Archive Articles

  • When and Why Foundations Should Blur the Line Between Profit-making and Charity

    March 27th, 2010 by admin

    recent New York Times article on program-related investing highlighted the $10 million equity stake the Bill & Melinda Gates Foundation took in Liquidia Technologies. Some in the foundation world are concerned that the investment blurred the line between profit-making and charity. We and our Braintrust advisor Stephen Viederman say foundations should blur those lines—as long as they deploy their endowment assets when they do so.  We would argue that foundations should use all of the tools available to them to meet their mission and purpose: grants, program-related investments and, most powerfully, their endowment assets. 

    November 28, 2011–An article that appeared on Black Friday in the New York Times business section reported on the growing use of what are known as program-related investments (PRIs). PRIs have lately been made with increasing frequency by foundations as an additional tool within their grant budget to advance their missions. PRIs are counted in the 5 percent grant payout required by the IRS for foundations to maintain their tax-exempt status. However, to qualify as a PRI under the strictest interpretations of IRS rules an investment should be made without consideration for its financial return and it should usually be expected to yield “below market rate” returns.

    The Times article highlighted the Gates Foundation’s first equity PRI—a $10 million equity stake it took in Liquidia Technologies to help fund an initiative by the company to deliver vaccines to underserved populations.  (A non-voting observer from the Gates Foundation will attend Liquidia board meetings, according to an article in Xconomy by Luke Timmerman.)

    Some members of the foundation community, the Times reported, were concerned that PRIs made in for profit businesses may be “blurring the lines between profit-making businesses and charitable work.”  Diana Aviv, chief executive of the Independent Sector, was quoted as saying:  “Foundations are increasingly agnostic about how they achieve their goals. If their purpose is, say, to eliminate food deserts, they may see supporting a grocery store chain as the best way of doing that rather than funding a nonprofit program.”

    The article went on to note that this “trend [concerned Aviva] at a time when government financing for nonprofits is declining and the charitable deduction is under fire. ‘It’s part of this slow erosion of nonprofit funding streams that threatens to undermine organizations that have been built over decades to meet high standards of public trust,’ [she] said.”

    But perhaps one could argue that a foundation should indeed be in the business of blurring the line between profit-making businesses and its charitable work. The blurring should take place, however, not when a foundation makes grants or PRIs, but when it deploys its endowment assets.

    “PRIs are great,” says Stephen Viederman, former president of the Jesse Smith Noyes Foundation. “But foundations have a spectrum of tools at their disposal to effect social change and grants and PRIs are only two of them.” Foundations also have another much more powerful tool, he maintains, they can also purposefully make investments out of their endowment assets and engage in shareholder activism to advance social change. Gates does not seem to be doing either.

    Indeed, leading foundations like the F.B. Heron Foundation and Annie E. Casey Foundation have been making mission-related, market-rate investments using their endowment assets for years. The Noyes Foundation in the 1990s, under Viederman’s leadership, deployed a significant percentage of its endowment in mission-related investments including venture capital. Noyes publicly states that “in concert with the Foundation’s mission to promote a sustainable and just social and natural system, we seek to invest our endowment assets in companies that: provide commercial solutions to major social and environmental problems; and/or build corporate culture with concerns for environmental impact, equity and community. Viederman continues to advocate strongly that more foundations should adopt this investment approach.

    An investment, says Viederman, should only be deemed a PRI in cases where without it an objective aligned with the foundation’s mission could not be realized. PRIs, Viederman asserts, should be seen as levers.  They can enhance a foundation’s grant making mission, through their grant budget, but with different means, such as loan guarantees that will hopefully be returned.

    What is interesting about the Gates Foundation’s PRI in question is that it appears to have been made into a company that was already able to attract investment capital. As Timmerman’s XConomy article reported: “The Gates Foundation certainly isn’t the first group to see potential in Liquidia’s work. The company already had significant venture backing, including a $25 million Series C venture round last April from Canaan Partners, Pappas Ventures, Morningside Venture Investments, New Enterprise Associates, PPD, and Firelake Capital.”

    “Foundations exist for the broad public benefit which goes beyond just their particular mission,” Viederman concludes. “But most only extend their responsibility to serve the public benefit through their grant making [which includes their PRI portfolios] and not through the rest of their asset base.  So I guess we could say, ‘hurray’ for these foundations who are looking at alternative investment tools to support their missions. But wouldn’t it be nice if they made those investments out of the asset base rather than the grant bucket, especially at a time when grant money is so scarce.”

