Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 1

Paper 2b: Toward Sustainable Financing and 

Strong Markets for Green Building:

US Green Building Finance Review

Leanne Tobias

Malachite LLC

The built environment has a profound effect on surrounding ecosystems and on the world’s 

atmosphere. In the United States, the built environment exceeds even the transport sector in the 

production of the greenhouse gas emissions associated with global warming.1 As well, 2007 

recommendations by the Intergovernmental Panel on Climate Change suggest that the use of 

green or sustainable building technologies can play a significant and economically beneficial role 

in reducing climate change emissions.2 In order to accelerate the adoption of green building 

technologies, the 2030 Challenge, an aggressive set of targets adopted by the American Institute 

of Architects and the Royal Architecture Institute of Canada envisions that all new buildings be 

carbon neutral by 2030. 

Because the development and purchase of real estate is highly capital intensive, the engagement 

of the finance sector is crucial if the 2030 Challenge is to be met. This study surveys the progress 

of the key actors influencing the financing of US green buildings and proposes a set of 

recommendations for both private and public sectors to mainstream the delivery of green 

buildings to the US market. The review is a broad one, encompassing the financing of 

institutional properties in the government, education and health care sectors; commercial 

buildings, including multi-family projects; single-family residential buildings and affordable 

housing. 

 1

US Green Building Council, “Building Design Leaders Collaborating on Carbon Neutral Buildings,” 7 May 2007, 

<http://www.usgbc.org/News/PressReleaseDetails.aspx?ID=3124>.

2

 Intergovernmental Panel on Climate Change, Fourth Assessment Report, Climate Change 2007: Mitigation of 

Climate Change: Summary for Policy Makers, May 2007, pp.14, 16, 19-20. <http://www.ipcc.ch/SPM040507.pdf>.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 2

The study has been prepared as part of a larger research effort being undertaken by the 

Commission for Environmental Cooperation, to accelerate the production of green buildings 

throughout North America, in order to realize the objectives of the 2030 Challenge.

Institutional Properties

Institutional property owners throughout the United States, including governments, educational 

institutions, and inpatient health care facilities, all have begun to adopt green building programs, 

as detailed below. 

Governments at the federal, state and local levels have been especially important actors in 

mainstreaming green building technologies. Government entities have acted as catalysts by 

mandating green building requirements for their own building programs and by issuing green 

building regulations that affect private developers and real estate owners. In addition, federal, 

state and local financial incentives have been important mechanisms for encouraging green 

development by the private and non-profit sectors; because these incentives are used to finance 

commercial and residential construction.

Federal Government. The federal government has been a key catalyst in the development of the 

green building market. The US government owns three billion square feet of real estate in 

445,000 buildings, and leases an additional 374 million square feet in 57,000 buildings.3 The 

General Services Administration (GSA), the agency that develops and manages most federal 

property, was an early champion of green building technologies. GSA requires that new 

construction and major renovations be built to a LEED-certified standard and encourages the use 

of the Silver LEED standard for federal projects.4

The Energy Policy Act of 2005 mandated that US federal buildings, when life-cycle cost 

effective, be developed to meet energy-efficiency standards at least 30 percent below the 

applicable International Energy Conservation Code (IECC) or American Society of Heating, 

Refrigerating and Air-Conditioning Engineers standards, as well as water conservation standards. 

The Energy Policy Act requires that the federal government apply sustainable design principles 

to the siting, design and construction of all new and replacement buildings.5 The Act also 

requires federal agencies, when cost-effective, to procure equipment—including building 

appliances—certified under the Energy Star program or the Federal Energy Management 

Program, to adopt specific energy use reduction goals, and, when practicable, to use advanced 

meters or metering devices to measure energy use.6

In January 2007, the president signed Executive Order 13423, which requires that federal 

agencies improve energy efficiency and reduce greenhouse gas emissions by three percent 

annually through the end of 2015, or 30 percent by the end of 2015, relative to each agency's 

 3

 Alison Kinn Bennett, Office of the Federal Environmental Executive, US Federal Government Commitment to 

Green Building: From Policy to Practice, Presentation at the Commission for Environmental Cooperation Mexico 

City Symposium, 20 February 2007, <http://www.cec.org/greenbuilding/symposium/pres/GB-PresBennett_en.pdf>. 4

 Correspondence with Donald R. Horn, US General Services Administration, 29 March 2007. 5

 Energy Policy Act of 2005, Section 109.

6

 Energy Policy Act of 2005, Sections 104, 102, 103.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 3

2003 baselines. For major renovations, the energy cost budget should be 20 percent below the 

pre-renovations 2003 baseline. The Order also requires agencies to ensure that all new buildings 

and major renovations—as well as at least 15 percent of their existing federal capital asset 

building inventory—incorporate sustainable practices by 2015. These practices include 

integrated facility planning and design, total building commissioning, the enhancement of indoor 

environmental quality, the use of environmentally-sensitive materials, a 20 percent reduction of 

total potable water consumption (relative to the Energy Policy Act of 1992 baseline), and a 50 

percent reduction of outdoor potable water consumption.7

The federal government also permits agencies to use contracting vehicles known as energy 

savings performance contracts (ESPCs) to finance and implement efficiency improvements. The 

contracts give federal agencies the flexibility to contract on a long-term basis with energy 

services companies (ESCOs) for capital improvements that promote energy efficiency. The 

contracts establish a long-term flow of low-risk, federal contract payments that developers, 

building owners and others can borrow against to finance energy-efficient capital improvements 

and building retrofits. Legislation authorizing ESPCs was enacted in 1992, and the US 

Department of Energy (DOE) promulgated regulations for their use in 1995. 

Super ESPCs—indefinite delivery, indefinite quantity (IDIQ) contracts were created in 1998 and 

reauthorized through 2016 by the Energy Policy Act of 2005. More than 400 ESPC projects have 

been awarded by nineteen different federal agencies in 46 states. Over $1.9 billion has been 

invested in US federal facilities through ESPCs, saving 16 trillion Btu annually, equivalent to the 

energy used by a city of about 450,000.8 Super ESPCs are umbrella contracts awarded to a subset 

of competitively designated ESCOs that have demonstrated their capabilities to provide energy 

services to federal customers. The super ESPC umbrella contract streamlines the contracting 

process for federal agencies and permits procurements to be authorized and implemented more 

rapidly than in the case of a stand-alone ESPC project.

Projects authorized under Super ESPCs include a wide range of building mechanical elements, 

control systems, lighting, building envelope modifications, distributed power generation and 

renewable energy systems, water and sewer systems, and a menu of energy saving 

enhancements, including peak shaving or load shifting, rate adjustments, and process and other 

improvements. Technology-specific Super ESPCs can be used for alternative energy equipment 

such as geothermal heat pumps, photovoltaics, biomass and alternative methane fuels and solar 

thermal systems.

Energy savings performance contracts can be used as collateral for financing building upgrades. 

One vehicle for borrowing against an Energy Savings Performance Contract is the energy 

savings trust certificate.9 This is a medium- or long-term debt vehicle utilized by general 

 7

Executive Order 13423, Office of the President, 24 January 2007, <http://www.ofee.gov/eo/EO_13423.pdf>. 8

 US Department of Energy, Federal Energy Management Program, Financing Mechanisms, 

<http://www1.eere.energy.gov/femp/financing/superespcs.html>.

9

 The following discussion of Energy Savings Trust Certificates is adapted from Anita Molino and Leanne Tobias, 

“Energy Savings Trust Certificates: Financing Energy-Efficient Improvements through the Capital Markets,” in 

Green Office Buildings: A Practical Guide to Development (Urban Land Institute, 2005), pp.174-175.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 4

contractors, developers, and non-regulated subsidiaries of utilities that have been designated as 

ESCOs by federal agencies pursuant to energy savings performance contracts. The debt is 

backed by the federal contract and debt repayment schedules are linked to the amount and term 

of the energy savings realized by the capital improvements. The term of a trust certificate for a 

lighting system, for example, is typically five to seven years, while financings for chillers or 

HVAC systems would have 15- to 20-year terms. The debt service on the certificates is secured 

by all payments, revenues and other income realized from the underlying federal contract, as 

well as by a security interest in the financed improvements, and associated payment and 

performance bonds.

Trust certificates are typically issued on an unrated basis and are privately placed with qualified 

institutional buyers. Because they are unrated, trust certificates typically trade at a premium to 

the issuer’s rated corporate bonds of similar maturity. The certificates are popular with 

institutional investors looking for a safe investment that offers a yield premium over time.

As suggested by the foregoing discussion, the green building policies of the US government are 

notable for their depth and comprehensiveness, and serve as a policy model for other 

governmental entities. The following additional changes in US government practice would 

further enhance federal capabilities to implement green building policies:

 Integrated consideration of federal construction, acquisition and operating budgets. The 

US Congress authorizes and appropriates funds for federal real estate acquisitions 

independently from funds for property operations. Similarly, the Administration accounts 

for its capital investments separately from property operating budgets.10 This separation 

prevents the ready linkage of operating savings from green buildings to offset higher 

initial construction costs. Mechanisms to promote the integrated review of projectspecific capital and operating costs would strengthen the ability of federal officials to 

implement advanced green building technologies.

 Formal federal leasing preferences for green properties. A potent tool to encourage the 

private sector to develop green space would be the enactment of a formal federal leasing 

preference for green properties. Although the informal guidance for Executive Order 

13423 actively encourages the use of such preferences, the guidance lacks the full force 

of law.11 A statutory change or additional executive order formalizing the guidance 

would mandate the broad federal use of green leasing criteria. As of the first quarter of 

2007, several Congressional proposals have been introduced to effect this change.

As well, the federal government exercises a profound influence over the private sector through 

tax policy and the regulation of financial institutions. These federal powers also can be used to 

mainstream the use of sustainable and energy-efficient building technologies. Potential policies 

on these fronts include: 

 10US General Services Administration, Real Property Activities, Fiscal Year 2008 Budget Discussion, 

<http://www.whitehouse.gov/omb/budget/fy2008/pdf/appendix/gsa.pdf> and interview with Donald R. Horn, US 

General Services Administration, 26 March 2007. 11 Interview with Donald R. Horn, US General Services Administration, 26 March 2007.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 5

 The extension and expansion of federal incentives for the development and retrofitting of 

green and energy-efficient buildings. The Energy Policy Act of 2005 offers a variety of 

incentives for real estate, including an energy-efficient commercial building deduction of 

$0.60-$1.80/ft2 for commercial buildings, residential properties, home manufacturers and 

installation credits ranging for the installation of qualified fuel cells (30 percent credit), 

stationery micro turbine plants (10 percent credit) and solar equipment (30 percent).12

Credits have also been created for residential solar (30 percent) and non-solar home 

improvements, and the manufacturers of energy-efficient appliances and energy-efficient 

homes, as detailed later in this study. 

