also seen how information technology features have become sought after as 'hot buttons':

"I'm doing three 'star wars' technology…projects in Seattle, and always the consumer wants to know 'who are my cable providers, my telephone providers, and high speed internet access [providers]-- that's it".

He suggests that sustainable building developers need to similarly identify and create awareness of parallel sustainability 'hot buttons'. He uses the example of an 'away button' -- a switch an occupant could press on the way out of the door to lower the temperature of the room and switch off all the lights.

"People are lazy -- it's absolute convenience -- they don't want to be educated about this… You just need one thing that you can bring it down to that is so simple that the consumer can think, 'do you know what -- that's great, I don't want to run around and turn all the lights off and I don't want to pay the electric bill'".

"You almost have to find three or four absolute 'hot buttons' that people start asking for….because all this quantitative stuff, nobody cares, because they don't get it, because you're making them look stupid. But an away button I can understand. A low-flush toilet I can understand."

Emphasizing long term benefits to occupants

Harold Kalke, meanwhile, sees long term benefits as the 'hot buttons' he sells to his clients, who typically include that niche market willing to pay a premium for sustainability. "Every project I do … must materially and positively influence the occupants' lives. Materially means money. As the market goes down, their investment in one of these units should go down the least and in an upmarket it should go up the most. How do you do that? [By ensuring there's] a long range quality about it. It's not going to leak…it's well built, that's what it is. But the other thing… is the occupancy cost. Things like water and energy and sewer and all the things you get hit for by the city and other agencies such as Hydro [are lower], so that's how you sell this stuff."

Branding

An important technique Bob Rennie uses to sell condominiums is to specify well-known and sought after electrical appliances. Clients may not know much about, say, building envelopes, but they do recognize the quality of a 'Sub Zero' refrigerator and may associate the whole condominium with the quality cues they can recognize.

Harold Kalke uses a similar approach with whole buildings: "Because when I give you that building to sell, you can't sell concrete and rebar and copper pipes and all of the stairwells that meet zoning codes and the National Building Code, there's nothing to sell yet."

He turns to Bob. "What do you sell?"

Bob Rennie sells Sub-Zeros.

"OK, a Sub-zero. So what you're selling is brand. And the more brands you can hook into, let's say a residential unit, then the better for you. But what about the building itself as a brand? That's where it's at. So if I spend 10% more money, and I can get 300% [return] on that 10%, then that's where the margins are. Because otherwise I'm just competing with concrete and land costs or just trying to beat the trades down and down and down."

Who should take the lead in marketing and education?

Realtors

Not realtors, argues Bob Rennie: "Realtors don't carry knowledge," he says. "They only go find it when asked to do so. They're the toughest crowd…"

Developers

Harold Kalke, believes that innovative developers should assume responsibility for their own market: "I think that the primary role has to be brought to bear by developers. And the reason is that the industry itself is always looking at the focus groups and looking in the rear view mirror as to public opinion."

Municipalities / other organizations

Michael Geller, meanwhile, sees market development and education as something external organizations can usefully become involved in. "I don't think it's the architect or the developer's responsibility to educate the marketplace in terms of the benefits of energy efficient buildings," he says.

"I think it's a broader society responsibility, and the logical people to do it are 'energy companies', or government or other interest groups in society who are deemed to be knowledgeable and reasonably independent. Ironically, I often find that if the developer suggests something, more often than not that's a negative in itself. But what we don't have right now are enough entities out there creating a higher level of awareness of what Bob's talking about. Many years ago I used to be on something called the Canadian Housing Design Council, and one of its mandates was to educate the consumer as to what sorts of things they might expect and demand. And in the absence of things like that, at the end of the day it is the realtors and the developers who end up letting the public know because there isn't that broader knowledge being disseminated."

What Municipalities Can Do

What can municipalities do to support developers interested in sustainable building projects?

Help foster a 'sustainability' culture

Geller, Kalke and Rennie agree on the importance of context in nurturing sustainable projects. For Rennie, this primarily means ensuring that the right kind of demographic is available and willing to buy your product.