    So, rather than assign its Liquidia investment to its PRI portfolio, would it not have made more sense for the Gates Foundation to deploy some of its $36 billion endowment into what appears to be a venture capital investment? The Foundation could thus have been free both to advance its mission and make a profit along with its other venture equity partners in Liquidia.  At the same time, it would have advanced another hugely important cause: that of mission-related investing.—Susan Arterian Chang

  • What’s New at the Evergreen Cooperatives

    March 27th, 2010 by admin

    We spoke last week with Ted Howard, co-founder with Gar Alperovitz of the Democracy Collaborative and a key strategist of The Evergreen Cooperatives, the subject of our second Field Guide to Investing in a Regenerative Economy study.  Evergreen is a remarkable experiment in anchor-institution-based cooperative enterprise, rooted in sustainable practices and dedicated to true wealth building in inner city Cleveland.

    Ted told us about the exciting progress being made at Evergreen on a variety of fronts since we published our study last May.  He updated us on the activity in the Evergreen business pipeline, including a new medical records document scanning cooperative and Ohio Cooperative Solar’s repositioning itself as an energy services company.  The Evergreen Cooperative Development Fund, the financing arm for existing and new Evergreen enterprises, is beginning to take shape and is now housed at the National Development Council, Ted reported. Evergreen is also going viral in cities as diverse as Atlanta, Milwaukee, and Pittsburgh, and Evergreen will be featured in an upcoming PBS documentary and in the independent documentary ShiftChange.
    Look for more in-depth reporting on what’s new at Evergreen in an upcoming Field Guide update.
  • TIAA-CREF’s Global Social and Community Investment Group

    March 27th, 2010 by admin

    July 2, 2012 update—TIAA-CREF’s Global Social and Community Investments Group was created in 2006, after a surveytiaa_cref_amyobrien_dsc2392 TIAA-CREF conducted of its clients indicated that the core values that guided their investment-decision-making turned out to be human rights, community investment, and environmental sustainability.

    Since we posted the profile of TIAA-CREF’s Global Social and Community Investment Group in June 2010, Amy Muska O’Brien has assumed the role of managing director. Former Director Cherie Santos-Wuest is now Principal Investment Officer Principal Investment Officer for Real Estate for the Connecticut Retirement, Pension and Trust Funds.

    The Global Social and Community Group’s Green Building Technology Investment Portfolio, operated in partnership with Good Energies Venture Capital, has been involved in several projects since its formation, including the Meldahl Hydroelectric project in Ohio as well as an investment in energy saving cooling systems. It has also entered into two joint ventures with Jonathan Rose Companies that were completed in late 2011. Both have been widely lauded as successes in retrofit and revitalization practices.—Evan Lozier. Evan is Capital Institute’s Summer 2012 intern.


    June 8, 2010—Shortly after TIAA-CREF created its Global Social and Community Investments Group in 2006, it conducted a poll of its clients, asking, among other questions, what core values guided their investment-decision-making. As it turned out, human rights, community investment, and environmental sustainability topped the list. This came as no surprise to TIAA-CREF since just prior to undertaking the survey it had observed an almost exponential growth in its social equities mutual funds. When TIAA-CREF subsequently dug deeper to assess which of its investments met those three values criteria it found that 85 percent of those assets resided in its real estate holdings.

    In 2007 Cherie Santos-Wuest, former director of TIAA-CREF’s Global Private Market’s Group, was tapped to direct the Global Social and Community Investments Group, and assumed responsibility for managing the company’s existing Corporate Social Real Estate Investment Portfolio. In 2009 she also became the director of TIAA-CREF’s new Green Building Technology Investments Portfolio. We talk here with Santos-Wuest about the investment strategies TIAA-CREF is implementing with these two Portfolios to better address the expressed core values of TIAA-CREF clients.


    Can you describe how TIAA CREF’s Corporate Social Real Estate Investment Portfolio has evolved?

    Prior to 2006 the Corporate Social Real Estate portfolio consisted mostly of revolving loan and collateralized trust note facilities focused on affordable housing nationwide, as well as investments in Low Income Housing Tax Credit (LIHTC) equity funds, which support the construction of affordable housing through tax credit investments.

    When I joined the group in early 2007 I thought it best to expand the strategy of the portfolio to include other types of investments that our survey indicated were important to our clients. So while we continued our focus on affordable housing, we also included in our mandate investments that supported workforce housing, which are located mostly in bicoastal areas where the gap between average medium income and housing prices is widest. Then, in addition to affordable and work force housing, we expanded the mandate to include sustainable and green investments in commercial RE located in urban infill, transit-oriented, and low to moderate income areas of large cities, where the investment resources are least available and where we felt new real estate development would be most transformative to people living and working there.