Under the Energy Policy Act, these federal incentives have been restricted to property 

placed in service in 2006 and 2007. In addition, a number of the incentives are 

comparatively small, rendering their effect on manufacturing and purchasing behavior 

more tenuous. The extension and expansion of the federal incentives would help to 

encourage the retrofitting and development of energy-efficient and green properties. In 

addition, a number of observers have suggested that the federal government enact a 

central tax credit for green or energy-efficient development and renovation of investment 

property, analogous to the historic renovation tax credit. The extension of accelerated 

depreciation to newly-constructed or renovated green or energy-efficient properties 

would also help to stimulate green building investment.13

 The regulation of lending institutions to encourage green and energy efficient lending.

The federal and state governments are also key regulators of financial institutions. 

Requirements that financial institutions disclose the volume of their green or energyefficient building loans or develop programs to encourage green or energy-efficient real 

estate lending might be a potent vehicle to stimulate lending for sustainable properties. 

The use of such approaches to encourage urban lending have been in place at the federal 

level for some 30 years under the Home Mortgage Disclosure Act and the Community 

Reinvestment Act. The requirements set forth under these statutes could readily be 

broadened to support the growth of the green or energy-efficient real estate finance 

market. 

Acting through the Federal Reserve Board, the US government participates in the 

establishment of international banking guidelines under the Basel Capital Accord 

process, as do the central banks of other nations. As of early 2007, the Basel process has 

yet to address the subject of green lending protocols. A first step would be to encourage 

the Bank for International Settlements, the entity that coordinates the Basel process, to 

develop research on how green lending principles relate to loan risk. Similar efforts also 

could be undertaken at the national level in the United States and elsewhere.

 12 US Department of Energy, <http://www.energy.gov/taxbreaks.htm>; material supplied by Michael Zimmer and 

Jason Hungerford, Thompson Hine, 1 February 2007; Business Tax Incentives, Tax Incentives Assistance Project, 

<http://www.energytaxincentives.org/business/>.

13 Conversations with Bruce Becker, Becker and Becker, June 16, 2007 and Michael Zimmer, Esq., Thompson Hine, 

26 June 2007.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 6

State and Local Governments. Like the federal government, US state and local governments 

have helped to accelerate the dissemination and use of green building technologies. As of early 

2007, 54 state and local governments had adopted green building regulations.14 Most of these 

regulations have required that public buildings be constructed according to green standards, 

frequently to the Leadership in Energy and Environmental Design (LEED) standards of the US 

Green Building Council. More recently, a number of jurisdictions, including the state of 

Connecticut; Babylon, New York; Boston; Washington, DC; Montgomery County, Maryland; 

and Pasadena, California, have begun to impose green building requirements for private 

construction. 

As of early 2007, over 400 local governments throughout the United States had endorsed the 

Climate Protection Initiative of the US Conference of Mayors, which establishes the objective of 

meeting or exceeding the greenhouse gas reduction targets of the Kyoto Protocol at the local 

level. A number of state governments and the National Governors Association have also 

endorsed greenhouse gas reduction. Because green building programs are central to the goal of 

reducing global greenhouse gas emissions, state and local governments should be encouraged to 

enact green building legislation that would commit to green building standards and encourage 

green leasing preferences. Federal green building construction standards, including Executive 

Order 13423, represent an excellent template for state and local green building efforts. As well, 

state and local governments with strong credit ratings could make additional use of energy 

performance contracting to encourage sustainable development in their jurisdictions. 

State and local governments can also help to mainstream green and energy-efficient real estate 

through their pension investment activities. The US pension real estate sector totals an estimated 

$7 trillion. Significant institutional investors in this market include the $2.7 trillion state and 

local pension sector and the $420 billion union pension fund segment.15 By instructing their real 

estate advisors to invest a portion of their real estate investment allocations in green and energyefficient real estate in a manner consistent with the Employee Retirement Income Security Act 

(ERISA), states and localities can help to mainstream green development and renovation.

As well, state governments could use their regulatory powers over state-chartered banking 

institutions to encourage green and energy-efficient lending, as suggested for the federal 

government, above.

Educational Institutions. The more than 100,000 US academic institutions represent an important 

locus for the continued establishment of green building programs. Elementary and secondary 

schools represent distinct challenges from those present at the post-secondary level.

The most recent data from the National Center for Education Statistics indicate that there are 

some 95,726 public elementary and secondary schools in the United States.16 The dominant US 

guidelines for green construction serving grades kindergarten through 12 (K-12) are those of the 

Collaborative for High Performance Schools (CHPS), initially developed in California. CHPS 

 14 Sally Deneen and Brian Howard, “Buildings that Breathe,” EMagazine.com, Volume XVIII, No. 1, JanuaryFebruary 2007, <http://www.emagazine.com>.

15 Building Design and Construction, Green Buildings and the Bottom Line, November 2006, p.3. 16 National Center for Education Statistics, Digest of Education Statistics 2005, Chapter 2, Table 84, 2003 data.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 7

constitutes California’s recommended school construction criteria and has been adopted by 21 

California counties. Eight additional states (New York, Massachusetts, Washington, Rhode 

Island, Vermont, New Hampshire, Maine and Connecticut) have adopted elements of CHPs in 

their school construction guidelines.17

CHPS criteria include comfort and safety for students and school staff, indoor environmental 

quality, energy and water efficiency and efficiency in the selection and use of building materials. 

CHPS estimates that school districts can save “thirty to forty percent on annual utility costs for 

new schools and twenty to thirty percent on renovated schools by applying high performance 

design and sustainability concepts. The potential for savings is greater in new schools because it 

is possible to ‘design out’ inefficiencies from the outset.”18

Despite the potential economies associated with the adoption of CHPS or similar standards for 

K-12 institutions, school district budgeting processes frequently serve as disincentives to the 

implementation of green building programs for new construction or renovation. A 2006 review 

of this sector conducted by TIAX LLC19 finds that there is a strict division between operating 

and capital budgets. Capital budgets are fixed periodically by local governments, often on a 

project-by-project basis intended to maximize square footage built and limit local tax increases 

and other publicly-imposed fees. Operating budgets are set and managed separately.20As a result, 

operating cost savings frequently are not considered when school districts evaluate project 

expenditures, and green and energy-cost reduction technologies are given “low priority, 

especially if they increase first costs.”21

Budgeting challenges may be less severe in the United States’ 4,14022 colleges, universities and 

other post-secondary schools. Although building capital and operating budgets are typically 

maintained separately, they are more frequently overseen cooperatively,23 often by a unified 

facilities staff. Similarly, colleges and universities typically take a long-term view of facilities’ 

development, maintenance and life-cycle costs and expect to own their buildings throughout 

their life span, which increases interest in the use of green building technologies.24 Similarly, 

cutting-edge building design and construction are often considered important in the attraction of 

high quality students and faculty, and green and energy-efficient features are often considered 

mission-congruent with the interests of universities and colleges in promoting responsible 

responses to societal challenges.25 As this suggests, colleges, universities and other postsecondary educational institutions are potentially fertile ground for green building initiatives.

 17 Collaborative for High Performance Schools, Membership, Why Should I Join CHPS? See 

<http://www.chps.net/membership/whyjoin.htm>. 18 Collaborative for High Performance Schools, CHPS Overview, <http://www.chps.net/overview/index.htm>. 19 TIAX LLC, Products to Enhance Market Penetration of High Performance Buildings, report prepared for the US 

Department of Energy, October 2006, pp. 4-14 - 4-15. 20 ibid.

21 op. cit., pp. 4-14 - 4.-15 22 22 National Center for Education Statistics, Digest of Education Statistics 2005, Chapter 3, Table 213, 2003 data. 23 TIAX LLC, Products to Enhance Market Penetration of High Performance Buildings, report prepared for the US 

Department of Energy, October 2006, p. 4-15. 24 op. cit., p. 4-16. 25 ibid., p. 4-16. 
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 8

Health Care Institutions. Hospitals and other inpatient medical facilities are intensive users of 

energy and are also highly regulated. TIAX’s 2006 study concludes that inpatient medical 

facilities typically must comply with minimum lighting, outdoor air exchange, emergency power 

and other infrastructure requirements needed to ensure patient health.26 As well, the capital 

budgets for inpatient medical facilities are utilized for medical equipment as well as for real 

estate. As a result, capital access for green and energy-efficient improvements may be 

restricted.27

As the foregoing summary suggests, hospitals and inpatient medical facilities may face special 

challenges in implementing green building programs. At the same time, these facilities would 

benefit from more extensive use of green building programs in order to manage their energy 

expenses and to provide the healthiest possible settings for their patients. The drivers of cost 

control, mission congruence and market differentiation among patients may help to further 

promote the use of green building technologies in medical settings.

Conclusions. A number of policy recommendations emerge from the foregoing analysis of the 

use of green building technologies by government, educational and health care organizations: 

 Institutions, particularly government entities, are important to the early adoption and 

initial mainstreaming of green building policies and programs. Actions to encourage the 

use of green building policies by institutions are therefore an important focus for the 

future.

 Unified consideration of operating and capital budgets facilitate the use of green building 

strategies by institutions. Long-term operating cost savings frequently offset additional 

capital expenditures associated with building green. Integrated consideration of a 

project’s capital and operating costs therefore would be expected to optimize the 

development of green buildings by institutions. 

 In addition to actions affecting their facilities capital and operating budgets, governments 

and other institutions should consider adopting leasing requirements that provide 

preferences to green facilities.

 In the United States, federal policies, including Executive Order 13423, provide a useful 

template for state and local governments interested in developing their own green 

building policies and programs.

 Adoption of green building policies, programs and leasing requirements could play an 

important role in advancing state and local interests in reducing greenhouse gas 

emissions.

 As well, state and local governments might consider increasing their pension investment 

commitments to green real estate, as detailed in the commercial real estate discussion, 

below.

