The blog is cross-posted from Heartland Capital Strategies.
Innovative Projects to Rebuild Philadelphia Showcased at Responsible Investment Forum
Paseo Verde, an innovative project to rebuild a critical neighborhood in North Central Philadelphia, was the highlight of a Responsible Investment Forum that preceded the project’s official groundbreaking on April 10, 2012. Partly financed by the AFL-CIO Housing Investment Trust’s (HIT) Building America CDE, the multi-use housing, retail and services project near Temple University is setting new standards for LEED construction, energy efficiency, renewable energy sources and transit-oriented development.
The forum, the third of four regional conferences sponsored by Heartland Capital Strategies in collaboration with the BlueGreen Alliance, focused on the need to revitalize the real economy and rebuild cities through value-added investments in real estate and clean energy. The forums have provided a “collaboratory” on the successful roles of pension funds and other sustainable investors in re-investing in America.
The Keynote Speaker was Eric Price, CEO of the Building America CDE program, who showed how the fund, capitalized by union pensions, is creating sustainable targeted investments that bring highly competitive returns while creating more than 12,000 jobs in the beleaguered construction trades, including hundreds of jobs in Philadelphia.
In opening the forum, David Wood, Director of Harvard’s Initiative for Responsible Investment, framed the challenges facing pension fund trustees seeking what he termed “impact investments” that reflect the Environmental, Social and Governance (ESG) criteria that are fundamental to the UN’s Principles of Responsible Investment (RI).
Wood noted, “What’s out there in the market often doesn’t meet pension trustees’ long-term needs, and we have to think about the market as a whole and how it can be influenced in the direction of responsible investments.” In considering impact investments, Wood said, there are two motivating factors for these trustees: 1) finding funds that are performing by creating wealth; and, 2) understanding that plan beneficiaries have to live in the world.
“Trustees are rethinking systemically what it means to subscribe to modern portfolio theory, but always in the difficult context of making your number and in what asset classes,” he concluded.
Building Solid Returns and Quality Jobs
Eric Price’s presentation offered strong evidence of how formidably the HIT has been generating highly competitive returns and thousands of unionized jobs.
The HIT is fixed-income fund of over $4 billion, mostly in government-backed securities, investing primarily to fund apartments and single-family housing. It raises capital from over 350 investors, union and public employee pension plans and labor organizations, and focuses very heavily on creating union jobs and affordable housing – over $6 billion invested and nearly 70,000 jobs created to date.
Launched in 2009, the HIT’s Construction Jobs Initiative has invested $1 billion. The 40 projects financed by the HIT and its subsidiary Building America CDE in 20 cities are creating 13,000 housing units and over 12,000 jobs. The goal is to reach 15,000 jobs created by the end of the year while continuing to secure highly credible returns.
“Over the past few years, we’ve seen there’s not enough private capital available to fund the projects at hand,” Price said. “Many of these projects require infrastructure improvements, affordability, sustainability and retail serving amenities.” He said that cities are often combining multiple capital resources to finance the projects that the HIT is selecting.
Leveraging New Market Tax Credits: A Tool to Rebuild Cities
In 2011, HIT’s Building America CDE received a $35-million award of New Market Tax Credits that have been employed to create more attractive financing. For a project to qualify for the tax credits it must be in a severely distressed community with a poverty rate of 30 percent or more.
HIT is using the award to leverage investment in five projects, and will be receiving another $50-million award that will be used to help finance another eight projects. In pursuing projects that seek to transform neighborhoods, the debt financing is done by HIT and Building America administers the New Market Tax Credits.
In a distressed neighborhood in Philadelphia, near Temple University, Building America’s $5 million investment in tax credits has allowed the city and its community and development partners to break ground on the Paseo Verde mixed-used, transit-oriented development that is creating 120 affordable housing units and 150 union construction jobs, part of a $48 million investment.
The goal of the project, a partnership with the Jonathan Rose Companies, Asociacíon Puertorriqueños en Marcha (APM) and the City of Philadelphia, is to provide a healthy living environment for residents through LEED construction certification and other sustainable practices, as well as cost savings through effective reduction in water and energy use. Besides providing affordable living spaces for low and moderate-income residents, Paseo Verde will house health and social services tenants to service the community. Paseo Verde is translated, in Spanish, to mean “green walk.”The building will be constructed with an environmentally responsible design that includes: an energy efficient building envelope and MEP systems; a green roof; photovoltaic solar panels; and the use of local, recyclable, and renewable materials. In all, the project is combining nine different grant sources.
“We’re seeing more and more often that private developers are seeing the value of other public funds being brought into play,” Price concluded.
Laurie Actman, Deputy Director of the Greater Philadelphia Innovation Cluster (GPIC), said the HIT project personifies the Public-Private-Partnership model, part of a movement to create multi-disciplinary hubs much closer to market through public-private consortiums.
“To address the policy issues on energy,” she said, “you have to look at buildings, you have to focus on retrofitting existing buildings,” which is what GPIC is seeking to do at the Philadelphia Navy Yard, a former Army base.