    Ours is a triple-bottom-line strategy. First and foremost our goal is to achieve market rate returns because we are governed by ERISA and need to invest for our participants to retire comfortably. Our second bottom line goal is to find high social impact investments that are transformative, and provide temporary construction and permanent jobs, where previously little to none existed. Our third bottom line is environmental sustainability, to make sure the investments are sustainable and efficient, with the goal of lowering the carbon footprint of our real estate investments.

    The portfolio now stands at about $490 million in commitments, considerably less than the $580 million at our peak, before we sold a large portion of our tax credit portfolio last year. We are on track to grow this back to its previous size by the end of this year.

    Why did you decide to invest in the Rose Smart Growth Investment Fund?

    The Fund hits all our screens in the way few funds do. Because it concentrates on smart growth development it naturally results in a reduction of vehicular miles traveled. It involves the renovation of affordable properties using green practices with a goal of LEED certification. So it is not only socially responsible, it is also returns driven because the strategy results in lower net operating expenses, which in turn leads to higher valuations. What I also like about the Fund is its focus on multifamily projects where it seeks a market-rate of return for mixed-income affordable housing. I think it is a great real estate play and you don’t need to be a “Green” developer to appreciate that. In fact, over the past 15 years, through a couple of real estate market cycles, the returns on offices, as well as retail and mixed-use properties, in downtown, transit-based locations have been very attractive.

    I also like that the Fund’s goal is to produce a 6 to 8 percent income yield within a year after acquisition, which is unusual for a fund of this type. The Fund is trying to make a net return quickly for investors, and current income is very important for pension fund investors these days. The fund’s strategy is to go after the lowest hanging fruit, for example, changing all your light bulbs and ballasts to flourescent, recycling and reusing products, dimming or turning off lights after hours, etc. Many acquisitions the Fund makes are sorely in need of capital expenditure, so, for example, changing the 25-year-old cooling tower lowers energy costs by 30 or 40 percent, which immediately results in savings, and helps the Fund achieve those returns to investors.

    Ours is a triple-bottom-line strategy. First and foremost our goal is to achieve market rate returns because we are governed by ERISA and need to invest for our participants to retire comfortably. Our second bottom line goal is to find high social impact investments that are transformative, and provide temporary construction and permanent jobs, where previously little to none existed. Our third bottom line is environmental sustainability, to make sure the investments are sustainable and efficient, with the goal of lowering the carbon footprint of our real estate investments.

    We at TIAA-CREF like to partner with the best and brightest and most seasoned developers. It lowers our risk across investments. Many real estate developers are trying to inhabit this space but there is a 3- to 5-year learning curve. The developer needs to know how to work with both public and private resources and financing institutions. This is no small feat in New York but Jonathan Rose has not only done it there but in several tough markets including Denver, New Haven and the West Coast.

    Can you describe how your investment with The Rose Smart Growth Investment Fund is structured?

    This fund actually has a 50-year investment term. It was initially launched with high-net worth and family investors focused on longer term investments. We as an institution need to match our investment term with our liabilities, so we favor 7- to 10-year investments. Consequently we negotiated a “side car” or a parallel fund investment which specifies that we will invest with the Fund on new investments between now and the end of 2011. As a result, our investment term is ten years with two, 1-year extensions, as contractually agreed upon by the partners.

    This investment is also unique in that we have invested $10 million, which is a small amount for us, but relatively large for the Fund, representing 21 percent of the Fund’s investment dollars. We tend not to want to be larger than 20-25 percent of a fund. In contrast we invested $30 million with the Thomas Properties Group Fund in 2008. This is a High–Performance Green Fund focused on developing “Green” office buildings. Other co-investors include CALSTRS, which has invested $150 million in the fund. Our $30 million investment is the smallest in that fund.

    Most of the funds we invest in are doing nothing but acquisition rehabilitation at the moment. When you can purchase an existing property and rehabilitate it at lower than replacement cost why take the development and leasing risk? Also, due to the current tight credit landscape, there is not a lot of financing available for new construction, even if you wanted to do it.

    What Is the Green Building Technology Investment Portfolio’s Investment Strategy?

    We launched the Green Building Technology Investments Portfolio last year to make smaller strategic investments in venture capital, green building technologies which will increase energy efficiency in commercial buildings. We hope to be able to showcase these technologies in our wholly owned RE portfolio, run under the Global RE Equities team, so I am working closely with the team on vetting these investments.

    To source these potential investments, we have a memorandum of understanding with Good Energy Inc., a venture capital firm focused on high-energy-efficiency technology. It is through their expertise that we are depending on the flow of investment. We are looking for mid-stage investments where the company has developed the patents and is seeking to expand its manufacturing and/or distribution of the technology. We favor those investments where the barriers to entry may be high and the company stands to have a great market share. The exit would be an IPO or a purchase of the company.