 The use of discounted cash flow and other analytic metrics to evaluate holding period or 

life cycle costs would be helpful to institutions in assessing the costs and benefits of 

green building technologies.

 26 ibid., p. 4-16. 27op. cit., p. 4-17. 
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 9

 The development and dissemination of additional data on payback metrics for green 

improvements would assist institutions in determining whether to build green.

 The federal government has been able to successfully utilize energy savings performance 

contracts as a borrowing mechanism to finance green improvements. State and local 

governments and other institutions with sufficiently strong credit ratings also may be able 

to utilize this vehicle.

 Market differentiation and other benefits related to mission may help to encourage 

institutional users to consider green building programs. In the higher education segment, 

the use of green building technologies may help institutions attract and retain students 

and faculty, as well as demonstrate a responsible approach to larger social issues. 

Hospitals and other inpatient medical facilities may also find the greening of facilities as 

a means of attracting patients and demonstrating their commitment to providing the best 

possible health care settings. 

 Government regulations and tax incentives play pivotal roles in encouraging investment 

in green real estate. Regulations help shape market parameters, while tax incentives can 

reduce the cost of green commercial properties and make green real estate investment 

more viable. Because buildings represent the single largest source of greenhouse gas 

emissions, exceeding even the transportation sector, green real estate investment policies 

should be considered a key element of US energy policy.

 More robust tax incentives for investment in green commercial properties and accelerated 

depreciation for green property owners are two mechanisms worthy of additional 

exploration by policy makers. A central tax credit for green and energy-efficient building 

investment, analogous to the historic preservation tax credit, is one possible mechanism. 

As well, federal policy makers might consider extending tax incentives for green 

commercial buildings beyond 2007.

 Federal and state governments are also key regulators of financial institutions. 

Requirements that financial institutions disclose the volume of their green building loans 

or act to encourage green or energy-efficient real estate lending could be a potent vehicle 

to stimulate lending for sustainable properties. The use of such approaches to encourage 

urban lending have been in place at the federal level for some 30 years under the Home 

Mortgage Disclosure Act and the Community Reinvestment Act. The requirements set 

forth under these statutes could readily be broadened to support the growth of the green 

real estate finance market. 

 Acting through the Federal Reserve Board, the US government participates in the 

establishment of international banking guidelines under the Basel Capital Accord 

process, as do the central banks of other nations. As of early 2007, the Basel process has 

yet to address the subject of green lending protocols. A first step would be to encourage 

the Bank for International Settlements, the entity that coordinates the Basel process, to 

develop research on how green lending principles relate to loan risk. Similar efforts also 

could be undertaken at the national level in the United States and elsewhere.

Commercial Real Estate

Green properties represent a small but fast-growing segment of the $5.7 trillion28 US commercial 

real estate market. According to the most recent available estimates,29 green properties comprise 

 28 Green Building Finance Consortium, May 2007.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 10

some two percent of US non-residential construction, a sector that generates over $500 billion in 

annual economic activity.30 The asset class is growing rapidly; McGraw-Hill Construction 

forecasts that the high performance asset class will comprise up to 10 percent of the US real 

estate market by 2010. US green real estate construction totaled an estimated $11 billion in 2006, 

and is expected to grow to $29 billion to $57 billion annually over the next several years.31

As well, a number of financial institutions, including Citicorp, Bank of America and Wells Fargo 

have announced significant green lending programs that incorporate commercial real estate 

components. Increased green loan volumes are beginning to lead to the selective inclusion of 

green loans in commercial mortgage-backed securities (CMBS) pools. Because the CMBS 

market, which stood at an estimated $750 million in June 2007,32 exerts a considerable influence 

on US underwriting, lending and borrowing decisions, this development is a welcome one, and a 

number of observers predict the emergence of green CMBS pools as the market matures.

Pooled real estate funds dedicated to green real estate investment are beginning to come to 

market, and a number of existing funds, including ProLogis, Liberty Property Trust, the MultiEmployer Property Trust and the Urban Strategies America Fund, are adding green property 

investments to their existing portfolios. 33I A 2007 study of US real estate investment executives 

suggests that as many as a third have begun to invest in green or other responsible property 

investments.34

As the foregoing developments suggest, capital is beginning to move into green commercial real 

estate investment. At the same time, many green developers report that lenders and investors are 

reluctant to recognize additional investment value in green features with respect to energy cost 

savings or consumer appeal. Similarly, many commercial real estate lenders and investors feel 

that they are “flying blind” when asked to assess the value of green commercial real estate 

projects,35 noting the lack of lending and investment guidelines dealing specifically with green 

buildings. 

The following concerns represent some of the key investment risks perceived by lenders and 

investors with respect to investing in green commercial real estate. Mitigation of these perceived 

risks would accelerate the flow of private capital into green buildings:

Reliability of Green Building Technologies. As of 2007, most real estate lenders, investors and 

appraisers lack the technical capabilities to evaluate the effectiveness of green building 

technologies. As a result, finance professionals are uncertain of the reliability of the engineering 

and energy saving technologies used to build green properties and are frequently concerned that 

forecast energy savings may not materialize. The outcome is a reluctance to fully recognize the 

 29 Estimate supplied by McGraw-Hill Construction, November 2005 and quoted in CNNMoney.com, “Green 

Building Goes Big,” June 2006.

30 Building Design and Construction White Paper 2006, Green Buildings and the Bottom Line, November, p. 6. 31 CNNMoney.com, “Green Building Goes Big,” June 2006. 32 Commercial Mortgage Alert, June 21, 2007, <http://www.cmalert.com>. 33 Leanne Tobias, “Green Builds a Head of Steam,” IPE Real Estate, March-April 2007. 34 Gary Pivo, “Responsible Property Investing: A Survey of American Real Estate Executives,” May 2007. 35 Leanne Tobias, Gary Christensen, David Cohen and Lisa Galley, “Marketing Green Properties to Investors and 

Lenders,” Sustainable Development Conference, Urban Land Institute, Pittsburgh, PA, 23 April 2007.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 11

energy savings associated with green buildings in investment models, thereby depressing the 

value creation associated with reduced energy usage. 

The addition of in-house or third-party engineering and energy professionals to underwriting and 

appraisal teams, and the explicit incorporation of energy usage criteria in investment and 

valuation protocols would overcome the lack of green and energy-specific technical knowledge 

and standards in the real estate underwriting process. Training of investment, lending and 

appraisal personnel in green design and construction methods would also be helpful.

Uncertainty about the Costs of Developing of Green Real Estate. The cost premium to deliver 

sustainable properties to the market has declined considerably in recent years. The informal rule 

of thumb among US green building experts is that a moderately green project with features 

equivalent to those required under the basic LEED or Silver LEED guidelines can be delivered to 

the market for a cost premium in the 1.5–3 percent range, assuming an appropriately experienced 

design and construction team and the use of an integrated design process that incorporates green 

features from the outset, a belief that has been validated by initial research.36

The increasing affordability of green commercial real estate is not well understood, however, by 

many real estate professionals. A 2007 study of corporate real estate professionals by Jones Lang 

LaSalle and CoreNet found that 22 percent believed that a green facility would be over 10 

percent more expensive than an equivalent structure, while 30 percent believed that the green 

building would be 5 to 10 percent more expensive.37 Additional education of the industry is 

needed to teach commercial real estate finance professionals about the relatively modest 

premiums associated with the delivery of many green real estate projects.

Uncertainty about the Economic Benefits of Green Real Estate. The economic benefits of green 

real estate also need to be better understood. Case study data prepared by developers and 

researchers suggest that green office, multi-family and mixed-use properties frequently lease 

faster than their conventional equivalents and attain rents and sale prices at the top tier of the 

relevant market ranges, with occasional premium pricing reported.38 The 2007 Jones Lang 

LaSalle/CoreNet survey found that 77 percent of corporate space users would pay a premium for 

green space.39 The sale of credits in the carbon trading markets (see sidebar) may also enhance 

green building cash flows. It also has been suggested that municipal officials expedite 

governmental approvals and permitting for green projects, thereby quickening the pace of 

development and increasing the cost-effectiveness of development.

 36 See Greg Kats, Leon Alevantes, Adam Berman, Evan Mills, Jeff Perlman, The Costs and Financial Benefits of 

Green Buildings: A Report to California’s Sustainable Building Task Force, October 2003. See also Lisa Fay 

Matthiessen and Peter Morris, Costing Green: A Comprehensive Cost Database and Budgeting Methodology, Davis 

Langdon, September 2004. Findings of both studies are summarized in Building Design and Construction White 

Paper 2006, Green Buildings and the Bottom Line, November, p. 4. 37 Ben Breslau and Eric H. Fowles, “Sustainable Perspectives and Trends in Corporate Real Estate,” Jones Lang, 

LaSalle and CoreNet Global, 2007.

38 See, for example, Chris Corps, Green Value, Royal Institution of Chartered Surveyors, 2005 and Leanne Tobias, 

“Financing, Leasing and Investment Considerations,” Green Office Buildings: A Practical Guide to Development, 

Urban Land Institute, 2005.

39 Ben Breslau and Eric H. Fowles, 2007, op. cit.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 12

Sidebar: CARBON EMISSIONS TRADING: A ROLE FOR GREEN REAL ESTATE?

At the close of 2006, the global carbon emissions trading market (hereinafter, the carbon market) stood at 

over US$30 billion. The carbon market is segmented into two areas: (1) the trading of pre-designated 

allowances, such as those awarded by the European Union, a segment valued at US$24.6 billion; and (2) 

the trading of project-based credits, wherein a buyer purchases credits from a project which achieves 

verifiable reductions of greenhouse gas emissions relative to standard practice, a US$5.5 billion market.40

Carbon trading takes place through a variety of vehicles. Trading mechanisms sponsored by governmental 

and quasi-governmental entities include the European Union’s Emissions Trading Scheme, and the Clean 

Development Mechanism (CDM) and Joint Implementation (JI) programs organized under the Kyoto 

Protocol. Voluntary trading mechanisms include Japan’s Keidanren Voluntary Action Plan and the US’s 

Chicago Climate Exchange.

The real estate sector can participate in the carbon markets in two ways. First, real estate companies can 

buy and sell carbon credits as members of voluntary carbon exchanges. ProLogis, a US-headquartered 

real estate investment trust with an international industrial portfolio, has become the first real estate 

member of the Chicago Climate Exchange. Members of the Chicago Climate Exchange agree to 

voluntarily reduce their greenhouse gas emissions by 6 percent by 2010, relative to a pre-set baseline. 

