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In Green Realty He Trusts

Green Realty Trust, the New Sustainable REIT From TIC Patriarch Rob Hannah, is Poised to Help in the Effort to Green Existing Buildings
January 23, 2008
Rob Hannah
Rob Hannah
You might know Rob Hannah from his early days as a bond trader, or from his real estate development ventures in Chicago's Lincoln Park neighborhood.

There's a better chance you know him as a pioneer in the tenant-in-common (TIC) industry -- where he helped develop an IRS Revenue Procedure on TIC compliance with 1031 exchanges and created an exchange insurance policy -- or as CEO and co-founder of TSG Real Estate, a Chicago firm that manages a $600 million U.S. real estate portfolio for its TIC investors.

But one thing you surely don't know Hannah for is green real estate -- that is, until his new eco-friendly REIT files for its IPO later this year, a move the TIC patriarch hopes lands him back at the starting line of another big industry movement. "We're on the front end of the curve. This is a new and unique opportunity to do well from a business and a personal standpoint," Hannah told CoStar News.

Named Green Realty Trust (GRT), the non-traded REIT is Hannah's first venture into sustainable real estate, an area where he admittedly isn't an expert. His hand will be guided by a team of sustainable real estate and design experts -- including Transwestern's Greg O'Brien and H2 Ecodesign founder Holley Henderson -- in managing the REIT's portfolio, advising tenants and evaluating investments in existing green assets, new construction projects and loan purchases, with a spotlight on 'green' building conversions.

With pension funds and institutional investors beginning to pick up the green scent, Hannah believes that a focus on buying and converting buildings into more eco-friendly assets will help separate his latest venture from the pack.

To date, most of the capital invested in green projects has flowed into ground-up construction, where cost premiums have been thoroughly documented and developers can tailor projects to meet green specifications. "You're starting with a blank slate. It's much easier to deal with a new development," says Dan Rashin, the manager of Hines' $500 million green development fund with CalPERS and its National Office Partners LP fund.

The disparity is readily apparent in LEED certification, where LEED for New Construction (LEED-NC) projects account for more than three-fourths of all LEED certified projects, according to a November study on sustainable real estate investing by RREEF, one of the nation's largest property investors.

On its web site, the U.S. Green Building Council (USGBC) lists just 64 projects certified under the LEED for Existing Buildings (LEED-EB) program, compared to more than 850 projects certified under LEED-NC.

But with the foundation already poured and building envelope sealed -- for better or worse -- on about 99 percent of the nation's building stock and new construction (yes, even green construction) governed by the normal flux of supply and demand, sustainable investors are increasingly sizing up existing buildings for green makeovers. "That's where you're going to see the big changes," Rashin says of where the green trend is heading. "You're going to see existing buildings be far more of a focus by owners and ultimately by tenants."

By focusing on green conversion, Hannah expects to broaden the potential asset pool and narrow the list of direct competitors considerably. But if he's wise to blaze a trail in green conversion, he'll also have his share of challenges.

Investors have shied away from large-scale green retrofits partly because many green cost benefits, particularly regarding energy conservation, are measured over 20 or 30 years, far longer than the typical investor's holding period. And the conversion process is no walk in the park, especially with tenants in place. According to the RREEF report, "Many of the points required for [LEED] certification are more easily attained when the building is empty, especially for older buildings. If a building has tenants in place, the renovation costs can pale in comparison to the value of income lost during renovations and the costs incurred to re-lease the space, even if at a higher rent. Tenant lease restrictions may also limit an owner's ability to relocate tenants to undertake the renovations."

Another concern is that "the market premium for renovated green buildings is still not clear," the report says. "The cost and net benefits of renovating existing buildings to green standards is much less clear because the extreme diversity of the standing stock (e.g., age, condition, quality, style of construction) makes blanket statements essentially meaningless."

But signs from the industry indicate that the mainstream greening of existing buildings is indeed approaching. GE recently committed to green its investment practices -- and its 385 million-square-foot property portfolio -- from top to bottom, and CB Richard Ellis is donating 100 existing U.S. office buildings into a USGBC pilot program to pursue LEED certification. Former President Bill Clinton is doing his part, encouraging large cities to retrofit their municipal buildings and offering incentives to private property owners to do the same. And USGBC recently overhauled the LEED-EB program, addressing serious concerns about ambiguous language, a cumbersome amount of documentation and too much overlap with the LEED-NC program.

"Existing commercial buildings in the U.S. account for 60 billion square feet of space," stated USGBC board member Tim Cole of Forbo, a member of the Alliance for Sustainable Built Environments. "If we want to make a difference for the environment, building occupants and our bottom lines, we must get our existing building stock up to peak green performance."
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