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Would You Invest 40 Percent More Money For Sustainable Real Estate?

For Tiffany Ivins, everything changed while walking along the deck of a boat cruising the Mekong River—a vital waterway for some 400 million people in six southeast Asian nations. After dropping something into the water, she was preparing to dive into the water to retrieve it when a group of her shipmates stopped her. They were there, coincidentally, to measure the river’s out of control pollution levels, and explained to her that the river was full of unsafe levels of carcinogens.

“These hydrologists told us that the reason the Mekong is so dangerous is that Chinese industries dump into it far upstream,” Ms. Ivins says. “We’re homebuilders and know that a lot of building products used in the US come from that part of China. That was our defining moment. We didn’t want to be part of the problem anymore. That’s when we committed that we would only build net zero.” Ms. Ivins and her husband Mitchell Spence own Redfish Builders, a Utah-based homebuilder now known for creating radically energy efficient net zero homes. That means their homes generate all their own energy and emit zero pollutants.

For Redfish, the first challenge was not just to determine whether homebuyers would pay the 30 percent to 40 percent premium for an extremely well-built, energy efficient home, but also whether lenders would risk capital on one. “Everybody was saying, ‘You can’t build a green home and make money on it. There’s nothing for the banks to compare them to’,” says Mr. Spence. “But we knew if we could crack that nut, there was a sustainable business model in there, and we decided to find it.” The first step was attracting investment capital itself.

“Capital is a scared animal. It does not like uncertainty,” says Dr. Laura Nelson, executive director of the Utah Governor’s Office of Energy Development (OED). “And so when it comes to Utah’s policy and regulatory landscape we try to message the importance of certainty and clarity. We believe that markets work and that [consumer] preference is revealed in markets, and increasingly consumers want energy to be not only affordable and reliable but also clean.”

The OED was created in 2011 with a mandate to—among other things—propose policies supporting cost-effective and renewable energy resources. In the OED, Shawna Cuan advises on efficient and renewable energy policy. It was Ms. Cuan who helped Redfish sidestep a major hurdle: how to make it easier for green homebuyers to get mortgages on homes costing more than those of comparable size in the vicinity. “Shawna met with us and said ‘How can the governor’s office help open up pathways for you to accomplish this kind of work?'” Ms. Ivins recalls. “We’d just hit the roadblocks of the appraisers, who didn’t have any kind of complementary training to help them accurately assess the value of a home that generates all the energy it utilizes. She said, ‘We can reach out to the appraisers and offer a training program to build their capacity to assess value around energy efficiency.'”

Next to sustainability, the word that comes up most often when talking with Ivins and Spence about their work is resilience, usually in reference to energy resilience—meaning the ability to operate independently of the energy grid and the inevitable disruptions to service that go along with it. “We’re looking for business models that are resilient and are sustainable in the financial sense, not just in the environmental sense,” says Rose Maizne, partner at Utah-based VC RenewableTech Ventures. “We are a cleantech venture firm, so we only look at companies that have some sort of positive environmental impact. These have to be solutions that save a company money—that cut down costs by a substantial sum by trimming their electrical costs, trimming their water usage, switching to building materials that are not only environmentally friendly but also cheaper and will last longer. Somehow it all has to come back to the bottom line to be sustainable.”

And resilience? “Resilience is another fund criteria, meaning, the economics can’t be dependent on something like a tax credit or a particular regulatory environment nor the price of oil. It must be resilient in that respect,” Ms. Maizner says. “Our portfolio companies are not going to fall victim to short term changes in the macro-economic nor the political environment.” For Mr. Spence, sustainability and resilience mean finding a niche that’s immune to the inevitable peaks and troughs of the business cycle.

“The word sustainable is a very loaded one. We’ve figured out how to build high performance homes that people will pay money for, setting ourselves up above the market,” says Mr. Spence. “Now we’re looking to build a subdivision in Sanpete County where land is cheap and our homes can be sold for $270,000 and we still make the same 20 percent there as on our million-dollar homes up here. If we can do that, we’re recession-proof. That’s what these big developers aren’t doing and it’s the reason our model will endure.”

Creating a sustainable economic and regulatory environment for net zero housing has moved Ms. Ivins and Mr. Spence to take what many would consider to be the counterproductive move of giving their core secrets away. “We’re sharing our learnings and home designs because when the homeowner goes to look for a builder, they’re going to come to us,” says Mr. Spence. “The best part of it is that if they implement it, we’ve helped someone build a better home. The more people that build better homes, the more standard it’s going to become. Our whole objective is to lift the building standard; to create an ecosystem that’s sustainable and profitable.”

Ms. Ivins finds this to be very good for business. “If you build it they will come, and if you collaborate, more of them will come,” she says. Meanwhile, the public sector is approaching ground-level sustainability from a few different angles. Park City recently set the goal of achieving net zero status for city government by 2022, and for the entire community by 2032. Last year, the governors of Utah and six other western states signed a compact encouraging electric vehicle (EV) ownership and interstate travel through construction of a network of EV charging stations at regular intervals along 5,000 miles of freeway traversing the states.

The University of Utah runs the Intermountain Industrial Assessment Center, which teaches engineering students to conduct real world energy audits at no cost for industrial entities throughout Utah. The U also recently launched a program meant to drive down emissions through discounts on electric bikes for students. How is the Governor Herbert’s ambitious energy policy working out for budding new enterprises in need of investment? It would seem to have some ground to cover before Utah becomes a green version of Silicon Slopes. As a VC laser-focused on this world, Ms. Maizner laments the state does a much better job attracting capital for budding high tech than cleantech companies.

“My gut feeling is still that it’s easier to build a software company here than a cleantech company. … I’d like to think that, in a more cleantech-friendly regulatory environment, you’d also see more community support coalesce around cleantech startups, in universities, the startup ecosystem, et cetera,” Ms. Maizner says. “I can think of a half-dozen examples right off the top of my head where companies have had to move their pilot production or demo their products out of state, or, in some cases, have moved out of Utah entirely in order to grow their businesses. I think it’s a missed economic opportunity to not better support these companies and encourage local growth.”

For his part, Mr. Spence has never been more optimistic, as he sees a powerful grassroots-based demand for pro-environment action taking shape in Utah, the Wasatch Front’s infamous wintertime inversions presenting a powerful catalyst. “Our state has never been in a more primed position [to make change]. Bad air is bad air,” Mr. Spence says, noting that 40 percent of air pollution comes not from vehicles but from structures. “It doesn’t matter what your politics are.” And a large part of making that change both ideologically broad-based and sustainable is allowing markets to work their magic. “Socially minded capitalism makes sense,” Mr. Spence says. “And people will pay for it.”