Participants can reduce their carbon emissions by internal energy reduction practices, or can buy the 

required emission reduction credits either from Exchange members whose reductions exceed the required 

target or from outside offset credit providers vetted by the Exchange.41

The real estate sector is also a potential source of credits under project-based trading mechanisms, for 

projects that meet appropriate greenhouse gas reduction standards. Typically, project-based trading 

mechanisms require that greenhouse gas reduction projects embody ‘additionality’— the production of 

greenhouse gas reductions in excess of those that would occur under a business as usual scenario. Eligible 

projects also typically must provide independently verifiable and permanent results and offer controls 

excluding the sale of a set of credits to more than one buyer at the same time.42 Offset providers vetted by 

the Chicago Climate Exchange are sources of project-based credits, as are projects verified under the 

Kyoto Protocol’s CDM and JI programs.

Many carbon market observers anticipate that green real estate is likely to serve as a growing source of 

salable carbon trading credits. At present, the CDM and JI project-based programs, in which buyers from 

industrialized nations typically procure credits from green projects in developing nations, are the most 

robust project-based exchanges. In 2006, the average price for CDM project credits was $10.90 U.S. per 

ton of carbon dioxide reduced, while JI project credits sold, on average, for $8.70 per ton.43 The growth of 

voluntary and other carbon markets in North America and elsewhere is expected to generate increasing 

demand for project-based credits. 

The sale of carbon credits may be expected to produce incremental cash flow for green real estate 

projects. In some cases, the ability to demonstrate demand for carbon credits to be produced by a project 

may help to secure project financing. Larger green real estate projects or portfolios, which have the 

 40 World Bank, State and Trends of the Carbon Market, World Bank Institute and International Emissions Trading 

Association, May 2007, pp. 3, 8. 41 See “About CCX” and “Offsets” at website of the Chicago Climate Exchange, http://www.chicagoclimatex.com/. 42 Word Bank, State and Trends of the Carbon Market, World Bank Institute and International Emissions Trading 

Association, May 2007, p. 37.

43 Word Bank, State and Trends of the Carbon Market, World Bank Institute and International Emissions Trading 

Association, May 2007, p. 21.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 13

potential to produce substantial emissions reductions volumes, are likely to be especially favored as 

carbon markets mature.

Model regulations of the Regional Greenhouse Gas Initiative (RGGI), a carbon trading system developed 

by a consortium of state governments in the Northeast and Mid-Atlantic regions of the United States, 

illustrate the potential influence of emissions trading requirements in shaping the role of green real estate 

in the carbon markets. RGGI is an emissions cap-and-trade program scheduled to commence in 2009. It 

will cap power plant emissions from 2009 to 2015 and will require that regulated power plants reduce 

greenhouse gas emissions from 2015 through 2019. Its intent is to reduce regulated greenhouse gas 

emissions by 35 percent relative to what would have occurred in the absence of regulation. In addition to 

trading emissions allowances, participating power plants may purchase project-based offsets from entities 

outside the electricity sector for at least 3.3 percent of their emissions, with market conditions triggering 

potential additional offset purchases up to a ceiling of 5 to 10 percent of plant emissions.

44

RGGI’s Model Rule, finalized in early 2007, provides the underpinning for the individual state statutes 

that will implement the initiative. Under the Model Rule, new buildings qualify as sources of projectbased credits only if they replace an existing building on the same site, or if they are “zero net energy 

buildings,” buildings that produce as much renewable energy as they consume from non-renewable 

sources.45 Unless the Model Rule is revised on a state-by-state basis, relatively few newly-constructed 

green real estate projects are likely to qualify as sources of carbon credits under RGGI. On the other hand, 

RGGI’s Model Rule favors renovations of existing buildings as a source of project-based carbon credits 

RGGI’s Model Rule further requires that eligible projects produce energy savings in excess of those 

mandated by governmental regulation or judicial order, and excludes projects that receive certain 

incentive funds for energy-related or greenhouse gas reduction purposes.46 These Model Rule 

requirements, if adopted by states participating in RGGI, would appear to limit the eligibility of green 

buildings that receive public incentives as a source of project-based emissions credits under RGGI. As 

well, only green buildings producing energy savings in excess of mandated standards would be eligible to 

sell credits under the Model Rule.

Other emissions trading schemes will of course adopt different requirements with respect to green 

buildings and other sources of project-based credits. The salient lessons are that carbon trading 

mechanisms have the potential to help mainstream the construction and renovation of green buildings and 

that the regulations governing carbon emissions trading will play a role in shaping the green real estate 

market. 

Operating cost savings are of course the most widely-reported presumptive financial benefit of 

green real estate. Most green properties typically cut energy use by 25 to 40 percent, with 

accompanying savings in energy costs A new insurance program offered by Fireman’s Fund 

reduces insurance premiums by five percent for properties certified under the Green Globes and 

LEED initiatives, offering another arena in which cost reductions can be pursued.47

 44 See Model Rule of the Regional Greenhouse Gas Initiative, final version, 5 January 2007, p. 63 at 

<http://www.rggi.org/docs/model_rule_corrected_1_5_07.pdf>. 45 ibid.

46 ibid.

47 Building Design and Construction White Paper 2006, op. cit., pp. 13, 15.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 14

Investors, lenders and appraisers, however, are reluctant to rely on case study data as a basis for 

underwriting decisions. Finance professionals would prefer to see broad quantitative reports that 

would validate the cost-effectiveness and economic benefits of green real estate. Broad 

quantitative data would in turn assist in the development of valuation and underwriting 

information, methods and practices to guide green investment and lending decisions.

Additional financial support for green real estate research and data collection by such 

organizations as the Green Building Finance Consortium, the Vancouver Valuation Accord and 

the High Performance Building Data Protocol and Repository would help to generate the broad 

quantitative information needed to assess the performance of green buildings and construct the 

appropriate underwriting and valuation protocols and practices to guide the commercial real 

estate finance industry. Similarly, existing commercial real estate databases should be refined to 

track the performance of sustainable buildings. CoStar, the leading source of commercial real 

estate leasing and sales information, has undertaken such an initiative and the Building Owners 

and Managers Association, which tracks property operations, is reported to be planning a similar 

effort.

Uncertainty about Green Building Performance Over Time. Lenders are also uncertain whether 

green buildings will be operated or maintained in such a way as to maintain fuel and water 

economies and other benefits, such as enhanced indoor air quality, over time. Green loan 

covenants, tenant leases or memoranda of understanding to be recorded with the property’s title 

have been suggested as possible approaches to ensure that green buildings are operated so as to 

maintain green performance benefits.48 These mechanisms should be explored by private 

industry and real estate trade organizations. 

As well, research to test the post-occupancy performance of green commercial buildings with 

respect to energy performance, water use and indoor air quality, could be used to identify the 

building features and operating protocols that maintain building performance over time, 

including the most cost-effective measures available. Such research is needed to develop best 

practices that finance professionals could require of building operators and borrowers to reduce 

lending and investment risk associated with building operations. The revision of industry 

protocols so as to track and disclose of a building’s energy and water usage upon leasing and sale 

would provide an increased incentive for building owners to commit to long-term green 

operations, thereby reducing another source of investment risk.

Rethinking Loan Security and Cash Flow Issues. Research and education is also needed to 

encourage real estate investors and lenders to devise innovative loan structures for green and 

energy-efficient buildings. The Clinton Climate Initiative, for example, is partnering with ABN 

AMRO, Citigroup, Deutsche Bank, JP Morgan Chase and UBS in a $5 billion effort to renovate 

existing buildings in major cities to energy-efficient standards.49 The program anticipates that 

 

48 Conversation with Lisa Galley, senior vice president, HSH-Nordbank, 22 June 2007. 49 William J. Clinton Foundation, “President Clinton announces landmark program to reduce energy use in buildings 

worldwide,” 16 May 2007, <http://www.clintonfoundation.org/051607-nr-cf-pr-cci-president-clinton-announceslandmark-program-to-reduce-energy-use-in-buildings-worldwide.htm>.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 15

borrowers, including cities and building owners, will pay back the loans plus interest with the 

energy savings generated by the reduced energy costs created by the building retrofits. The 

potential lesson for lenders and investors is to structure financing that links the provision of 

capital for green improvements to the cash flows represented by energy savings. 

Additional attention is also needed to ensure that green real estate loans are backed by collateral 

satisfactory to lenders. These typically include a lien on the underlying real estate, as well as a 

lien on the mechanical elements and fixtures financed by the loan. As well, lenders might also 

consider liens on energy services contracts associated with the financing, as occurs in the 

financing of solar equipment. And as detailed more fully below, programs should be undertaken 

to educate borrowers and lenders in the integration of diverse capital sources to finance energyefficient and sustainable real estate.

It has also been suggested that lenders increase loan-to-value ratios or reduce interest rates on 

green properties thought to reduce the lender’s risk parameters. New Resource Bank, a San 

Francisco-based, state-chartered commercial bank initiated such a program in 2007. The bank 

offers slightly higher loan-to-value ratios for green properties and states that it will reduce 

interest rates by 1/8 percentage point for certain “green leadership” properties.50 Research on the 

comparative performance of loans backed by green and conventional properties is needed to 

determine if such incentives are economically sound.

Integration of Diverse Financing Sources. An additional key issue for green commercial real 

estate, particularly for non-institutional owners of existing property, is that green retrofits may be 

expensive and the owner may have limited capital to commit to green property upgrades. As 

detailed below, incentives offered by utility companies and state, local and federal governments 

may be required to supplement private capital in order to make green improvements a reality. 

The sources of financing to assist with energy-efficient equipment and upgrades are varied and 

complex. The Database of State Incentives for Renewables and Efficiency <www.dsireusa.org> 

lists 1,324 cost reduction programs available through US utility companies and federal, state and 

local governments to make green improvements more affordable, and similar databases are 

maintained by the US Department of Energy, the Alliance to Save Energy, and state energy 

departments.51 Private sources of capital are also diverse, encompassing vehicles offered by the 

real estate lending industry and the energy equipment finance industry.