    Can you talk about the role that reliable subsidies will play in the development of Green Building investment?

    Subsidies for the development of Green Building technologies are needed in these early stages. As a parallel example, the subsidies for affordable housing have been around for a while, but in its first five years or so, the low-income housing tax credit program didn’t attract a lot of investors, because there was a concern about what the yearly allocations would be going forward. When the LIHTC program was well-established and funding became more reliable, institutional investors entered the market, which shifted the burden of creating affordable housing in this country from HUD to private developers. That in turn created much more efficiency and scale, and became instrumental in the growth of affordable housing nationwide. I would like to see the same thing happen with energy-efficiency products and infrastructure. Unfortunately, we do not live in a society where the highest and best uses translate into the most socially responsible use of resources so these types of projects require a subsidy. That subsidy will diminish over time as more developers come into the marketplace. But for the moment sustainable investments and products will need to be supported with tax credits, offsets or some form of subsidies to draw more investors and users to this space and create the market.—Susan Arterian Chang can be reached at sarterianchang@capitalinstitute.org.

    Find Out More About TIAA-CREF’s Socially Responsible Investment Strategy

  • Third Millennium Economy Report Released

    March 27th, 2010 by admin

    Economics, Finance, Governance, and Ethics for the Anthropocene, a working paper of the Capital Institute-housed Third Millennium Economy project, was released last Thursday for public review in advance of the Rio+20 UN Conference on Sustainable Development. As the civil society groups and grassroots activists meet now and world leaders arrive later this week, the paper is a flag in the ground that offers a new vision for addressing our global ecological crisis. Our report, written with a team of leading scholars, lays out many of the challenges posed by the unjust economics that have lead us into ecological overshoot and delineates a number of leverage points for change.

    Read the report and share your thoughts on it on the Third Millennium Economy web page.

  • The Importance of Ideas

    March 27th, 2010 by admin

    While on a panel with John Fullerton last week at the BALLE conference, Gar Alperovitz offered a powerful thought on the importance of ideas which we subsequently asked him to capture in writing.  Here is his response:

    “Rarely do important new ideas matter in politics. What usually matters is the momentum of entrenched power….
    But not always!
    Sometimes–when the old ideas no longer explain the world, when it is obvious that something is wrong–new ideas matter, and matter a very great deal. Now is such a time: As the global and domestic economic, political, and climate change crisis increase pain and force people to ask ever more penetrating questions, there is a need for–and a hunger for–new understanding, new clarity, and a new way forward that is intelligible and intelligent. Ideas matter now, perhaps more profoundly than at any time in modern American history.”
  • Tackling Climate Change in the Absence of Global Leadership

    March 27th, 2010 by admin

    If the Rio + 20 Earth Summit demonstrated little else it was that national, regional, community, and company initiatives are fast filling the vacuum left by the dismal failure of global leadership to effectively address climate change and other ecosystem emergencies.  These ad hoc approaches present opportunities as well as challenges to the institutions and economies that are the first to take action.

    Three recent initiatives—one on a regional and two on a national leve—are cases in point. In May, France passed the Grenelle II Act which will require all public and privately held companies with more than 500 employees to report details of the social and environmental impacts of their business operations as part of their annual reports, and to have that report approved by their board of directors and verified by an independent auditor. By requiring that this information be embedded in the annual report rather than published in a separate report it is an initial step in the direction of integrated reporting.  Clearly there will be administrative costs to companies in complying with the mandate, but as a briefing paper on the act published by Institut RSE notes compliant companies will reap the benefits in heightened “competitiveness, operational efficiency, brand image, and risk management.” Although there will be no penalties for failure to report under the act—companies will merely be required to comply or provide gap analysis where they do not–shareholders will have the right to bring actions against companies that fail to disclose material risks.

    Meanwhile British Columbia and Australia are putting other laggard developed economies—notably the US—to shame with progress on their carbon tax regimes.  On July 1, British Columbia increased its four-year-old tax on carbon, from $25 to $30 per metric ton of carbon dioxide. The carbon tax revenues are returned to taxpayers via cuts to individual and corporate income taxes.  Over the past five years, the province has cut its greenhouse gas emissions by 4.5% although it is still a long way from its target reduction of 33% by 2020.

    Unfortunately, as Yoram Bauman and Shi-Ling Hsu noted in a recent New York Times Op-Ed piece, the province’s latest carbon tax increase will be its last, at least until other neighboring economies institute their own tax, since the province does not want to unduly compromise the competitiveness of its most energy intensive industries.

