Green Building Bonds as a Game Changing New Source of Capital

Regency Centers Corporation, a publicly traded REIT, completed the sale of $250 million of “green building bonds” on May 14, 2014.

Proceeds from these corporate bonds will be used to fund “eligible green building projects” including the acquisition, construction, development or redevelopment of projects that will pursue LEED certification.

Regency is an owner, operator, and developer of grocery anchored neighborhood and community shopping centers. With 332 retail properties, the REIT’s portfolio encompasses over 43.9 million square feet located throughout the United States. The REIT has 17 LEED registered projects since 2009 (7 of which are under construction) and 7 of which have been certified.

Regency described this source of capital as an opportunity to support an important market as investors seek more socially responsible investment options. This bond issuance also confirms Regency’s commitment and long term view on sustainability, as evidenced by its greengenuity© program, which is the REIT’s “commitment to do all that is practical to reduce its environmental impact in developing and operating shopping centers.”

Only days before the green building bond sale, on May 12, 2014, Regency was honored by the U.S. Department of Energy’s Better Buildings Alliance as an inaugural Green Lease Leader, leading the market by incorporating lease clauses that help overcome market barriers and align tenant and property owner interests to save energy in commercial buildings.

These green building bonds are more specifically 3.75% ten year senior unsecured notes due on June 15, 2024. The interest rate for these green building bonds was lower than other similar, but non-green building bonds offerings by REITs. While bond financing can have higher transaction costs than oft used mortgage backed loans, even in large dollar amounts as in this instance, it is significant that there was strong market demand for these unsecured bonds that drove the lower interest rates.

Green building bonds are a new investment vehicle in the U.S.  Until recently green bonds had been issued by the World Bank raising funds from investors to support World Bank lending for projects “that seek to mitigate climate change or help affected people adapt to it,” but while ‘green’ the bonds were not limited to ‘green building’. Since 2008, the World Bank has issued over $6 Billion in green bonds through 65 transactions and 17 currencies. And while several European business entities have issued similar green bonds, this transaction is the first in the U.S. exclusively for green building.

In November 2013, Bank of America issued the first ever U.S. bank green bond, but again its purpose was not limited to green building. The funds of the debenture are being used to finance renewable energy projects such as wind, solar and geothermal. Funds are also being used to finance energy efficiency projects such as lighting retrofits, district heating, co-generation, and building insulation in residential, commercial and public properties. The bank acted as underwriter on Regency’s deal.

As investors seek socially responsible investment options, green building bonds present a game changing opportunity for financing green building. Green building, which arguably offers higher value collateral and reduced risk, will be advantaged by bonds as a cheaper cost of capital all while saving the planet.

Article by Stuart Kaplow, appearing courtesy Green Building Law Update.