Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesEqually important, but seldom discussed, is the “cost” that developers, investors or owneroccupants face due to required changes in their standard operating procedures. The mostsuccessful sustainable projects have specialized contracts, specialized subcontractors,more upfront planning and an integrated whole building approach to design andconstruction. Finding and developing new vendors, subcontractors, architects, and otherservice providers can be costly. Furthermore, learning new development processes,altering contracts and leases, and other required sustainable activities could be daunting tomany. While experienced owners and service providers claim that costs and process issuesare not significant, new investors to the sustainable property market need to be aware ofthese less quantifiable “costs.”Sustainable property investments can realize significant reductions in development coststhrough their ability to capitalize on incentives offered by utilities, local, state and Federalgovernments. Expedited permitting and approvals, design and code flexibility, rebates,financing assistance, and tax benefits are just some of the incentives available in themarketplace today to offset potential increases in development costs.Development costs may also be reduced through improved private debt and equityfinancing. As the capital markets have shifted from ready availability of capital to limitedaccess, a potential benefit of sustainable projects will be their improved access tofinancing. Improved access might take the form of better loan to value or debt servicecoverage ratios, more lenient reserve/holdback requirements, or simply meeting aminimum standard required by an investor. The growing availability of SociallyResponsible Investment capital for real estate suggests that some sustainable real estateprojects will have access to financing that might not otherwise have be available were theynot sustainable projects.It is important to caveat the discussion of the magnitude of potential financing benefitsfrom sustainability because real estate finance is not driven by sustainability. Typically, itis unlikely that sustainable property attributes will overcome the usual factors that preventprojects from accessing reasonable cost financing, including poor market conditions,insufficient equity, inexperienced sponsorship, unsubstantiated financial projections, badlocation, or an unsustainable competitive advantage.A critical component of an analysis of sustainable development costs is to evaluate aproperty on an integrated basis. While some sustainable features, such as renewableenergy systems, green roofs, new windows, and other improvements can costincrementally more than non-sustainable alternatives, it is often possible to downsize somesystems (such as HVAC systems) and reduce costs in other parts of the budget.Finally, while integrated design, improving contracts, and commissioning can increasecosts, costs can also be reduced due to reductions in the number and magnitude of changeorders, reduced operational startup costs, and other operational improvements.116