    This month, Australia’s 400 largest polluters will begin paying a fixed tax of A$23 ($24) per carbon ton that they emit, covering more than 60% of the country’s emissions. The rate will increase by 2.5% annually until 2015, when it will move to a floating rate. Much of the increased cost is expected to be carried over to consumers.  Frank Jotzo writes for Project Syndicate that the carbon tax must be much bigger to drive significant reductions in emissions, but it is a good first step.  Australia has shown real leadership by putting in place a much more effective carbon tax than the EU.

    As the prospects of a global consensus on addressing climate change dwindle, we need to continue to encourage this kind of bold pathmaking.

    Meanwhile, positioning itself for a place in the Climate Change Hall of Shame, the US is leading an effort to end the EU carbon tax on airlines flying in and out of Europe.

  • Rethinking Federal Policymaking for the Small Urban Manufacturing Sector

    March 27th, 2010 by admin

    In researching our soon-to-be-released Field Guide study of the Manufacturing Renaissance Council we discovered an illuminating 2011 Brookings Institution white paper, “The Federal Role in Supporting Urban Manufacturing,” co-authored by Joan Byron and Nisha Mistry.  The paper focuses exclusively on the emergence of Small Urban Manufacturers (SUMs) as a trend that is transforming the American manufacturing landscape.  SUMs are defined as urban manufacturers employing less than 100 people.  The authors offer specific suggestions on how federal policy, which has largely failed to serve the needs of these entities, can be retuned to support them.

    SUMs have been making an ever greater contribution to the domestic employment rolls in recent years:  Between 1972 and 1992 while employers of 500 or more employees shed 3 million workers, those employing less than 500 added 2 million workers to their workforce.  Currently 91.4% of all American manufacturers employ less than 100 people. By overlooking the importance of SUMs to both the domestic manufacturing sector and to metropolitan economies, the authors’ argue, the federal government’s policymaking in support of urban economies and the manufacturing sector has clearly been suboptimal.

    Byron and Mistry target three specific areas in which Federal policy or programs are either inadequate in their support of the contemporary manufacturing sector, or are directly hindering the growth and formation of SUMs and SUM networks.  They recommend the following correctives: 1) The development of a new, more accurate narrative about manufacturing and metropolitan economies that will be used to guide programs and policies. 2) More robust support of SUMs regional cluster growth and development. 3) Federal help to ensure SUMs have the space and infrastructure they need to grow and thrive.

    Updating the American manufacturing narrative would be extremely valuable in fostering more effective federal policy initiatives.  The new view, the authors hope, will reflect the importance of urban and regional manufacturing assets.  The authors state that this new description of American manufacturing should be applied to both existing and future programs.

    The authors also call for funding government research into the factors that are most conducive to the formation of SUMs beyond their mere amalgamation into regional clusters.  These include: suggestions for joint research studies conducted by the U.S. Department of Housing and Urban Development and the U.S. Economic Development Administration; the formation of advanced manufacturing centers that provide technology research and worker education to SUMs; and the designing of metropolitan export strategies tailored to SUMs producing specialty products.

    The federal government, the authors maintain, has also failed to provide adequate support to SUMS with regard to the acquisition of space and funding for the infrastructure and technical assistances they need to survive. The remedy suggested is a better integration of economic development and sustainability objectives, replacing the current mixed-bag of programs and policies implemented by various uncoordinated agencies.

    For example, the study recommends the following:

    •    The federal government should redouble its efforts to find and support SUM clusters and should conduct these efforts under the Partnership for Sustainable Communities to ensure that physical development activities are aligned with regional economic development plans.

    •    The U.S. Small Business Administration should revisit the inner workings of its loan programs in order to vary types of financing and amounts of capital available to manufacturers of all sizes.  In particular, the SBA should ensure that SUMs have access to adequate capital for the land, space and equipment needed to expand their operations.

    The authors also maintain that the federal government must act to revive the market for industrial real estate through various means.  Currently, many nonprofit industrial developers with access to capital, are actively seeking to convert traditional, large industrial space, and are willing to accept a lower rate of return.  SUMs, on the other hand, demand suitable industrial space in urban areas where there is only a supply of large, traditionally single-operation facilities.

    The federal government should promote strategies compatible with the already successful efforts of nonprofit industrial real estate developers.  For example, the Internal Revenue Code should be revised to allow funds raised through Industrial Revenue Bonds (IRBs) to be used for the acquisition and redevelopment of multi tenanted rental industrial buildings, not just owner-occupied buildings as is currently the case.  Through this revision of IRB code, redevelopment opportunities of industrial properties that would fulfill SUMs needs would become more attractive.  The government should also facilitate the flow of IRB benefits issued for for-profit entities through to non-owner occupants in privately owned urban industrial real estate.  The authors call for the government to plan a recoverable grant program to underwrite predevelopment costs, and provide assistance to build the capacity of nonprofits to engage in industrial development.  The authors believe that the federal government should encourage the conversion of abandoned urban federal properties for industrial use, and should ease the restrictions on reuse of federal properties.

