LaSalle Debt Investments, the European lending arm of real estate manager LaSalle Investment Management, has committed to providing at least €500 million of green loans across the European property market during 2023.
The manager, which has put in place a sustainability-focused lending framework for its senior debt products, is aiming to finance borrowers with plans to improve the energy efficiency of existing assets through extensive retrofitting projects, as well as construction schemes for new energy efficient buildings.
LaSalle began writing ‘green’ loans through its senior-secured lending strategies around a year ago and provided €350 million of facilities, which it said fit the description during the 12 months to the end of March.
Richard Craddock, managing director, who leads the firm’s senior-secured debt strategies, said LaSalle is making a “firm commitment” through its senior lending to provide green loans.
He explained what the company considers that to mean. “We structure green loans to be bespoke to the sponsor. But we aim to align the borrowers’ sustainability intentions with the financing, including by penalising them if they do not deliver.”
LaSalle’s loan structures vary according to the sponsor’s business plan, based on the sustainability needs of the underlying asset and its baseline energy performance before the owner’s intervention. As part of this, the firm aims to support ‘brown-to-green’ transition projects by providing capital expenditure lines alongside equity contributions from sponsors.
The manager has worked with third-party sustainability advisers to create a green lending framework that aligns with finance industry body the Loan Market Association’s green loan principles.
“We have come up with our own green framework to measure whether a project is sufficiently ambitious from a sustainability perspective,” said Craddock. “We make use of the LMA framework, but it is quite loose in how it is applied in practise, so we came up with our own framework to focus on targets around aspects such as improving energy consumption, to determine whether we think a project we are considering financing is sufficiently ambitious in sustainability terms.
“Through our framework, we require enhanced reporting requirements from the borrower to measure progress towards their ESG targets. We will also monitor use of proceeds from the loan to ensure they are going towards the green aspects of the scheme.
“We also have financial levers to incentivise the borrower. These factors in unison create a green loan.”
David White, managing director at LaSalle Debt Investments, added: “The financial incentives we use are linked to fees rather than to margins, but it translates into economic consequences for sponsors which do not meet their targets.”
Although margin ratchets can be used under the framework, LaSalle typically ties incentives to exit fees as an observable measure of the completion of a business plan.
White said such loan structures feature sustainability-linked covenants. “If a sponsor commits to providing data, and does not do so on a quarterly basis, that represents a reporting default. So, alongside interest coverage ratio covenants, debt service coverage ratio covenants, etc, we include default covenants linked to ESG reporting.”
LaSalle’s incentive, Craddock said, is to ensure it finances assets that will be subject to occupier demand in an increasingly polarised market. “From an occupancy perspective, the European prime office markets are tight. There is a limited supply of high specification space. Meanwhile, 5,000 global corporates have signed up to net-zero targets, so the low-hanging fruit for them as they set out to achieve it is the space they occupy.
“This is also true in the logistics sector. It is much easier for a third-party logistics provider to choose to occupy ESG-compliant space than to electrify its fleet, for instance.”
LaSalle’s recent green loans included a £148 million (€169 million) senior construction facility for a purpose-built student accommodation scheme in central London, a £115 million development loan for a regional UK student housing portfolio, and a €40 million mezzanine loan for the retrofitting of a Berlin office building.
“Demand for loans to finance green refurbishments and the construction of energy-efficient developments will likely increase as the need to decarbonise gathers further momentum. By adding a dedicated green loan focus to our existing senior-secured strategies, LaSalle is able to provide a crucial source of capital to help reduce European real estate’s carbon footprint,” said Craddock.
LaSalle Debt Investments has more than €1.5 billion of current lending capacity in Europe across its credit strategies, which include senior loans, whole loans, mezzanine and development finance. The business forms part of LaSalle’s pan-European Debt and Value-Add Strategies division, which provides debt and equity capital across European markets and sectors.