Why green banks should be able to finance upgrades to old buildings
by Patrice Frey and Calvin Gladney
The Inflation Reduction Act is rightly praised for its transformative climate investment targets. But one potential impact has received little attention: a multibillion-dollar infusion of capital into lending institutions that could help transform urban landscapes to combat climate change.
The act will invest $27 billion in green banks, which will bring climate-friendly development to communities across the U.S. With this injection of cash, green banks could expand their investments to include the adaptive reuse of existing buildings in walkable, bikeable and transit-accessible locations. It’s a move that would reduce emissions, revitalize cities and benefit communities that have long been cut off from opportunity.
Green banks provide low-cost capital to finance clean energy and related projects. The mission of these nontraditional banks is twofold: to provide loans to jump-start clean energy projects and, in the longer term, to demonstrate that lending to these projects can generate competitive returns, thereby enticing conventional lenders to provide much-needed capital.
The substantial new federal investment in green banks will significantly increase the volume of deals these lenders can support. And it brings with it the possibility to expand the types of projects financed by these banks, including adaptive reuse of existing buildings in compact, connected, walkable and mixed-use neighborhoods. Green banks have not traditionally funded these types of projects in the past, but the Biden administration could ensure that such projects are eligible for the new funding. These kinds of investments are essential to meeting carbon-reduction targets and achieving them in a way that supports climate-justice goals.
Here’s why. Each year in the United States, we construct about 6 billion square feet of new buildings. At the same time, we tear down 1 billion square feet of built space. The carbon impacts of this build-and-abandon cycle are substantial, as are the emissions from our seemingly boundless appetite for sprawl-inducing greenfield construction. Worldwide, the manufacture of new building materials such as steel, cement and glass is responsible for an estimated 11% of energy-related carbon emissions.
Meanwhile, millions of buildings sit vacant or substantially underutilized in the U.S., with many in disinvested urban corridors or distressed rural downtowns. These buildings represent an enormous opportunity. Rehabilitating existing buildings typically produces 50% to 75% less carbon emissions than new construction.
These existing structures are often located in places developed before 1950 and are much more likely to be in neighborhoods that are walkable, bikeable and accessible by transit. Rehabilitation of such location-efficient buildings has a double bottom-line benefit for the environment: First, it reduces construction-related greenhouse gas emissions, and second, it reduces the need for driving and the emissions that come along with it. And increased development in these areas would allow people better access to housing, workplaces and services no matter their age, ability, income or race because denser development makes it easier to live without cars and avoid their associated financial and environmental burdens.
Allowing green banks to fund adaptive reuse and location-efficient buildings also has an added financial benefit for municipalities: It will save them money. Building walkable, connected communities saves an average of 38% on upfront costs for infrastructure and 10% on ongoing delivery of services; it also generates 10 times more tax revenue per acre than conventional suburban development.
Skeptics may suggest that there is a mismatch between the location of these underutilized buildings and the demand for space. But in our experience leading our respective organizations, Smart Growth America and Main Street America, we find precisely the opposite. Many buildings in high-value locations are demolished or remain vacant not for want of use but because of the difficulty of financing adaptive-reuse projects in all kinds of geographies, from disinvested urban corridors to distressed rural downtowns and many places in between.
The struggles to access capital among communities of color are well documented, as are the difficulties of obtaining financing in rural areas. Many factors contribute to these challenges. In the case of communities of color — whether in urban or rural contexts — a legacy of racism led to systemic barriers to lending that persist today. And the loss of community lenders across the country exacerbates these problems, as many national banks have little interest in projects of less than $5 million in total value.
Failure to finance the reuse of our existing assets has wide-ranging effects. Communities of color and people in rural areas continue to be excluded, with fewer chances to build individual wealth and limited ability to open or expand small businesses, thereby suppressing job creation and economic development. And the inability to finance adaptive reuse exacerbates our national housing shortage, keeping many thousands of housing units off the market, often in places that offer enhanced affordability because car ownership is optional. Our failure to make better use of what we already have unnecessarily drives up our carbon emissions when we urgently need to drive them down.
With a significant infusion of funding from the federal government, green banks have a powerful opportunity to drive capital to carbon-smart projects starved for resources. The Environmental Protection Agency and Department of Energy, which jointly oversee the new green banks program, will soon develop regulations that govern the use of federal funds. These regulators should take swift action to ensure that green banks are permitted to invest in location-efficient adaptive-reuse projects, particularly those that include aggressive efficiency upgrades and the integration of renewables onsite. Doing so could transform communities — particularly those harmed by decades of disinvestment and negative climate impacts — by putting existing assets back into productive use and demonstrating to conventional lenders the soundness of these green investments.
Patrice Frey is senior advisor to Main Street America, where she leads an initiative to accelerate investment in small-scale real estate development projects on main streets. She previously served as president and CEO of Main Street America.
Calvin Gladney is president and CEO of Smart Growth America and is a nationally recognized thought leader on the equitable and sustainable revitalization of communities.