Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesReal estate asset risk is also typically understood to have two components: systematic andunsystematic risk. Systematic, or market risk, cannot be mitigated through diversification,and is common to all assets. Unsystematic, or asset-specific risk is unique to a particularasset. Asset-specific risk can be mitigated through diversification--by increasing thenumber of assets randomly assembled in the portfolio. These concepts, and the relativecovariance between real estate and other asset classes, are key concepts in the constructionof real estate portfolios, but less important in our discussion of property-specific risk inthis section.2. Why RAP is Key to the Future of Sustainable Property InvestmentSustainable property investment has dramatically increased during the last few years.However, many investors and occupants still need to be educated, and many who areactively investigating sustainable property investment are under-investing due toinsufficient or incorrect consideration of revenues and risk. Superior RAP will be a criticalcomponent of the changes necessary to overcome sustainable investment obstacles.Some of the key reasons RAP is so important to the future of sustainable propertyinvestment include:• Sustainable investment is relatively “new” and untested;• Volume and magnitude of “positive” risk;• Value of sustainable property to corporations/occupants;• History of sustainable property advocacy;• Critical role of risk mitigation;• Enhanced role of risk in investment decision-making.3. How to RAPThere are as many ways to RAP as there are different types of sustainable propertyinvestment decisions. However, the following guidelines should be helpful in thinkingthrough the preparation of any RAP.• Clarity: Perhaps the most important advice in preparing a RAP is that thepresentation be clearly prepared and easy to consume. Discussions of positiveand negative risks need to be specifically tied to the particular financialassumptions or other key assumptions in the investment package and/or financialmodel. The presentation should be logically consistent, discuss positive andnegative risks, and provide rationale for how “net” risk impacts are assessed.• Comprehensive: Perhaps one of the most important guidelines is that risks befully presented. Real estate decision-makers are well versed in dealing withhighly complex and risky decisions, and a project has a much better chance ofbeing approved if the risks are fully presented. There is nothing more damaging133