    By marrying policy with the realities of the new manufacturing demographic, government can foster the growth of an efficient and resilient manufacturing sector.  If federal policy ineffectual and continues to fail to support the formation of versatile SUM clusters, there is a risk that those initiatives that do succeed will remain isolated and multimodal.  By creating powerful sources of information and support for the SUM sector, the federal government can usher in the new age of American manufacturing, an age that is sustainable, flexible and resilient, and a vital component of the 21st century economy, the authors conclude.—Evan Lozier is a 2012 summer intern at Capital Institute.

  • Robert Massie Appointed President and CEO of the New Economics Institute

    March 27th, 2010 by admin

    Former Executive Director of Ceres Robert Massie has been appointed CEO and President of the New Economics Institute effective March 19. Massie led the launch of the Global Reporting Initiative (GRI) from the helm at Ceres. As President of NEI, Massie will oversee the upcoming Strategies for a New Economy conference where the Capital Institute will host a track on finance. We look forward to continuing our close relationship with NEI as they continue to drive the transition to a new economy with Massie leading the way.

  • Rose Smart Growth Investment Fund

    March 27th, 2010 by admin

    “To repair the fabric of cities, towns and communities while preserving the land around them” is the stated mission of Jonathanvance_exterior_highres Rose Companies. It may sound like an unusually lofty, exceedingly idealistic goal for a real estate company. But Jonathan Rose Companies is more than about developing real estate.

    Founded in 1989 by a third-generation developer who sought to mix his passion for real estate with his passion for making a difference in urban communities, every project of Jonathan Rose Companies is guided by five principles: First, to increase the diversity of the places where people live and work–mixing public spaces with residences, workplaces, marketplaces, and education and spiritual centers. Second, to build with environmental sensitivity using a combination of high-tech modeling techniques and practical, often low-tech solutions. Third, to support the integration of work life and personal life–as expressed by “livelihood.” Fourth, to be mindful of the linkages between projects, users and their surroundings. And fifth, to consider that change is a given for real property as it is for all things, and thus to recognize that development projects must be conceived to adapt to often unanticipated future needs.

    After establishing a long track record for high quality, mixed-income, mixed-use property development, Jonathan Rose Companies launched the Rose Smart Growth Investment Fund I in 2005. The Fund was the first of its kind in the country to focus exclusively on acquiring and greening existing buildings in walkable, transit-based communities. “Jonathan had been investing successfully with different groups of investors for over 15 years and he thought it was time to put together a fund that would give him the flexibility to act quickly when he found suitable investments,” says Wendy Rowden who joined the firm in January 2009 as managing director of its Investment Practice. “The fund gives us an opportunity to take our green, mission-driven investment approach to scale.”

    The Investment Appeal of the Smart Growth Fund

    The Fund, which was closed to new investments in 2009, has raised $50 million. “It is an unprecedented time of interest in green building that would have been unthinkable ten years ago,” says Nathan Taft, director of acquisitions for the Fund. “Green building is no longer a social ‘do-good,’ it is an economic imperative.”

    Rowden reports that Rose Smart Growth Investment Fund investors include both “savvy” real estate investors who understand the economic and investment value in green retrofitting, as well as social investors seeking a market rate investment with a mission focus. While Smart Growth Investment Fund projects all support the company’s underlying mission they are undertaken on a strictly for-profit basis. Taft maintains that investing “smartly” in green retrofits on the right properties is an essential element of the Fund’s value creation strategy, which focuses on strengthening the top-line, reducing expenses and increasing net operating income. Taft reports that recent studies indicate that tenants prefer green space, which provides the Fund with a marketing advantage and leads to higher tenant retention, even in a down market.

    headshot_wrowdenWendy Rowden, managing director of Jonathan Rose Companies’ Investment Practice, says the Smart Growth Investment Fund has attracted both savvy real estate investors as well as impact investors seeking a market rate of return with a mission focus

    The Smart Growth Investment Fund has attracted interest from an array of seasoned impact investors including TIAA-CREF’s Corporate Social Real Estate Portfolio, which holds a 21 percent stake. The Portfolio has a triple bottom line strategy: to achieve market rate returns, high social impact and environmental sustainability with its investments. “The Smart Growth Investment Fund hits all my screens in the way few funds do,” says Cherie Santos-Wuest, the director of TIAA-CREF’s Global Social and Community Investments Group. She also notes that while many real estate developers are trying to inhabit the green retrofit space, there is a steep learning curve, and few have Jonathan Rose Company’s longevity and expertise in the sector. [See The Impact Investor’s profile of TIAA-CREF’s Social Real Estate Portfolio.]