Too frequently, however, real estate owners and real estate and energy equipment finance 

professionals are unaware of the array of financing options that may help them to bring a project 

to completion, especially for an owner with limited capital. Education of finance professionals 

 50 “New Bank Aims to Make It Easier to Build Green,” Greener Buildings, GreenBiz.com, February 1, 2007, 

<http://www.greenbiz.com/sites/greenerbuildings/news_detail.cfm?NewsID=34525>. 51 Additional data bases that track incentives energy incentive programs are those maintained by the US Department 

of Energy, <http://www.eere.energy.gov/buildings/info/tax_credit_2006.html>; the Alliance to Save Energy,

<http://www.ase.org/content/article/detail/2356> and those of individual state departments of energy.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 16

on the variety of options available would help lenders to package financing for energy upgrades, 

thereby enhancing consumer choice and mainstreaming the use of green and energy efficient 

technologies.

Lisa Galley, senior vice president of HSH-Nordbank, suggests that financial institutions consider 

the development of integrated financial services practices for green and energy-efficient lending. 

Galley notes that while “one-stop shopping” for multiple debt and equity products is a firmlyembedded business model for the real estate sector, no such integration exists with respect to 

green and energy-efficient real estate and equipment lending. Galley suggests that the creation of 

highly versatile hybrid finance companies “with deep specialist knowledge of green buildings, 

building upgrades, technology and techniques plus a systems knowledge of capital markets 

trends, capital sources, regulatory [developments] and tax law...would serve to accelerate the 

greening of properties [by] removing the burden of inefficiency and fragmentation from 

financing green real estate.”52

Pending the creation of such specialized lending units, investors and lenders should be educated 

as to the array of financing options that may be packaged to permit the financing of green and 

energy efficient building retrofits and development projects.

Mission Congruent Investment. Green real estate investment appears to be mission congruent for 

a variety of private sector actors, notably the socially responsible investment (SRI) sector ($2.3 

trillion), the union pension sector ($420 billion), and the foundation segment. Together, these 

actors control approximately $3 trillion in capital. Carbon market investors may also have 

interest in supplying capital to green real estate projects with significant potential to reduce 

greenhouse gas emissions (see sidebar). 

To date, most potential private sector investors appear to have been hesitant to charge their 

financial advisors with green real estate investment requirements. While the attainment of social 

goals cannot supplant fiduciary responsibilities in the allocation of investment capital under the 

federal Employee Retirement Income Security Act, the available evidence suggests that green 

commercial real estate investments may well outperform investments in conventional property. 

The development of prudent green real estate investment objectives would therefore be 

permissible and desirable adjuncts to the policy and program objectives of SRI, union and 

foundation investors, as well as investors in carbon market offset alternatives.

Conclusions. A number of conclusions and recommendations flow from the foregoing review of 

the finance market for US green commercial real estate.

 The development of research programs and databases documenting the financial 

performance of green properties would assist financial institutions in quantifying the 

value of such investments and developing appropriate underwriting protocols. As well, 

existing commercial real estate databases should be expanded to track the performance of 

green and energy-efficient properties and the comparative performance of loans backed 

by green and conventional real estate.

 52E-mail correspondence with Lisa Galley, senior vice president, HSH Nordbank, 22 June 2007.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 17

 Engineering and energy expertise relevant to the evaluation of green real estate 

investment opportunities and property performance should be utilized in real estate 

underwriting and investment procedures.

 Real estate finance professionals, including lenders, investors and operators, would 

benefit from education and training related to the design, construction and operation of 

energy-efficient and sustainable properties.

 Post-occupancy research on the operation of green and energy-efficient buildings is 

needed to identify the building features and operating protocols that maintain building 

performance over time, including the most cost-effective measures available. 

 The revision of real estate industry standards so as to routinely track a building’s energy 

and water usage upon leasing or sale would provide an increased incentive for building 

owners to commit to green construction and operations.

 The use of loan covenants, tenant lease clauses and memoranda of understanding 

recorded with the title of a property are possible mechanisms to ensure that green 

properties are operated so as to maintain green operating economies.

 Innovative loan structures and collateral arrangements that promote the financing of 

green and energy-efficient properties. The recognition of energy savings as cash flows 

that can be deployed in the repayment of green or energy-efficient renovations should be 

explored, as should the use of energy contracts as additional loan collateral.

 Real estate and energy equipment finance professionals should be trained to help 

customers integrate diverse sources of capital, including government incentives, utility 

company incentives, and private capital in order to finance green development and 

renovation programs.

 Potential investors concerned about energy-efficiency and climate change should be 

encouraged to develop sound green real estate investment programs. Private investors for 

whom these concerns may be especially important include socially-responsible investors, 

unions and foundations.

Market Rate Housing

The $10 trillion US single-family housing market53 represents a substantial opportunity for the 

acceleration of progress toward carbon neutrality. Although financing innovations typically lag 

the broad dissemination of development technologies, the opposite is true with respect to energyefficient mortgages for this sector, which first were introduced in the early 1980s. 

US standards for home energy-efficiency have been codified in the Mortgage Industry National 

Home Energy Rating System or HERS. The HERS standards have been developed and 

maintained by a private, non-profit organization, the Residential Energy Services Network or 

RESNET.54 The HERS standards are in use throughout the United States and are implemented 

 53Note that apartment housing is grouped with commercial real estate, above. Debt outstanding in the single-family 

market drawn from Bob Blakely and Tom Lund, Fannie Mae, Presentation at Credit Suisse Financial Services 

Forum, Naples Florida, 8 February 2007, 

<http://www.fanniemae.com/ir/pdf/issues/2007/FNM_Credit_Suisse_Feb0807.pdf;jsessionid=CPDHOE2MT1LQBJ

2FQSISFGA>.

54 Residential Energy Services Network, RESNET’s Standards, <http://www.resnet.us/standards/default.htm>.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 18

by a national network of RESNET-accredited home energy raters. Similarly, the Energy Star 

Builder Option Package is in national use for newly-constructed housing. 

The major secondary financing entities for single-family housing offer mortgage products that 

make energy-efficient homes more affordable55:

 Fannie Mae. Fannie Mae’s valuation guidelines allow lenders to increase home values to 

reflect the added value of energy-efficiency measures by up to 15 percent for retrofits and 

five percent for new construction. In addition, monthly energy savings are added to 

borrower income available for mortgage debt service.

 Freddie Mac. Freddie Mac recognizes energy savings as a compensating factor increasing 

the income available for the borrower’s mortgage payments and permits appraisers to 

incorporate energy improvements into a home’s market value.

 Federal Housing Administration. The Federal Housing Administration (FHA) allows 

lenders to finance 100 percent of energy improvements up to the greater of $4,000 or five 

percent of a home’s appraised value, up to a maximum of $8,000.

 Veteran’s Administration. The Veteran’s Administration (VA) finances energy 

improvements in homes purchased by qualified military personnel, reservists and 

veterans. Financing is available for up to $3,000 in documented improvements and up to 

$6,000 when improvements produce monthly energy savings in excess of mortgage 

payment increases.

Despite the broad availability of energy-efficient secondary mortgage products, experts estimate 

that they are used by one percent or fewer of American homeowners.56 Most residential lenders 

are unaware of the energy-efficient mortgage product, or lack the technical experience needed to 

underwrite energy-efficient home loans, according to Joel Wiese, an expert in energy-efficient 

home lending. Similarly, the secondary market lenders have had little incentive to publicize 

energy-efficient mortgage products in the face of minimal demand.57

RESNET has proposed Congressional adoption of a 50 percent energy usage reduction for US 

residential housing by 2020 and the enactment of reporting requirements for secondary market 

lenders showing progress toward this goal. RESNET also recommends that the federallysponsored secondary market lenders formally define residential mortgage debt service—now 

defined as principal, interest, taxes and insurance (PITI)—as PITI less the energy savings 

derived from a certified home energy rating.58

Recent tax incentives enacted by the US Congress also represent vehicles to encourage the 

development and retrofit of US housing to promote energy efficiency. Tax incentives placed in 

force by the 2005 Energy Policy Act include:

 55 ibid.; telephone interview with Joel Wiese, Energy Efficient Mortgage Product Specialist, Indigo Financial, 7 

March 2007.

56 Telephone interview with Joel Wiese, Energy Efficient Mortgage Product Specialist, Indigo Financial, 7 March 

2007. Telephone interview with Steve Baden, Executive Director, RESNET, 8 March 2007.

57 Telephone interview with Joel Wiese, telephone interview with Steve Baden.

58 RESNET Policy on Energy Efficient Mortgages, <http://www.resnet.us/about/policy/eems.pdf>. Telephone 

interview with Steve Baden.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 19

 Tax Credits for Home Builders. Pursuant to the 2005 Energy Policy Act, home builders 

are eligible for a $2,000 tax credit for each new energy efficient home that achieves 50 

percent energy savings for heating and cooling over the 2004 International Energy 

Conservation Code (IECC) and supplements. At least one-fifth of the energy savings 

must come from building envelope improvements. The credit also applies to contractors 

of manufactured homes conforming to Federal Manufactured Home Construction and 

Safety Standards. Producers of manufactured homes complying with the Energy Star 

standard of the US Environmental Protection Agency or achieving heating and cooling 

savings in excess of 30 percent of the 2004 IECC standard and supplements are eligible 

for a $1,000 tax credit. The home builder tax credits apply to new homes located in the 

United States whose construction is substantially completed after August 8, 2005 and that 

are acquired from the eligible contractor for use as a residence from 1 January 2006, 

through 31 December 2008.59

 Tax Credits for Manufacturers of Energy Efficient Appliances. The 2005 Energy Policy 

Act established a tax credit for manufacturers of certain clothes washers, dishwashers, 

and refrigerators produced in 2006 and 2007 that meet or exceed specified energy 

efficiency ratings. The expectation is that this credit will lower the final retail prices that 

consumers pay for these appliances.60

 Tax Credits for Non-Solar Home Improvements. Under the Energy Policy Act of 2005, 

homeowners may receive a 10 percent tax credit of up to $500 for the purchase and 

installation of energy-efficient home improvements with a life of at least five years. 

