Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable Properties• Detailed analysis of comparable built and to be built properties. This analysis isdone with a particular focus on the competitive advantages or disadvantages ofthe subject property, with a particular eye on the relative benefits of sustainableproperty attributes.• Analyze existing national or local space user surveys. The key here is to evaluatesurvey research to see how the opinions and results might influence the specificspace users identified for the subject property. Critical to this analysis are a veryclear understanding of the respondents and the nature of the questions that wereasked in these surveys. Many such surveys are done on a regular basis (seewww.GreenBuildingFinanceConsortium research library and Industry Links,index code 15.73, and Appendix F, Enterprise Value Analysis).• Develop a clear understanding of the existing and/or likely tenants in theproperty, and conduct an analysis of the potential demand for green buildingscurrently, and in the future. Key factors that will influence this are the specificregion, industry, ages of occupants, specific ties to green or sustainablebusinesses, and other factors.• Conduct market research. Do independent surveys of tenants, brokers, and othersin the marketplace. Focus not only on existing trends or opinions, but expectedtrends over time. This will provide additional understanding of rollover risk. 73The process of measuring the relative importance of factors is by its nature a qualitativeprocess, but should be based on significant quantitative research. Sophisticated forecastsof rents, occupancies, and other market factors are often relied upon. Market informationallowing segmentation of green building demand by different types of tenants (CoStar dataon leases for example) and survey data that reflect different demographics, geographies,and other key issues is becoming more available.Finally, the last step is to integrate all the information collected on both sustainable andnon-sustainable factors, for each of the key financial model inputs, and make decisions.For investors who rely on the discounted cash flow model and internal rates of return, theywill be focused on the key financial variables discussed in this section. Also, as discussedearlier, the particular allocation of cash flow benefits between owners and tenants asspecified in leases, and related risks, need to be carefully assessed.For corporations and other owner occupants, financial analysis including discounted cashflow or total occupancy cost analysis may be supplemented by financial assumptions forimproved productivity, improved health, reduced litigation or health cost risk, workersatisfaction, improved recruiting and employee retention. Whereas an investor must focuson an assessment of the market’s response to the particular property that they are offering73 Rollover risk refers to the risk of not being able to secure new tenants at favorable rates and terms when existingtenant leases in a building terminate. The risk also incorporates the leasing and tenant improvement costs to resign newtenants if tenants choose not to renew their leases. The rollover risk of a property will be unique to its particularportfolio of leases and markets conditions.130
Value Beyond Cost Savings: How to Underwrite Sustainable Propertiesto the marketplace, a corporation or other owner occupant can presume to accrue many, ifnot all, of occupant-based building performance benefits. Owner occupants must assessthe value they ascribe to potential health, productivity, reputation and leadership benefitsand make decisionst accordingly.4. Special Sources of Sustainable RevenueSustainable properties can generate specialized revenue streams from Power PurchaseAgreements, Renewable Energy Certificates, and a wide variety of government and utilitytax credits, rebates, and other subsidies. These issues are briefly discussed in ExpandedChapter V.H. Step 6: Risk Analysis and Presentation (RAP)RAP is key to the future of sustainable property investment. Sustainable properties faceincreased risks due to new processes, products, materials, and regulations, but also benefitfrom reduced or mitigated market, regulatory, construction, legal, and operating risks.Sustainable property decisions require a clear organized presentation of both positive andnegative risks to provide appropriate context for assessing sustainable options and relatedreturn on investment calculations.One of the most important issues in underwriting the financial performance of sustainableproperties is a full understanding of the risks associated with the pro-forma cash flows inthe DCF model. For the purposes of improving sustainable investment decision-making,more detailed documentation of the risks of sustainable property investment, both positiveand negative, are necessary to provide decision-makers with proper context for evaluatingpro-forma financial performance.RAP should be part of the investment package that goes to decision-makers for anyinvestment decision. The form and content of the RAP will vary based on the context ofthe investment decision, but should be directly linked in the presentation to thequantitative valuation and rate of return calculations.In this section we address four important risk issues:1. Property risk focus2. Why RAP is key to the future of sustainable property3. How to RAP4. Background on Cash Flow and Building Ownership Risk131
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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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