Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesExhibit V-5GBFC Sustainable Property Cost-Benefit Checklist(continued)H. Increased Investor Demand1. Reduced capitalization and discountrates: higher values2. Reduced exit/take-out risk3. Increased FAR—zoning---densitybonuses4. Improved access to debt financingII. Potential Building CostsA. Increased Development Costs1. Certification, energy modeling, legal andcommissioning costs2. Higher cost specialized serviceproviders3. Higher cost products and systems4. Higher tenant improvement costs forgreen improvements5. Higher finance costs—more high costequity; increased construction interest6. Project delaysB. Increased Development Risk1. Construction risk (cost and delays)2. Legal/contractual risks3. Exit/take-out riskC. Decreased/Unchanged Space-UserDemand1. Excess investment cost relative tomarket demand2. Space user demand does not meetexpectations3. Building operating problemsD. Increased Operating Costs1. Higher maintenance costs--training,manuals2. Vendor availability and pricing3. Product or systemfailure/underperformance4. More costly lease analysis andimplementation5. Higher real estate taxes6. Costs of required additionalmonitoring/measurement7. Resource cost increasesE. Building Operating Problems/CapitalCosts1. Products underperform2. Service providers underperform3. New systems learning curve forengineering staff/maintenance staff/etc.4. New/different systems can reduceeconomies of scale for engineering stafffor a concentrated portfolio of similarassets5. Capacity/seasoning of serviceproviders/contractors6. Tenants do not cooperateF. Increased Cash Flow Risk1. Risk of rapid functional obsolescence2. Process underperformance3. Operating cost underperformance4. Revenue underperformance5. Value/sales price underperformanceG. Limited/No Increase in InvestorDemand1. Increase/no change in capitalization anddiscount rates2. Energy cost declines increase pay-backperiods, reduce value of sustainableinvestment3. Existing leases limit ability to pass coststo tenants--capture sufficient benefits tojustify costs4. Failure of appraisers/brokers to acceptvalue/enhanced performance112
Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesF. Step 4: Evaluate Financial Implications ofCosts/BenefitsNow that sustainable property costs and benefits have been identified and evaluated, thenext step is to determine how the subject property’s sustainable costs and benefits willinfluence the financial performance of the property.1. Linking Costs and Benefits to Financial PerformanceFor real estate investor, developer and lender decisions, financial modeling typicallyinvolves an estimate of the development, acquisition, or retrofit costs and construction of apro forma cash flow statement outlining actual or projected revenues and operatingexpenses on a monthly, quarterly, and/or annual basis. Revenues are calculated based onassumptions for rents, periodic rent increases, absorption/lease-up timing, equilibriumoccupancy levels, tenant retention and other variables. Operating expenses are estimatedbased on an analysis of energy, water, maintenance, management, landscaping, propertytaxes, and other operating expenses. For multi-tenant properties, financial models to assessincremental investments in sustainable attributes must also incorporate a specificconsideration of the allocation of landlord and tenant costs and benefits based on leaseterms.Discounted cash flow analysis (DCF) is the standard approach used by real estate investorsto assess commercial property value and financial potential. In DCF, the net present value,or return, on a project is determined by looking at the project outflows (development &operating costs) and inflows (revenues & net sales proceeds) over time. The net costs orrevenues over time are converted to present value through a discount rate that reflects therisk of the cash flow as determined by investors.While the specific type of financial model will vary based on the type of decisions beingunderwritten, the logic and structure of a DCF model provides the conceptual frameworkneeded for interpreting how sustainable features influence return and/or value. Even ifperfect data is not available, by thinking through the specific assumptions within a DCFmodel, users can gain important insights about the magnitude of the financial implicationsof sustainable property investments. The key financial model inputs of the DCF modeldirectly affected by sustainable costs and benefits are shown below in Exhibit V-6.113
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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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Property Type: CBD OfficeSquare Fee
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Value Beyond Cost Savings - Green Building Finance Consortium

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