Improvements must exceed the 2000 IECC standard. The tax credit for home 

improvement purchases is limited to $500 for the years 2006 and 2007. The $500 limit 

represents the total credit that can be claimed for both years combined. A maximum of 

$200 of the $500 total limit can be used for purchasing windows. Eligible purchases 

include exterior doors and windows, storm windows, skylights, metal roofs, insulation, 

central air conditioning and heating, geothermal heat pumps, hot water boilers and 

advanced main air circulating fans.61

 Tax Credits for Home Solar Improvements. Taxpayers may claim 30 percent tax credits 

up to a maximum of $2,000 for installing home solar panels, and an equivalent credit for 

home solar water heating equipment. No part of either system may be used to heat a pool 

or hot tub. Credits for the installation of a home fuel cell power plant may be claimed up 

to $500 for each half kilowatt of capacity generated. In general, a qualified fuel cell 

power plant converts a fuel into electricity using electrochemical means, has an 

electricity–only generation efficiency of more than 30 percent and generates at least 0.5 

kilowatts of electricity. The credits apply for property placed in service in 2006 and 

2007.62

 59 Federal Tax Credits for Energy Efficiency: Energy Star, US Department of Energy,

<http://www.energystar.gov/index.cfm?c=products.pr_tax_credits#s6>. 60 Miscellaneous Tax Credits, 2005 Energy Policy Act, 

<http://www.otpco.com/SaveEnergyMoney/EPACTMiscEnergyTaxCredits.asp>.

61 Energy Tax Credits, <http://taxes.about.com/od/deductionscredits/qt/energytaxcredit.htm>. 62Solar Panels and Fuel Cell Power Plants (aka Residential Energy Efficient Property Credit),

<http://taxes.about.com/od/deductionscredits/qt/energytaxcredit.htm>.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 20

The tax credits established under the Energy Policy Act of 2005 for homeowners, homebuilders, 

and appliance manufacturers represent an initial step in motivating suppliers and consumers to 

embrace energy efficiency. The program is of comparatively short duration, however, and 

warrants extension beyond 2007 in order to affect home construction, improvement and 

appliance purchasing patterns. As of 2007, the US Congress is evaluating a new package of 

energy efficiency tax incentives that would presumably extend some of the 2005 credits.

In addition, the energy-efficiency standards to which the tax credits are linked should be 

reviewed periodically to ensure that they relate meaningfully to the most recently implemented 

technical standards and available manufacturing capabilities. Ideally, federal tax incentive 

programs would be sufficiently robust to effectively advance energy efficiency and green home 

production to a meaningful degree on an ongoing basis, while providing meaningful financial 

incentives to consumers and producers.

As detailed above, state or local tax incentives for energy efficiency have also been adopted in a 

majority of US states. As suggested with respect to federal tax incentives, state and local 

programs warrant periodic review to ensure that eligibility criteria are linked to the most recently 

implemented technical standards and manufacturing capabilities.

Broader consumer interest in energy-efficient home construction or rehabilitation is likely to be 

fueled by growing awareness and the wider availability of tax incentives for green appliances 

and construction. Rising consumer interest may also be expected to encourage the development 

of additional lending programs geared to green or energy-efficient construction or home 

rehabilitation. An early initiative of this type has been launched in the Chicago area through 

ShoreBank’s Homeowners’ Energy Conservation Program. The lending program, undertaken in 

partnership with the Northern Illinois Energy Project and the Illinois Clean Energy Community 

Foundation, offers homeowners a free energy consultation in connection with their loans. A free 

Energy Star refrigerator is provided to consumers who include more than $2,000 in energy 

saving improvements in their rehabilitation borrowing. Capital for the deposits against which 

loans are made are raised from ShoreBank’s ‘Green Neighbor’ certificates of deposit, which earn 

market rates of interest.63

Larger institutions are also beginning to announce green mortgage finance projects. Citigroup 

has included green home lending under a $50 billion green lending initiative announced in May 

2007. As a $20 billion, 10-year program unveiled in March 2007, Bank of America announced a 

green mortgage program, under which homebuyers will receive a reduced interest rate or $1,000 

back for each home purchase mortgage meeting Energy Star specifications.64 JP Morgan/Chase 

also has announced plans for an energy-efficient mortgage program.65 These developments 

suggest that consumer choices are expanding for energy-efficient green mortgage products.

 63 Joel Freehling, “ShoreBank: Building a Market for Energy Efficient Homes,” Green Money Journal, Winter 2005, 

Volume XIV, Issue 2, Number 57.

64Citigroup, “Citi Targets $50 Billion Over 10 Years to Address Global Climate Change,” 8 May 2007,

<http://www.citigroup.com/citigroup/press/2007/070508a.htm>; “Bank of America Announces $20 Billion 

Environmental Initiative,” Bank of America, Press Release, dated 6 March 2007, 

<http://newsroom.bankofamerica.com/index.php?s=press_releases&item=7697>.

65 Bhavna Prasad, vice president, Environmental Affairs, JP Morgan/Chase, presentation delivered at meeting 

sponsored by the Harvard Center for Health and the Global Environment, Washington, DC, 4 April 2007.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 21

Conclusions. The foregoing review of US single-family financing options for green homes 

suggests a number of conclusions and policy recommendations:

 Energy-efficient mortgage products for single-family homes predated the widespread 

development of green building standards and technologies and significant consumer 

demand for energy-efficient home improvements. To date, market penetration of these 

financing products has stood at one percent or fewer of American households. As this 

suggests, green real estate financing vehicles are typically effective only after the 

development of relevant standards and technologies and in the presence of consumer 

demand. 

 Market priming through the dissemination of green construction standards for one- to 

four-family homes and consumer and lender education on the benefits of sustainable 

homes will likely help to accelerate the use of green mortgage products. 

 Mortgage lenders should also be educated in green residential construction standards and 

technologies, as well as on the sources of relevant design, construction and equipment 

installation expertise. 

 As recommended in the section on commercial lending, above, residential lenders should 

be trained to help consumers integrate the diverse sources of financing, including public 

and utility company incentives, needed to finance green residential renovation and new 

construction projects.

 An initial wave of primary lenders is beginning to enter the home mortgage market with 

green products. Additional primary lenders are likely to enter if these product 

introductions are successful.

 Energy-efficient home mortgages in the US market typically have been offered through 

federally-sponsored secondary market lenders, including Fannie Mae, Freddie Mac, the 

Veterans Administration and the Federal Housing Administration. Congressional 

adoption of a 50 percent energy usage reduction for US residential housing by 2020 and 

the enactment of reporting requirements for secondary market lenders showing progress 

toward this goal would help to spur the use of relevant mortgage products. 

 The redefinition of residential mortgage debt service by government-sponsored mortgage 

lenders as principal, interest, taxes and insurance less the energy savings associated with 

approved green or energy efficiency technologies would help to shape market demand for 

energy-efficient home loans.

 Federal, state and local tax incentives for green and energy-efficient home improvements 

help to make these improvements affordable and accelerate the growth of market 

demand. These programs should be of sufficient duration to affect consumer behavior 

and warrant periodic review to ensure that eligibility criteria are linked to the most 

recently implemented technical standards and manufacturing capabilities.

Affordable Residential Housing

Although US homeownership rates grew to 69 percent of households by 2005, housing 

affordability has become an increasing challenge due to post-2003 mortgage interest rate 

increases, significant appreciation in home prices, the growth of low-wage and part-time 

employment, and continuing restrictions on the affordable housing supply due to local zoning 
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 22

regulations. 66 According to Harvard University’s Joint Center for Housing Studies, the 

percentage of American households experiencing moderate to severe housing cost burdens 

(defined as households spending in excess of 30 percent of their incomes for housing) increased 

from 29.4 percent in 2001 to 31.8 percent in 2004.67 The housing cost burden has been most 

pronounced among poorer families: 49 percent of poor working families with children 

experienced severe housing cost burdens in 2004, defined as a housing expenditure in excess of 

50 percent of income, and fully 75 percent had either moderate or severe burdens.68

Recent increases in residential energy expenses have placed additional cost burdens on US 

families, especially on lower-income households. According to 2003 figures, the most recent 

data available as of early 2007, 2.5 million US households in the bottom income quartile spent 

over 30 percent of their budgets on home energy costs, and an additional 1.4 million households 

spent 20 to 30 percent of their incomes for home energy.69 The affordability challenges posed by 

rising residential energy expenses have no doubt grown more severe, as the 2003 data preceded 

2005–2006 run-ups in oil costs.

As the foregoing data suggests, housing and home energy affordability are growing challenges in 

the United States. The mainstreaming of green housing is an effective mechanism to address 

these challenges because of the ongoing operating cost savings associated with green buildings 

and because green housing is frequently more durable and easier to maintain than conventional 

housing.70

Long-term financing mechanisms and other subsidies have a meaningful role to play in greening 

affordable housing because green features can be financed over a period of up to 30 years, 

depending on the loan term. The challenge in financing green affordable housing, however, is 

three-fold: 

 As is the case with conventional housing and commercial properties, lenders and 

appraisers frequently lack the data necessary to quantify the financial benefits of green 

housing in their underwriting.

 Because it is unusual for affordable housing to achieve price increases upon resale, green 

improvements are difficult to underwrite.71

 The housing subsidy system in the United States is highly fragmented. Financing for an 

affordable housing project typically is dependent on multiple sources of capital, and 

capital sources may have varied underwriting requirements. Thus, the addition of features 

 66 Joint Center for Housing Studies, Harvard University, The State of the Nation’s Housing 2006, pp. 3, 25, 

<http://www.jchs.harvard.edu/publications/markets/son2006/son2006_bw.pdf>. 67 op. cit., Table A-6, p. 36 68 op. cit., p. 3.

69 op. cit., p. 8 and Table A-6, p. 36. 70 Jessica Boehland, “Greening Affordable Housing,” Environmental Building News, Volume 14, Number 3, March 

2005.

71 William Bradshaw, Edward F. Connelly, Madeline Fraser Cook, James Goldstein and Justin Paley, New Ecology, 

Inc., and Tellus Institute, The Costs and Benefits of Green Affordable Housing, excerpted in Institute for 

Professional and Executive Development, Green Homes and Sustainable Communities: the Future of Affordable 

Housing and Community Development, Conference Proceedings, San Francisco, July 13-14, 2006.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 23

considered non-standard and which add up-front cost, including energy-efficient or green 

features, may be particularly problematic.72

At present, US affordable housing subsidies are financed primarily through four vehicles: 

(1)Housing Choice vouchers (typically referred to as Section 8 vouchers) issued by the US 

Department of Housing and Urban Development (HUD); (2)HUD assisted and discretionary 

funding programs; (3)public housing and (4)the federal low-income housing tax credit (LIHTC) 

program. These programs and the key green initiatives affecting them are discussed below.

