Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable Propertiesneed to accept and “own” the qualitative nature of their work, and get down to businessdoing a better job of it.C. Step 1: Select Financial Model1. Investment ContextThe starting point for underwriting a sustainable property is to clearly understand theinvestment decision being addressed, and the context in which the decision is being madeas was presented above in Chapter II.Clear delineation of the decision and investment context is critical to selecting the bestanalytic methods, determining data requirements, assembling the underwriting team andpreparing effective support for the decision.The type of financial analyses required is significantly influenced by the sustainableproperty investment decision (see Exhibit II-3 in Chapter II). New construction, retrofits,existing building acquisitions, or leasing and financing decisions have always requireddifferent models and data. Sustainable property financial analysis requires some newthinking and analytic techniques to properly collect and analyze the data inputs to themodels, but the fundamental approaches to decision-making used by the real estate industrywill remain largely the same.2. Sustainable Property Financial Analysis AlternativesFinancial analyses alternatives can logically be separated into four categories:a) Traditional Sustainability Financial Analyses;b) Traditional Real Estate Financial Analyses;c) Sustainability Sub-Financial Analyses; andd) Public Sustainable Benefits AnalysesA summary of the approximately forty sustainable property financial analyses alternativesis presented below in Exhibit V-2 and in substantial detail in Appendix F. More detaileddescriptions; examples, observations and key links are also provided in Expanded ChapterV and in the Research Library under index codes 1.1 to 1.5.100
Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesExhibit V-2Sustainable Property Financial Analysis AlternativesA. Traditional Sustainability Financial Analyses1. Simple Payback2. Simple Return on Investment (ROI)3. Simple Change in Asset Value: Direct Capitalization(SCAV-DC)4. Simple ROI and General Cost-Benefit Analysis5. Life Cycle Costing (LCC)6. Value Engineering7. ENERGY STAR Building Upgrade Value Calculatorfor Office Properties8. ENERGY STAR Cash Flow Opportunity9. Life Cycle Assessment (LCA)10. Post Occupancy Analyses (POE)B. Traditional Real Estate Financial Analyses1. Cost Management2. Discounted Cash Flow Analysis (DCF)• Change in Asset Value• Net Present Value• Internal Rate of Return3. After Tax Cash Flow Analyses4. Valuation5. Total Occupancy Cost (Cost of Ownership) Analysis6. Economic Value AddedC. Sustainability Sub-financial Analyses1. Comparative First Cost Analysis2. DCF Lease-Based Cost-Benefit Allocation Models3. Sustainability Options Analysis4. Churn Cost Savings Analysis5. Productivity Benefits Analysis6. Health Cost Savings Analysis7. Government/Utility Incentives and Rebates Analysis8. Enterprise Value Analysis9. ENERGY STAR Financial Value Calculator10. Risk Analysis and Presentation (RAP)D. Public Sustainability Benefits Analyses1. Reduced Infrastructure Costs2. Environmental & Resource Conservation Benefits3. Land-Use Benefits4. Climate Change Reduction5. Economic Benefits6. Security Benefitsa) Traditional Sustainability Financial AnalysesThe first ten models and analyses shown in Exhibit V-2 are those that have traditionallybeen used in the real estate industry to make energy efficiency/sustainability investmentdecisions for buildings, features and equipment. Historically, Simple Payback and SimpleReturn on Investment (ROI) models have been the primary financial analyses used inmaking energy efficiency or sustainability decisions.Traditional Sustainability Financial Analyses are appropriate and sufficient for many typesof sustainable investment decisions that can be justified on cost savings alone. However,with major retrofits, the acquisition of an existing sustainable building, or new construction,more sophisticated analyses that consider all costs, benefits (revenue enhancement), andrisks will be required to ensure proper allocation of sustainable property investment dollars.In these cases, traditional real estate analyses like Discounted Cash Flow Analysis willneed to be employed. 68Today, and more so in the future, as regulators, space users and investors increase theirdemand for energy efficient and sustainable buildings, relying on Traditional Sustainable68 For many decisions it is not necessary or appropriate to complete a DCF analysis, but in order to properly account forpresent and potential revenue and risk implications, a conceptual understanding of the DCF model is required.101
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Appendix FSustainable Property Fina
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Appendix GSustainable Property Cost
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Appendix HDiscounted Cash Flow Anal
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