    The Smart Growth Investment Fund also wins points with impact investors for its “purity of purpose. ” “While some REITS are trying to green their portfolios ours is green from the ground up,” says Taft.

    Low Cost Green Strategies Yield Short Term Paybacks

    While Fund projects employ highly sophisticated energy modeling techniques, most all of its green retrofits are selected to meet the Fund’s relatively short investment payback requirements. (An exception was the West 135th Street apartments in Harlem [see “Smart Growth Fund Projects” box to the right], which received state and federal grants to offset some of the cost of a solar panel installation.) “There are a lot of lower cost strategies that do a tremendous amount to improve energy efficiency and air quality of a building,” says Rowden. “We look at the building envelope and base building systems, as well as interior tenant spaces and common areas. We do everything from installing low-flow water fixtures, higher efficiency lighting and motion sensors, to increasing building insulation. While these things may not be as glamorous as the higher tech solutions in new green buildings, they make a lot of economic sense.”

    “There is a misconception that greening existing buildings uniformly requires extensive capital improvements,” Taft further elaborates. “For some existing buildings getting to a third-party verified green certification requires less of a focus on capital and more on commissioning existing systems, such as HVAC, and operating the buildings in a green manner. It requires a thoughtful approach, understanding the building as a system and tweaking things to have impact. We bring together our team of architects and engineers at the outset of a project to determine the best greening approach for a building and how to spend your money wisely. It isn’t a matter of tacking green on piecemeal or at the end of a renovation.”

    How the Fund Picks Properties

    While “greening” is always figured into the equation when the Fund underwrites a project, it does not bank on the associated cost savings when forecasting projected returns. Instead, under Taft’s direction, the Fund selects properties with “good architectural bones” in the right location, and with the right tenant mix. “These are the qualities that provide great long-term appreciation value,” says Rowden. “Green is not going to make a bad asset a good asset, it will make a good one a great one.”

    The Smart Growth Investment Fund acquires two types of properties: class B office buildings and affordable housing. All investments are located in walkable downtowns, most often near or adjacent to more than one mode of mass transit, including rail, bus or light rail. “We focus on the larger, gateway cities that are rich in connectivity as well as intellectual and cultural capital, ” says Rowden.

        w135st_02b_1-1
    The Smart Growth Investment Fund invested in a green retrofit of these 100-year-old houses on 135th Street in Harlem. The affordable housing project was the first of its kind to be awarded funding from the HUD Green Retrofit Program for Multifamily Housing under the American Recovery and Reinvestment Act of 2009

    The Rose social mission is always inextricably intertwined with the financial one. “We are attracted to urban downtown areas because they are historically underinvested,” reports Taft. “Our projects are pivotal to the revitalization of a neighborhood. We feel real estate plays a powerful role in peoples’ lives. Our projects enable low-income families to spend less money on utilities and less time and money getting to services, schools and work.”

    Tapping In-house Expertise

    The Fund is fortunate in its ability to tap into the in-house expertise of other Jonathan Rose Companies practice areas: The Jonathan Rose Companies’ Development group builds new “green” affordable and mixed income housing; the Planning Practice engages in longer-term planning at the city, regional and national level, with an emphasis on building livelier, healthier and more equitable communities (for example, the planning group wrote the green guidelines for rebuilding southern Louisiana after Katrina); and The Owner’s Representative Practice consults as program managers to cultural, civic, and educational projects (it advised Cooper Union on the construction of its new academic building).

    Measuring Up to Green Building Standards And Beyond

    Although the standards for green building continue to evolve, Rose Smart Growth Investment Fund projects are focused on attaining or exceeding them. The Fund seeks to meet LEED standards for office buildings, and Enterprise Green Communities standards, as well as LEED, for affordable multifamily projects. Energy Star certification is used for both. “Even if the standards are not ideal they are objective, difficult to game and provide important third-party verification of our work,” says Rowden.

    Fund projects go far beyond simply making energy efficiency improvements. Project managers also work with tenants to operate the buildings in a green manner going forward. Green manuals are published and distributed to tenants. “We want tenants to be engaged in keeping the buildings green,” says Rowden. “It is not just getting LEED certification but how the building works going forward.” In the case of the Vance project in Seattle, the Fund has been very successful in hosting post-LEED certification “green charettes” to brainstorm ideas for maintaining and enhancing the sustainability of building operations. The Fund also often seeks linkages with workforce training programs looking to stitch the asset into the community. For example, in Seattle, the Fund selected a local firm for recycling, composting and sidewalk cleaning services, which returned at-risk populations to the local workforce.

