Rooting Your Portfolio in Positive-Impact Farmland, Real Estate and Housing

24th in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

The main real estate investment for most investors is their home. Are there opportunities for your home mortgage to be more sustainable or HIP? As the world now has 7 billion people, what innovative approaches to housing, land and forestry are available to investors?

A potential allocation for a HIP portfolio is investing in real estate and forestry, which can offer interesting opportunities for increased human impact and profit. For many investors, this starts with your house (the asset) and how you finance it (the liability).

If you own a house, you have diversified your portfolio. Historically in the United States, this is one of the best savings and investment vehicles that also benefits from the tax deductibility of mortgage payments. To increase your portfolio’s HIP factor, you might consider an Energy Efficient Mortgage (EEM). Created by President Jimmy Carter’s executive order in 1979, these mortgages allow homeowners to take credit for energy savings in the calculation of how much home you can afford, by adding the energy savings onto your income. If you are upgrading your home, you might qualify for an Energy Improvement Mortgage (EIM). Both mortgage types require a rating of your home’s energy efficiency by a qualified rater. Ask your bank or your credit union how you might qualify for an EEM or EIM, which can make your overall investing more HIP. In addition, a green-mortgage program may also facilitate lower-priced improvements through partnerships with contractors specializing in improvements, like installing attic insulation, sealing the air ducts and installing dual-paned windows.

As you seek to insure your home’s value, HIP investors can also explore house insurance that would rebuild their home to energy efficient and eco-friendly standards. Fireman’s Fund Insurance Company, as well as another two-dozen residential and commercial insurers (as of 2009), offers these types of policies that protect your assets and rebuild a more sustainable home for you if unfortunate damage occurs. If your home is already certified as LEED, you can qualify for a discount, too. Fireman’s Fund also announced its “hybrid upgrade” auto insurance in August 2009, which enables owners to purchase a more fuel-efficient auto if they need to replace their vehicle.

While you may have the comfort of a home with energy connections provided, much of the world’s population does not. Half of wood use worldwide is for subsistence use, specifically energy and cooking, says Peter Mertz, CEO of Global Forest Partners. “We seek to deliver units of wood from much smaller areas and in a sustainable way that is also profitable,” he said at the Social Capital Markets conference in San Francisco in September 2009, describing his firm’s investment approach. Global Forest Partners (GFP), a forestry-focused investment manager, manages $3 billion in assets, where half of its investing is allocated to sustainably cultivating forests in emerging markets. These yield both profit and positive human impact, by creating jobs, building a safety net for the community, and establishing a sustainable foundation for societal advancement.

“We are replacing rural development, like ranching and cattle, with more sustainable development,” he says. GFP offers housing for workers, not just managers, as well as showers for daily good hygiene, complete with stocked personal care products. Workers bring their families to the camps on weekends to show off the amenities, he says, continuing: “I was educated as a forester, so I think at a different level of responsibility.” This approach requires more investment to achieve the positive impact, but it also results in lower risks, more dedicated workers and an above-market profit. GFP is registered as an investment adviser that offers managed accounts and co-mingled funds to invest in these projects, which have delivered 9 percent annual returns over the past decade, according to GFP.

A real estate investment fund which seeks to deliver human impact is Cherokee Investment Partners, a private investment company in the Southeast, a long-time investor in the redevelopment of “brownfield” sites, which require environmental remediation. Cherokee’s unique investment approach acquires these sites, cleans up the damage, builds ecologically efficient buildings, and then operates them sustainably. While Cherokee’s profits are private, it manages nearly $2 billion in funds that rehabilitate residential, commercial, and industrial properties across North America and Europe.

Cherokee says that it seeks “financial, environmental, and community benefits, while mitigating risks that challenge them . . . Unlike traditional firms, we look at the whole-system and full lifecycle benefits associated with superior development and design. Our goal is for future generations to benefit from clean land and smart development.” One extreme example is a former metals plant in Charleston, South Carolina, which dumped toxic by-products like lead, arsenic, and mercury in the ground, accumulating more than 6,000 violations of the Clean Water Act. Cherokee’s team led the cleanup of the soil, treatment of the groundwater, and dredging. In 18 months, the project addressed 57 years of pollution, enabling the site to be repurposed for intermodal transport, warehouses, and light industry.

Another possible real estate investment fund is Farmland LP. This U.S. fund was created to deliver superior returns for its investors by acquiring conventional farmland and converting it to high-value organic farmland using sustainable agriculture best-practices. Sales of organic goods in the U.S. have grown 20 percent per year since 1990, and now exceed $24 billion growing at nearly $5 billion per year. Although many organic foods receive a price premium of 50 percent to 200 percent, the limit to market growth is available supply. Only 0.5 percent of U.S. farmland is certified organic, increasing at 8.5 percent per year. Farmland LP believes that farmers face the barriers of cost, knowledge, time, and effort in converting from conventional to organic, including the three-year organic transition and certification process. This fund seeks to own lower-risk farmland while benefiting from the value-added by converting it to organic farmland.

What frameworks are useful in evaluating real estate investments? The Sustainable Land Development Initiative (SLDI), a member-owned organization dedicated to promoting land development around the world, seeks to balance the needs of people, planet and profit – for today and future generations. SLDI is piloting a project at Ocean Mountain Ranch in Oregon using its “SLDI Code” (based on a holistic model) to pioneer innovations in eco-forestry and sustainable living (http://www.sldi.org/).

Last year, HIP came out with our new Sustainable Real Estate Portfolio, where we select from a universe of approximately 200 Real Estate Investment Trusts (REITs), and also includes national resource, forestry, and timber companies, as categorized by Morningstar. This real estate portfolio is scored for sustainability, including results from LEED-certified properties, which can generate savings from consuming less water and reducing energy usage. Check it out HERE!

In our next feature we will focus on tax deductible charity, and how giving can be good for your bottom line.

To navigate this series, please use this table of contents.

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HIP Investor supports Spring of Sustainability.  For three months, the Spring of Sustainability will feature 100 “stars” of sustainability, from Jane Goodall to Bill McKibben to Van Jones, in free interactive teleseminars throughout the spring of 2012. Live events will also be held in cities across the globe.

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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

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