Housing Choice Vouchers and Other Assisted and Discretionary Programs. HUD 

provides financial support for 2.3 million affordable housing units through Housing Choice 

vouchers issued to lower-income households and through subsidies for housing provided to 

senior citizens, disabled persons and others targeted for federal assistance. Housing Choice 

vouchers account for 1.4 million of the housing units provided.73 In addition, HUD provides 

community development grants to local governments for housing and related projects under the 

HOME and Community Development Block Grant (CDBG) programs, respectively.74

In order to promote energy-efficiency in housing supported by these programs HUD has:

 Provided funding preferences for assisted housing projects that meet Energy Star 

construction and appliance purchase standards.75 Utilization of energy-efficiency 

measures in CDBG and HOME grants, which are not covered by the preference, is being 

tracked.76 Bipartisan legislation has since been introduced in the US House of 

Representatives to require that HUD community development programs, including the 

CDBG and HOME initiatives, meet sustainability criteria, including energy-efficiency.77

 Adopted HUD-wide management performance goals to prioritize the attainment of 

energy-efficiency in HUD housing and implemented an alliance with the US Department 

of Energy to promote Energy Star construction and appliance purchase standards.78

 Initiated education, outreach and training programs on energy efficient residential 

maintenance and appliance purchases for residents of HUD projects and for HUD field 

office and project staff.79

The foregoing initiatives underscore the importance of drafting and implementing 

comprehensive standards, and educating building staff and consumers in order to mainstream 

green and energy-efficient building and real estate management practices.

 72 ibid.

73 US Department of Housing and Urban Development, Promoting Energy Efficiency at HUD in a Time of Change: 

Report to Congress, 8 August 2006, pp.8-9. 74 op. cit., pp.8-9. 75 op. cit., p. 13.

76 op. cit., pp.18-19. 77 High Performance Buildings Act of 2007, as introduced in the US House of Representatives, 1 March 2007.

78 US Department of Housing and Urban Development, Promoting Energy Efficiency at HUD in a Time of Change: 

Report to Congress, 8 August 2006, pp. 14-16. 79 op. cit., pp.17-18.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 24

Public Housing. The US public housing stock comprises an estimated 1.2 million units in 

13,000 properties, managed by some 3,100 public housing authorities (PHAs).80 Annual utility 

costs for public housing, including expenses paid directly by PHAs ($1.28 billion) and costs paid 

by tenants ($411 million), total $1.69 billion and represent an estimated 22 percent of operating 

expenses.81

Utility cost increases in public housing have grown at rates in well in excess of inflation. Costs 

rose by 14.9 percent from 2001–2004. Partial data for 2005 indicate that PHA utility costs 

increased by close to 22 percent over the prior year.82 As this suggests, cost increases represent a 

burden both for PHAs and for public housing tenants responsible for the direct payment of utility 

bills. Some 26 percent of St. Paul, Minnesota PHA evictions are said to be caused by utility 

cutoffs.83

Under the Energy Policy Act of 2005, newly-constructed public housing projects, known as 

HOPE VI developments, must be built to comply with or exceed the energy standards of the 

2003 International Conservation Code.84 HUD will issue regulations incorporating this 

requirement during the 2007 federal fiscal year. In addition, HUD offers two primary capital 

financing programs to enhance energy efficiency in existing public housing:

 Energy Performance Contracting. PHAs may contract for comprehensive energy 

improvement services under long-term energy improvement contracts, the duration of 

which can extend to 20 years. Energy cost savings realized under the contracts can be 

used to repay borrowings for associated capital improvements or to offset additional 

HUD-designated expenses. Alternatively, the PHA can elect to receive additional HUD 

operating subsidies to pay debt service for the improvements and keep 75 percent of the 

savings.85

 Capital Fund Financing Program. PHAs rated as standard or high-performing by HUD 

may borrow for energy improvements and other capital costs against collateral 

represented by future capital funds expected to be appropriated by the US Congress. 

Risks to lenders include the possibilities that anticipated appropriations will not 

materialize or that PHA capital funds will be withheld or recaptured by HUD due to 

performance lapses.86

Energy performance contracting and the Capital Fund Financing Program offer important longterm mechanisms through which PHAs may finance energy-efficiency and green improvements. 

 80 op. cit., p. 7.

81 ibid.

82 op. cit., pp. 7-8. 83 Global Green USA, Public Housing Authority Toolbox, www.globalgreen.org/pha-energytoolbox/index.htm. 84 US Department of Housing and Urban Development, Promoting Energy Efficiency at HUD in a Time of Change: 

Report to Congress, p. 23. 85 First Pic, D&R International, Facilities Strategies Group, Energy Performance Contracting: Field Office

Procedures, PowerPoint presentation prepared for the US Department of Housing and Urban Development, and 

delivered 28 February–1 March 2006. Available through link at 

<http://www.hud.gov/offices/pih/programs/ph/phecc/funding.cfm>. 86 ibid.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 25

As of mid-2007, however, only 3.7 percent of PHAs had taken part in these programs.87 HUD 

management reforms being implemented in 2007 and thereafter, which link PHA funding to 

operating performance on a property-specific basis, are expected to increase participation. 

Participation is also expected to be boosted by fiscal 2007 regulations requiring that appliances 

purchased for public housing conform to Energy Star and other federal standards.88

Additional management enhancements have been suggested to enhance the utilization and 

effectiveness of PHA energy performance contracting and Capital Fund Financing Program 

initiatives. Suggested actions include additional education of local officials (whose approvals are 

sometimes required for PHA programs) and lenders about the efficacy of the programs, 

development of aggregate regional programs for smaller PHAs, and training for PHA personnel 

on available financing sources, energy retrofitting and program oversight.89

LIHTC. The federal low-income housing tax credit program was established by Section 

252 of the Tax Reform Act of 1986 and was codified as Section 42 of the Internal Revenue 

Code. The program awards each US state per capita tax credit allocating authority for tax credit 

awards to investors in low-income housing. The dollar value of allocating authority is based on 

state population, adjusted according to statutory cost-of-living criteria. The per capita allocating 

authority for each state for 2007 is set at $1.95.90

The LIHTC program provides a federal guaranty for 10 years of tax credits for investments in 

projects in which 20 percent or more of the units are occupied by households with incomes at or 

below 50 percent of area median income as established by the US Department of Housing and 

Urban Development (HUD), or in which 40 percent or more of the units are occupied by 

households with incomes at or below 60 percent of the area median. Rents and utility expenses 

borne by low-income occupants of LIHTC properties cannot exceed 30 percent of household 

income.91 The LIHTC program has created an estimated 1.4 million rental units from program 

inception through 2004, the most recent year for which data are available; annual budget 

authority available under the program is estimated at $5 billion.92

Under the LIHTC regulations, state housing credit agencies, typically referred to as state housing 

finance agencies (HFAs), must develop qualified allocation plans establishing the selection 

criteria for designating LIHTC tax credit projects. The granting of preferential green selection 

criteria under HFA allocation plans for LIHTC credits is therefore a critical mechanism for 

greening the affordable housing stock. 

 87 US Department of Housing and Urban Development, Promoting Energy Efficiency at HUD in a Time of Change: 

Report to Congress, p. 25. 88 op. cit., p. 21.

89 First Pic, D&R International, Facilities Strategies Group, Energy Performance Contracting: Field Office 

Procedures, PowerPoint presentation prepared for the US Department of Housing and Urban Development, op. cit.

90 Commonwealth of Massachusetts, Department of Housing and Community Development, Low Income Housing 

Tax Credit Program: 2007 Qualified Allocation Plan, p. 5. 91 William Bradshaw, Edward F. Connelly, Madeline Fraser Cook, James Goldstein and Justin Paley, New Ecology, 

Inc., and Tellus Institute, op. cit.

92 US Department of Housing and Urban Development, Low Income Housing Tax Credit Database.

<http://www.huduser.org/datasets/lihtc.html>.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 26

As of 2006, 46 states had established LIHTC allocation plans that require or promote energyefficiency standards or other measures consistent with green construction, according to the nonprofit National Housing Trust.93 Forty-three of the 46 states cited addressed energy efficiency 

concerns in their allocation plans. Other factors identified in the various state plans included 

comprehensive green construction or sustainability criteria (ten states), water preservation (two 

states) and health preservation concerns (two states). 

Allocation plan criteria that might be adopted to accelerate the greening of LIHTC-supported 

affordable housing include:

 The inclusion of energy-efficiency or mandatory green design standards in threshold 

criteria that must be met by all LIHTC applicants.94 The utilization of Energy Star 

construction and home appliance standards would be a possible vehicle to achieve this 

end, as would the requirement that all projects meet the most recent IECC standards.

 Preferential treatment for projects that meet comprehensive green building guidelines, 

such as state-enacted green construction requirements or guidelines promulgated by 

Green Communities, LEED, Earthcraft, Green Globes and others.

Non-profit Initiatives. Affordable housing in the United States is often provided under the 

auspices of non-profit, community development corporations (CDCs), or community-based 

organizations (CBOs) operating at the local, state, regional and national levels. Non-profit 

organizations typically serve as developers of affordable housing, secure and coordinate 

financing from multiple sources, and frequently provide or coordinate supporting social services 

for project occupants. As they have a perpetual hold on their real estate, they have a vested 

interest in ensuring that long-term cost saving measures are put into place. Non-profits have a 

tradition of comfort with both leading-edge community concerns and the use of tax credits, setasides, and other means of tax-advantaged programming, to create their financial structures. 

Green initiatives are beginning to be undertaken by non-profits, CDCs and CBOs in executing 

affordable housing projects. Among the most prominent:

 Green Communities. Enterprise Community Partners and the National Resources 

Defense Council have partnered in the Green Communities Initiative, which will 

invest $550 million over five years to create 8,500 green affordable homes throughout 

the United States. As of early 2007, some 6,800 units had been placed in predevelopment or under construction or completed.95 Capital for the Green 

Communities initiative was obtained from grant financing from a network of 

foundations and corporations. Assisted projects are selected by competitive 

application and are developed in accordance with Green Communities sustainability 

criteria. Financial assistance available through the Green Communities initiative 

 93 National Housing Trust, Summary Table of Green State Low Income Housing Tax Credit Allocation Initiatives, 

July 2006, <http://www.nhtinc.org/documents/Green_Scan_July_2006.pdf>. 94 Stockton Williams, James Tassos, Enterprise Community Partners, Memorandum on Sustainable Development 

Policies in 2006 State Housing Credit Plans, 21 June 2006, reproduced in Institute for Professional and Executive 

Development, Green Homes and Sustainable Communities: the Future of Affordable Housing and Community 

Development, Conference Proceedings, San Francisco, 13-14 July 2006. 95 Sally Deneen and Brian Howard, “Buildings that Breathe,” EMagazine.com, Volume XVIII, No. 1, JanuaryFebruary 2007, <http://www.emagazine.com>. 
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 27

includes grants for planning, the purchase of green materials, energy systems and 

appliances; equity from LIHTC investors; and loans for design and other 

predevelopment expenses, the acquisition of land and buildings, and construction. 