    “It is an unprecedented time of interest in green building that would have been unthinkable ten years ago. Green building is no longer a social ‘do-good,’ it is an economic imperative.”

    Commercial tenants are also encouraged to build out space according to a green tenant improvement specification, which emphasizes open floor plans to minimize resource consumption. Open floor plans not only preserve natural light and appeal to workers but also are more cost effective from the owner’s

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    We like to be involved inn projects that weave together interesting communities ,” says Nathan Taft, director of acquisitions for the Rose Smart Growth investment Fund. “We think it makes for a richer life.”

    perspective, minimizing demolition costs for the next tenant.

    The Fund’s retrofits also improve the work and living environments for tenants. In addition to low VOC paints and sealants in construction, all cleaning products are green and integrated pest management is implemented at all project sites.

    Moving Away from Suburbia and the Return to the Urban Green

    Rowden notes that over the past year alone, greater awareness of climate change and of the significant role that energy efficiency can play in addressing it is translating into a heightened interest in green retrofits. She also sees demand for green retrofits accelerating in urban areas in particular. “As energy prices rise, there will be increasing demand for green, energy efficient space that is mass-transit accessible. In 2008, when oil prices rose, Americans drove less. Data indicate that rates of car ownership for people under 30 are declining. There is more interest in urban locations and dense suburban nodes near mass transit, jobs and amenities.”

    It is also the Jonathan Rose Companies’ philosophy that city life offers other, less quantifiable attractions that have stood the test of time. “Diversity is a key piece of what we are looking for when we redevelop a mixed-income project—it is in our DNA,” Taft reports. “We are looking not just for racial but economic diversity. We like to be involved in projects that weave together interesting communities. We think it makes for a richer life.”—Susan Arterian Chang can be reached at sarterianchang@capitalinstitute.org.

  • Responding to Occupy Wall Street

    March 27th, 2010 by admin

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    Photo credits: Léopold Lambert of The Funambulist


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  • PRI Makers and M4M Merge into the Mission Investors Exchange

    March 27th, 2010 by admin

    Since we posted our profile of More for Mission (M4M) in June 2010, the organization grew to a total membership of 96 foundations. In May 2012 M4M and Program Related Investment Makers Network (PRI) combined to form the Mission Investors Exchange.

    The merger of the PRI Makers Network and More for Mission was the end result of a long-standing relationship between the two organizations. PRI and M4M were initially focused on different areas of the mission-investment spectrum. PRI focused primarily on below-market investment while M4M focused on market rate investments. Gradually, conferences hosted by the two began to focus on the entire mission-investment spectrum. Leadership from both organizations realized the parallels between their respective missions, and began to contemplate the possibility of a merger in 2011. These efforts culminated in the formation of Mission Investors Exchange in May 2012.

    Located in Seattle, The Mission Investors Exchange includes more than 200 member foundations and mission investing organizations of different sizes. Full member organizations are using, or learning to use, program-related and mission related investing (PRI/MRI) to reach philanthropic objectives. Affiliate members work in partnership with foundations to combine and deploy capital in communities to achieve social and environmental goals. Peter Berliner, who joined PRI as Managing Director in 2009, heads the Mission Investors Exchange as Managing Director. The Mission Investors Exchange, a project of Philanthropy Northwest, is in strategic partnership with the Initiative for Responsible Investment of the Hauser Center of Nonprofit Organizations at Harvard University.

    In July of 2011 Lisa Hagerman left More for Mission and accepted the position of Director of Programs at Double Bottom-Line Investors (DBL). DBL Investors is a venture capital firm that focuses on both achieving high returns for its portfolio members, as well as planning and helping to implement double bottom line strategies into existing portfolio businesses.—Evan Lozier. Evan is Capital Institute’s Summer 2012 intern.

  • Peter Victor at INET

    March 27th, 2010 by admin

    At the Institute for New Economic Thinking conference earlier this month, Capital Institute colleague and Braintrust member Peter Victor gave the conference a sneak peek at his work with Tim Jackson on an ecological economics model of rapid economic growth, an economic crash, and a managed low-growth economy. He argues that the early findings suggest a steady-state economy may be preferable to economic growth. At the end of the video, he s that one of the question most in need of answering is whether a stable financial system requires growth in the real economy. This question gets to the core of the Capital Institute’s goals and understanding of the role of the financial system.

    Watch the video and learn more about Peter Victor at his Braintrust page.