July 2, 2012 update—TIAA-CREF’s Global Social and Community Investments Group was created in 2006, after a survey
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 [email protected].
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