Green Communities also offers training, information services and technical support to 

the developers of affordable housing.96

 LISC. The Local Initiatives Support Corporation (LISC) offers a comprehensive 

menu of equity and debt investment, grants and technical support to communitybased organizations and to affordable housing and community projects throughout the 

United States. In order to provide liquidity to the affordable housing market, LISC 

has created the National Equity Fund, a syndicator of LIHTC credits and the 

Community Development Trust, a real estate investment trust that provides equity 

and debt financing to affordable housing projects. LISC has begun to encourage green 

development by participating CDCs and CBOs through its Green Development 

Center, which offers technical support on green construction and development 

approaches. The green technical support supplements LISC’s other financial 

services.97 LISC is reportedly considering a credit enhancement program for 

mortgages to green projects by guaranteeing the additional income projected from 

associated energy savings. The guarantee would allow lenders to make larger loans to 

green properties.98

In order to be successful, non-profit, affordable housing projects must aggregate financing from 

a variety of sources, including LIHTC equity; government-issued bonds, loans and grants; 

foundation grants and program-related investments (that is, loans and equity investments that 

support a foundation’s mission); federal, state and local tax incentives; and private debt 

financing. As this suggests, the financing process is a challenging one. A comprehensive suite of 

financing and technical support services such as those provided by Green Communities and 

LISC is critical to increasing green, affordable housing production by community-based, nonprofit organizations. Legislation introduced in the US House of Representatives in March 2007 

would create a $10 million HUD program to fund sustainable development and education efforts 

in low-income communities.99

Foundations are also key sources of seed funding for green affordable housing, typically through 

grant funding. Program-related investment (PRI) support, under which foundations make 

mission-specific equity and loan investments, represents a new way in which foundations can 

provide financing. Foundations active in the environmental and real estate development arenas 

should be encouraged to undertake prudent, mission-related program-related investments to 

leverage their resources in support of green development initiatives.100

 96 Green Communities, <http://www.greencommunitiesonline.org/>. 97 Local Initiatives Support Corporation, <http://www.lisc.org>.

98 Bendix Anderson, “Lenders Teeter on the Edge of Green,” Green Building, March 2006. 99 High Performance Buildings Act of 2007, as introduced in the US House of Representatives, 1 March 2007.

100 Jon Jensen, The George Gund Foundation, “Ten Things a Foundation Can Do to Advance Green Building in 

Your Community,” May 2006, excerpted in Green Homes and Sustainable Communities: the Future of Affordable 

Housing and Community Development, Additional Materials, Conference Proceedings, op. cit., 2006.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 28

Finally, consumer-marketing programs are beginning to use cause marketing to fuel product 

sales. These marketing efforts, under which consumer purchases are linked to corporate 

donations to specific causes, are being used increasingly to finance initiatives related to energy 

and environmental issues. Bank of America, for example, permits consumers to donate their 

credit card WorldPoints rewards to organizations that invest in greenhouse gas reductions. Bank 

of America also has announced that it will make annual donations to Conservation International 

on behalf of home equity borrowers who use the Bank of America credit card associated with 

their loan; additional non-profit organizations may be added to the program over time.101 Similar 

cause marketing programs can be developed to finance non-profit green development initiatives.

Conclusions. The foregoing review of green financing options in the US affordable housing 

market suggests the following conclusions and recommendations:

 The US Department of Housing and Urban Development has made considerable progress 

in granting preferences for federal assistance to affordable projects that meet energyefficiency criteria, and new public housing construction must comply with the 2003 

International Conservation Code. Required periodic review of HUD’s energy efficiency 

standards would help to ensure that HUD guidelines reflect technical advances. 

 The enactment of federal legislation requiring that all new projects funded by HUD, 

including those supported by the Community Development Block Grant and HOME 

programs, meet sustainability and energy-efficiency criteria, would accelerate the 

development of green affordable housing.

 Regulations effective in fiscal year 2007 require that US public housing projects purchase 

energy-efficient appliances and encourage local public housing authorities to utilize 

energy savings performance contracts and the HUD Capital Fund Financing program to 

become more energy efficient. To date, only an estimated 3.7 percent of public housing 

authorities have utilized these programs. 

 Additional education and technical assistance on energy efficiency, retrofitting, project 

management and financial oversight would help to maximize public housing authority 

usage of financing vehicles for energy efficiency. Additional education of local officials 

(whose approvals are sometimes required for public housing expenditures) and lenders 

about the efficacy of the programs would also be helpful, as would the development of 

aggregate regional programs for smaller housing authorities.

 US affordable housing is also financed through low-income housing tax credits awarded 

to investors. Recipients of the tax credits are selected at the state level under allocation 

plans developed by state housing finance agencies. State allocation policies that might be 

adopted to accelerate the greening of LIHTC-supported affordable housing include the 

inclusion of energy-efficiency or mandatory green design standards in threshold criteria, 

or preferential treatment for projects that meet comprehensive green building guidelines, 

such as state-enacted green construction requirements or guidelines promulgated by 

Green Communities, LEED, Earthcraft, Green Globes and others.

 Affordable housing in the United States is often provided under the auspices of non-profit 

or community-based organizations at the local, state, regional and national levels. 

Additional public funding for sustainable development and consumer education efforts 

for these organizations would allow them to strengthen their efforts. Legislation 

 101 “Bank of America Announces $20 Billion Environmental Initiative,” Bank of America press release dated 6 

March 2007, <http://newsroom.bankofamerica.com/index.php?s=press_releases&item=7697>.
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 29

introduced in the US House of Representatives in March 2007 would create a $10 million 

HUD program for this purpose.

 Foundations and other charitable enterprises frequently provide grant financing for 

affordable housing and related community development projects. Foundations active in 

the environmental and real estate development arenas also should be encouraged to 

explore prudent, mission-congruent program-related investments, including equity 

investments and loans, to leverage their resources in support of green development 

initiatives.

 Cause-related marketing, wherein consumer product purchases are linked to corporate 

charitable donations to specific causes, is being used increasingly by US companies, and 

has been used successfully to finance initiatives related to energy and environmental 

issues. Expansion of these programs and their use to finance non-profit green 

development initiatives should be explored by community-based organizations.

Summing Up

The foregoing study has summarized the state of the real estate finance market for green 

buildings in the United States’ governmental, institutionally-owned, private commercial and 

residential, and affordable housing markets. Financing for green real estate has begun to 

penetrate all sectors, but more must done in order to accelerate the production of green buildings 

and potentially accomplish the objectives of the 2030 Challenge, which envisions that all new 

buildings be carbon neutral by 2030. 

Detailed recommendations have been set forth above for key actors influencing green building 

finance, but some over-arching themes are worth restating in conclusion:

 The mainstreaming of US green building finance will require the collaboration of private 

industry, government and non-profit organizations.

 The creation of green design and construction standards has played a key role in the 

evolution of the green building segment, and the continued refinement and dissemination 

of such standards underpins the growth of the green building market and associated 

financing.

 Governmental actors can accelerate the market adoption of sustainable building 

technologies through the adoption of green requirements for public and private 

construction and for the leasing of government space. 

 Tax incentives and the oversight or regulation of financial institutions are other possible 

mechanisms to mainstream green building production. These mechanisms are especially 

important in the early years of market formation. A robust federal tax incentive, 

analogous to the historic preservation tax credit, has been suggested as a model for a 

green building tax credit. Accelerated depreciation for green properties represents another 

possible mechanism to spur the production and retrofitting of green buildings. 
Background Paper 2b— Toward Sustainable Financing and Strong Markets for Green Building: 

US Green Building Finance Review 30

 In the United States, the private sector is the key source of financing for market-rate 

green buildings. The real estate sector is extremely well-capitalized, and green projects 

are beginning to attract market financing.

 Research and database development on the comparative economic and operating 

performance of green and conventional buildings and the loans collateralized by such 

properties is needed to educate lenders and investors, identify best practices, and develop 

cogent green building underwriting and appraisal standards and practices. The 

collaboration of private industry, trade groups and governmental organizations would 

serve to accelerate this process.

 The integration of engineering and energy expertise in the financial underwriting of real 

estate projects would help lenders, equity investors, and building owners to evaluate the 

soundness of green building proposals. The training of finance professionals in green 

building design and construction technologies would also be helpful.

 Well-capitalized institutions and individuals are likely to be able to access financing for 

green buildings with little or no outside support. Smaller businesses and less affluent 

households are more likely to require the integration of financing from a variety of 

sources, including private capital, utility company incentives and government incentives. 

Lenders should be trained to assist consumers in packaging these multiple financing 

sources. 

 In the affordable housing segment, public agencies should expand recent efforts to 

enhance financing options for energy-efficient public housing and to green state 

requirements for the award of low-income housing tax credits. Additional support for 

non-profit organizations that develop energy-efficient affordable housing should also be 

considered.

 Organizations involved in real estate finance, whether private, public or institutional, 

should be encouraged to integrate their capital and operating budgets for real estate 

projects. Integrated consideration of the long-term financial performance of a real estate 

asset encourages the use of sustainable technologies.

 Energy savings should be identified by all sectors as a source of cash flow for the 

repayment of energy-efficient building construction and renovation projects. Lenders 

should also consider a variety of financing models and collateralization approaches in 

developing green financing projects. 

 Investment organizations for which green real estate is mission-congruent should develop 

robust programs to encourage investment in this segment. The pension funds of states, 

localities and unions may have particular interest in the sustainable real estate segment, as 

might foundations and endowments. 

Consideration, refinement and action on the recommendations contained in this study are the first 

step of putting the US real estate finance industry on the road to meeting the 2030 Challenge.