Value Beyond Cost Savings - Green Building Finance Consortium

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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
Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesDevelopment RisksThe type and level of sustainability and the experience of the design and construction teamsignificantly influence development risk. Owners seeking the highest levels ofsustainability, where more pioneering design, construction, products and systems areemployed, will experience higher levels of risk. While such risk is inherent in thosecompanies or individuals taking a leadership role in sustainability, the positive benefits ofleadership are also powerful and need to be carefully evaluated.Development risk is driven by property cost uncertainty, property performance uncertaintyand legal and contractual risks. Pioneering design and construction, the availability ofexperienced contractors and subcontractors, pioneering products and systems, buildingcode and regulation complexities and limitations, and other issues drive property costuncertainty. Property performance uncertainty arises due to energy cost volatility,unreliable energy modeling, and underperformance of products, materials, systems orcontractors. Legal and contractual risks arise due to the enhanced expectations onarchitects, contractors, subcontractors and LEED consultants. Finally, all of these risks canaffect potential completion of the project, delaying revenues and increasing constructioncosts.The most important way sustainable properties can reduce development risks is throughthe reduction of entitlement risk. Sustainable projects can be beneficial in overcomingpotential neighborhood opposition, improving the timing and content of regulatoryapprovals. This risk benefit is most important when a project is first completed, but maycontinue over time as sustainability regulations continue to tighten.The primary way development risks are addressed in sustainable properties is throughmitigation. Integrated design, which encourages earlier and more explicit goal setting,value clarification among project participants, and better communications can reduce risk.Early, comprehensive, and ongoing commissioning can reduce costs and improveperformance. Legal and related contractual risks can be addressed through more explicitservice provider contracts, insurance, surety, and earlier and better communication.Finally, it is important to place sustainably related development risks in context. Newdevelopments or major retrofits of any kind are risky endeavors. Cost volatility, productfailures, subcontractor problems, delays, legal risks, and other issues are not“sustainability” issues per se, and the incremental aspect of sustainability needs to be keptin mind when evaluating “sustainability” risks.Space User Demand: Revenue ImpactAn increase in demand by space users primarily results from value that a potential spaceuser believes a property contributes to its overall business or organization. With a rapidincrease in demand for sustainability generally, and sustainable properties in particular, thenumber of potential space users interested in sustainable properties is on the rise:117
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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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