The city owns the energy grid in the Navy Yard and is developing a smart grid master plan to make it a clean energy campus by determining how to make the buildings there more energy dynamic. “Unlike a college or a military base, it is a true commercial environment,” she said, in which $130 million is being invested over five years for energy-efficient retrofits of average-sized buildings.
Software and hardware tools are the primary focus of the project, which is ambitiously trying to change the rules of thumb for measuring energy efficiency by creating benchmarks on energy savings as measurable elements of rates of return.
“The story of energy sector retrofits in real estate is very strong,” explained Leanne Tobias, Managing Principal of Mallachite, LLC. “Better roofing, insulation, more efficient motors on mechanisms, some of these simpler measures can begin paying back within two years; more complex approaches in 14 years. In real estate these approaches are blended and end up in a payback of four to five years.”
The Power of Power Purchase Agreements
Sustainable real estate investments are inextricably linked to investments in renewable energy, owing in part to the sizable purchases of land required for the construction of solar and wind farms.
David Wilhelm, the CEO of Woodland Venture Management is working with Credit Suisse to develop the Appalachian Impact Fund, mezzanine and equity financing to take advantage of the Small Business Administration’s funding for underserved areas. Woodland operates Hopewell Ventures and Adena Ventures, the nation’s first new markets venture capital firm to serve underserved areas of Appalachia and has developed the second largest angel network in America,
Wilhelm's group and its joint venture partners, SF-based Agile Energy, are building a 50 MW solar array, the largest project of its kind in the eastern United States, on reclaimed mine land in southeastern Ohio. Wilhelm is also working with Michael Peck, North American Chair of Isofoton, a Spanish solar panel manufacturer, on developing a new solar factory for Ohio. Together, they have been successful in getting a 25-year power purchase agreement with American Electric Power.
Wilhelm cited the transformational impact of power purchase agreements, which are being used to de-risk both the development of the site and the provision of the product. Over 300 jobs will be created in Noble County, one of the poorest in Ohio, largely as a result of getting the power purchase agreement (and thanks to a strong state renewable portfolio standard). “It’s been a revelation,” Wilhelm said.
Peck further explained that Isofoton, a leading solar energy technology company, chose Napoleon, Ohio, as the new home for its North American manufacturing facility. Ohio has nearly matched Isofoton’s pledged $16.4 million investment in the state. The factory will initially create 121 clean energy manufacturing jobs and will ramp up to 330 direct jobs within three operational years. Indirect job creation, a vital part of the Isofoton’s “all-Ohio” economic development strategy, should amount to 1,000 additional jobs beginning in 2012.
Building Sustainability, Valuing Partnerships
“We’re very close to a very interesting model,” Peck explained. “When you go into degenerated real estate, there is a forward-user strategy. If you can aggregate the net metering within a defined geo region, you could end up with a Power Purchase Agreement for that regional eco-system.”
"When it comes to underserved regions of the country, we need to be clear that the path to shared and sustainable wealth creation lies in the building of genuine entrepreneurial capacity. And strategies related to capital access in the absence of a more robust entrepreneurial ecosystem are not sustainable ways to go, " Wilhelm said.
"The President tells us that we need an "all of the above" strategy when it comes to national energy policy and I think that's right. Well, we also need an "all of the above" strategy when it comes to business building and job creation. We need to build out angel networks and mentoring networks, we need to train and nurture the serial entrepreneurs of the future, we need to provide meaningful operational assistance to high growth companies, and we need to provide a whole continuum of capital," Wilhelm added.
“The lens to think about this through,” added David Wood, “is industrial policy.”
The Value of Due Diligence
James Beal, a partner at Willig Williams and Davidson, suggested that pension trustees “treat the law as your friend, not your enemy” in considering what constitutes an investment that satisfies ESG sustainability principles.
“That starts with the duties prescribed under ERISA. The Department of Labor (DOL) has given specific guidance on economically targeted investments which appears hostile, but is actually empowering: with appropriate due diligence,” Beal said. “It’s very important, therefore, to have a stack of due diligence with which to defend your investment.”
Beal characterized a range of pension fund investments as The Good, The Bad and The Ugly.
The Good, he said, was exemplified by the Multi Employer Pension Trust (MEPT), which has a 30-year record of stable returns and due diligence and has withstood the financial crisis better than most.
He cited the Diplomat Hotel as an example of The Bad. The DOL sued trustees and achieved an $11-million settlement. “The problem,” Beal averred, “wasn’t the underlying investment, it was the lack of due diligence along the way and the failure to carefully implement the project.”
The Strip Beats The Street
The Ugly proved to be the more ironic of his examples, the investments made by the Teamsters Central States Pension Fund in the 1960s and 1970 involving loans to developers who were building in Las Vegas.
“It wasn’t until Wall Street took over the portfolio under court order that the investments started to sour,” Beal noted. “They [Wall Street] had an interest in heavy allocations in stocks, where they happened to have an interest. There was no self-dealing. They were simply running with the herd, doing what everybody thought was the right thing to do – and they were wrong.”