Although critical of the role of elected officials in furthering this, Kalke sees a 'sustainability' context arising from good planning principles, starting with clear long term planning goals that encompass, amongst other things, urban densification principles. "You've got to go back and say 'what's our urban planning vision here for a couple of hundred years?'" he says, "And work on that."

"Sustainability has become engrossed in this obsession for quantitative analysis and [while] there's some aspect of that, we've gone way overboard with 'litres per person per year' and 'BTUs per square foot' …and [have ignored] the qualitative aspects of sustainability," he continues.

Michael Geller's Burnaby Mountain Project, Kalke believes, helps nurture "a complete community…and when you build a very vibrant community, of course, the desirability to be there increases. And the value increases. And the quality of life increases…you'll feel so good about making the decision to move there that you'll truck on with life with an increased sense of passion and ability, then it comes round and hits me in the back and that's the sustainability aspect of it."

Kalke concludes: "You can build the most sustainable building but if you put it in the context of an urban setting, that is just like, you know, shutters down over the windows because there's bullets flying round at night, you don't give a s*** about whether it's costing $10 less a month to heat your place".

Geller, however, is more accepting of the role of municipal leadership: "Nelson… is an interesting situation, where I think it isn't inconceivable that a municipality, through it's planning policies, through an attitude to the preservation of heritage buildings, through certain kinds of enlightened attitudes, can begin to create a certain aura to a place that suddenly does enhance its attractiveness to people and that, in turn, works. It strikes me that there's a place that's doing a number of things that Kamloops isn't doing, or Smithers isn't doing -- if you could buy public stock in Nelson, I would do so, because they are starting to identify a certain niche of people willing to pay a premium for a certain type of environment, and so if developments there are, quote, sustainable, or represent best planning policy, they will create value."

Bonuses

Bob Rennie thinks most developers are looking for financial breaks. "If the municipalities want to see people do what Harold did, Harold has the brain and the passion, the foresight to do it, but in order to get the typical developer, who is just after making money … everything is bottom line, bottom line…municipalities have got to look at offering something. It might be density, offsetting taxes, something so that the developer can see a win... somebody has to start it so that the developer doesn't see that it's a huge cost. He just sees it coming out of profit. He doesn't even look at "do I have a better absorption" or "will I attract a better buyer".

Flexibility

One issue Geller and Kalke both agree on is the need for flexibility from those attempting to support cutting-edge sustainable projects.

They see various organizations' tendency towards prescriptiveness as a real problem for developers looking to innovate, whether it's through prescriptive activities required to obtain funding through a government or utility company program, or through municipal engineering design codes. A specific bugbear for both Kalke and Geller are typical municipal design codes for road widths in residential areas:

"I mean they create awful looking communities, they create far more pavement -- I can't believe I'm saying this, I've become indoctrinated up there," says Geller, referring to Burnaby Mountain. "Most developers would love to develop narrower roads that would have less impact in terms of storm water, that would look good and take up less green space, and you're not allowed to, because of municipal engineering standards".

Kalke and Geller both recount war stories in which they have attempted to gain permission to adapt what they considered to be inappropriate design standards. In West Vancouver, the Advisory Planning Commission of which Kalke was Chair developed its own road standards and took them to the municipal council, which approved them. "It's this kind of thinking that's so ingrained in our society about what works and what doesn't work: that's the problem," he explains.

Municipal support for certain technologies over others, Kalke argues, distorts the market's ability to pick winners and losers. Another problem with prescriptive approaches, says Geller, is that they sometimes specify technologies that, in his opinion, are not fully tried and tested. "There's a danger when municipalities do start to put in requirements for things that are unproven," he says. "I don't want to be told to put in geothermal heating because I'm not convinced that it will work all the time".

On the other hand, Michael also thinks municipalities can also be too conservative about new technologies, particularly when needlessly requiring conventional back-up systems to insure against a failure of innovative ones.

Bob Rennie suggests that there might be a role here of an external agency to work with developers and municipalities to help develop alternative design codes. The Federation of Canadian Municipalities might be able to help in such a role.

When necessary, set minimum standards

With the above caveats in mind, Michael Geller and Bob Rennie agree that municipalities should work to establish a level playing field for certain environmental features. "I do feel there is a role for elected officials and governments to impose certain regulations, sometimes on the leading edge, in order to ensure certain things happen," says Geller. "Recycling is an example…There are communities that still don't have recycling. Now I would think that at a certain point it's up to the municipality to mandate that, 'yes we are going to have recycling', and then it will happen."

