The long-term payback from lower energy and water bills can also be significant. Sustainable buildings generally cost 5% to 10% less to maintain than non-green buildings, notes a Rocky Mountain Institute report.

There are also a number of financial, insurance and tax breaks for going green. DSIRE, the Database of State Incentives for Renewables & Efficiency (dsireusa.org), provides a wealth of information on federal, state and local incentives for installing renewable energy systems and improving energy efficiency.

Fannie Mae’s Multifamily Green Initiative rewards multifamily properties that have a third-party green certification, such as by LEED or Energy Star, with a lower interest rate on loans. Fannie Mae multifamily lenders can grant building owners a 10-basis-point reduction in the interest rate of a refinancing or acquisition.

“Lower cost financing accrues to better returns at the tail end,” says Hood.

Happy Homes
With impact investments, social and environmental factors often operate synergistically. And some real estate funds are actively working to increase these effects.

OpenPath, for example, buys “Class B” and “Class C” workforce housing apartment complexes in supply-constrained metropolitan areas that are underperforming in terms of occupancy and rent levels, then upgrades the individual units to improve their energy efficiency, enhances the common areas and establishes the UrbanVillage program. The firm invests in the Western states, including Oregon, Utah, Arizona, Texas and Colorado.

The UrbanVillage program and the firm’s foray into impact investing sprang from the financial crisis. “We stumbled into this space fairly accidentally back in ’08, ’09, when the market was really soft because jobs were super scarce. Tenants were suffering and barely making ends meet,” says Slaugh.

“I asked myself, ‘What can we do to improve our properties and make them a little bit happier places and a little bit more supportive to our residents?’ knowing that, if our residents are struggling, it’s going to flow all the way through to investors. We’re all inextricably connected in that regard,” he says.

One of the major socio-economic barriers for residents at low- and middle-income apartment complexes is isolation. “Everybody closes their door and disappears. We created a social program that focuses on getting residents to know one another, open those doors and start collaborating on projects,” says Slaugh.

Although he says the motivation for the first UrbanVillage program was simply to help residents weather hard economic times, after about nine months he noticed that the property’s cash flow was increasing—in a market where rents were flat to declining. “You could not raise rents, but with the more connected community, our turnover costs were way down. Our resident referrals were up. Residents were actually inviting their friends to come live at this place because things were happening and they were part of something,” he says.

OpenPath targets a total IRR of 14% to 16% for its investors, but has historically returned 18% to 20% or more. Distributions to investors come in the form of an 8% annual preferred return, plus 70% of the capital gain. The investment minimum is typically $50,000. Investors include high-net-worth individuals, family offices and institutions.

Slaugh says that asset classes serving millions of people, such as real estate, can be great vehicles for impact investing. There’s also room for social and environmental innovation. “We are looking at adding beehives, and perhaps chickens, to our properties to create a backyard-farming atmosphere,” he says.
“This is the fun stuff. We get to be as goofy as we want to and it translates to residents that are fully engaged, really inspired and excited to be at our properties.”