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November 30, 2006
The Growth of Green Building Funds
    by Bill Baue

A new urban green real estate fund from Revival Fund Management exemplifies a budding trend toward private funds capitalized by accredited investors.


Green building is all the rage, but investment in this area is still in its early stages. Gary Pivo, professor of urban planning and natural resources at the University of Arizona and a leader of the socially responsible property investing (SRPI) movement, points to a burgeoning number of private funds focusing on green building. One example is the $120 million Hines CalPERS Green Development Fund launched in September 2006 as part of the California Public Employees Retirement System (CalPERS) Green Wave initiative. Another is the $100 million Rose Smart Growth Investment Equity Fund, which focuses on urban green building.

"A green fund with an urban orientation is a very good thing, because it brings both environmental and social benefits," Prof. Pivo told SocialFunds.com.

Boulder-based Revival Fund Management is ramping up to launch a $150 million urban green real estate fund for accredited investors (namely high net worth individuals or institutional investors with more than $1 million to plunk down) in January 2007.

"We see green building as the only viable way for real estate to continue into the future and we very much want to be part of shifting the industry in that direction," said Charlie Randall, a partner in Revival. "We want to start moving institutional investors into this space so they can support it."

As with the established Jonathan Rose fund, the new Revival fund brings both environmental and social benefits. On the environmental side, the fund embraces green building practices such as energy efficiency and low- to no-toxicity materials.

"There may be opportunities sometimes to carry some of the energy load with renewable power such as solar hot water, wind power, or in some cases photovoltaics," Mr. Randall told SocialFunds.com. "However, there's no programmatic element that says everything we do will have solar electric or wind power--we take a holistic approach, so it will depend on the project."

"Where your dollars are best spent nowadays are energy efficiencies," he added.

On the social side, the fund prioritizes urban sites to help revitalize downtown communities and promote affordable housing with appropriate properties. However, the social aspects of urban revitalization cut both ways, according to Prof. Pivo.

"There's a desire to keep jobs and development in cities so that people who are in lower-income parts of cities aren't cut off from opportunities that are beyond access by transit," said Prof. Pivo. "On the other hand, people are very concerned about involuntary displacement and gentrification that takes place with urban revitalization at the expense of low-income residents."

The Revival fund seeks to bridge the environmental and the social.

"We help developers who are social- and community-oriented learn to build green, and likewise we help green developers integrate social and community concerns," said Revival Partner Dennis Fleming. The fund also seeks to bridge human uses of the buildings to promote environmental efficiencies. "We encourage mixed-usage of residential and commercial, because you want 24/7 activity, and you also want a smart way of sharing energy load with residents above and commercial below."

Another bridge between environmental and social aspects is locating urban buildings within walking distance of public transit lines.

"Urban places are much less auto dependent, which is an important element of their carbon footprint," said Prof. Pivo. "Energy efficient green buildings that are not transit-oriented only address half the issue of carbon footprints and energy conservation."

Professor Pivo points out that Leadership in Energy and Environmental Design (LEED) certification, the yardstick for green building from the US Green Building Council (USGBC), rewards transit-orientation in its rating. This fusion of social and environmental returns contributes additional value to financial returns to create strong triple bottom line returns, a foundation of socially responsible investing (SRI).

"The SRI community has been dying for green real estate investments," Mr. Fleming told SocialFunds.com. "Ultimately, the triple bottom line is what we're after to meet the demand from the SRI community."

The Revival urban green fund is more analogous to a private equity investment than it is to the standard SRI vehicle of mutual funds. And it differs from the standard real estate vehicle, the real estate investment trust (REIT).

"As with a mutual fund, a REIT is a publicly traded vehicle that has liquidity because investors can sell their shares," Mr. Randall told SocialFunds.com. "REITs typically don't get into development, whereas we'll be partnering with developers to build joint projects."

Another distinguishing factor is the risk/reward ratio, which is projected to be in the 13 to 18 percent range for the Revival fund, whereas REITs tend to be in the 8 to 10 percent range, according to Mr. Fleming. And the time horizon of the urban green fund of nine years or more (what Mr. Fleming calls "patient capital") would differ from other private real estate funds, which typically turn over in the seven-year range.

Revival considers this first fund a stepping stone, establishing the urban green platform through institutional investment before eventually offering an urban green REIT to the public.

"Offering a public fund would be the ultimate measure of our success," said Mr. Fleming. "If you can make it democratic, you can really help green building grow."

 

 
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