Geller also sees the benefits of mandated minimum standards:

"Right now, there's a much higher level of energy-efficient building going on in the City of Vancouver than there was ten years ago. Is it happening because the public demanded it? No. Is it happening because the developers and the architects wanted to do it? No. It's happening because the City of Vancouver instituted a new energy code that started talking about the percentage of glazed windows and the percentage of heat loss and heat gain, and the developers have to comply with it and the builders have to comply with it and it's happening."

Lead by example

Harold Kalke, however, would prefer to be left alone to do his own thing. In turn, he suggests public bodies should do more to promote energy innovations in public buildings, rather than dictating the terms under which he can innovate in private ones. He cites an example from Sweden, where a particular percentage of heat in public buildings is mandated to come from geothermal ground loop systems and district heating systems -- a mandate that has spurred energy innovation in the public sector and which in turn is providing models for the private sector to pick up on.

"It's the state's role to look after it's own Ballywick so that we can copy it", insists Harold.

Conclusions

Conclusions

Three industry leaders, three quite different visions of the path to sustainability. Kalke's need for independence from "bureaucratic organizations" has lead him to target private end-users with the willingness and means to pay a premium for an innovative, quality product. Geller, although clearly mindful of the need to maximize the value of his development, is more comfortable sharing the responsibilities and burdens of environmental innovation with public institutions, and therefore has a different range freedom within which to experiment. Meanwhile, Rennie's impulse to maximize the size of a viable "demographic", either by lobbying municipalities for financial breaks or by searching for ways of marketing sustainability "baby steps" to more mainstream consumers, contrasts with the developers' strategy of building essentially niche products to push the envelope and serve as templates for subsequent developers.

Ideas for developers

• Be aware that there is a whole spectrum of ways in which you can become involved in 'sustainable developments', from premium cutting edge, state of the art showcases to simply promoting mandated environmental features in such a way that you may stimulate market interest in more advanced options;

• Develop a risk management strategy to help reduce risks related to high capital costs or uncertain markets;

• Think about marketing partners -- who else has an interest in your idea? eg utilities, municipalities, equipment manufacturers, local or federal organizations, energy service companies?

• Be aware of the power of precedent in shaping a market -- market demand can be created as well as responded to. Be alert to increased consumer demand and awareness in the wake of local sustainable developments;

• Try to nurture a good working relationship with a sympathetic municipal planning department and/or local politicians; be prepared to explain the community benefits of your proposal when asking for flexibility on engineering design standards, and refer to other alternative design standards eg East Clayton [link] to back up your case.

• If possible, 'shop around' various municipalities for the best incentives to design according to sustainable principles; be proactive in selling your ideas to potential influential champions;

Ideas for municipalities

• Help create the context for sustainable developments -- ensure you have a long term planning vision for sustainable urban growth;

• Encourage public debate about the future of your city or district -- what kind of place do people want to live in?

• Provide incentives to attract the kinds of developments and the developers you prefer;

• Be open-minded about required engineering design standards with developers interested in "pushing the sustainability envelope";

• On the other side of the coin, be prepared to set minimum performance standards (or, where unavoidable, mandate specific practices) where this will level and/or raise the playing field;

• Mandate specific practices only when there is clear public support (e.g., recycling) or proven technology

• Avoid pushing developers into specific practices that may have uncertain associated risks -- carrots are usually better than sticks;

• Allow the market to determine winners and losers where possible -- for example, set performance goals that invite innovation and creativity in their implementation.

• Work with external partners such as the Community Energy Association or Federation of Canadian Municipalities to explore some of the wider issues surrounding sustainable buildings.

• Facilitate partnerships between developers and parties who could minimize the risk of innovative development.

Ideas for UCBM, provincial government or NGOs

• Facilitate multi-stakeholder forums to explore alternative development standards and other general issues raised here;

• Act as a neutral information resource for all parties, including developers, municipalities and the public;

• Facilitate partnerships between developers and parties who could minimize the risk of innovative development