Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable Properties2. Linking Sustainable Features/Outcomes and Costs-BenefitsOne of the biggest challenges to underwriting sustainable property investment is to developa process that enables an underwriter to assess financial performance implications resultingfrom any combination of sustainable features, products, materials, systems, and certifications.There is almost an infinite combination of features that can “define” a sustainableproperty.Reliance on traditional sustainability analyses like simple payback and “value” engineeringhave reinforced the focus on the incremental costs or benefits of individual features likewater recycling systems, lighting upgrades, high efficiency HVAC, etc. Accurateassessment of the financial implications of sustainable properties requires underwriters torefocus their thinking on sustainable performance outcomes and the market’s response tosuch performance.The rationale for the focus on outcomes—like resource use, occupant performance, andsustainability compliance—is that this is what regulators, space users, and investors relyupon to make investment decisions. In fact, it is an axiom of sales that customers care moreabout benefits than attributes, and salespeople who understand this are invariably moresuccessful.The task in sustainable property financial analysis, which is often based on projectedoutcomes, is to understand enough about the types of sustainable features and processes toassess the risk of achieving the building performance represented. Accordingly, theunderwriter must not only assess the market’s response to sustainable building performance,but also to the risks and uncertainty in the forecasts of such performance.The key to properly evaluating the link between sustainable property features (products,materials, systems, etc.) and financial performance is to understand that you must assesshow the features contribute to building performance, then assess the market’s response tothe building’s performance. 69 A full menu describing the types of sustainable features andstrategies is presented in Expanded Chapter III, Appendix III-A.3. Sustainable Property Risk MitigationAssessing costs and benefits of sustainability also requires the assessment of sustainableproperty risk mitigation. In many cases, sustainable properties have risk increasing and riskdecreasing attributes. Development costs are a good example where the direct cost may besomewhat higher, but through entitlement benefits, better planning, and reduced changeorders, the additional direct costs can be mitigated through potential cost reductions. Risk isalso mitigated directly through insurance, surety, contracts, and other mechanisms.69 If you focus only on the marginal impact of a feature on operating costs it may be sufficient to support some decisions,but leaves revenue and risk out of the decision, which may result in a less environmentally and financially beneficialinvestment.107