Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable Propertiesrisks from properties that are unsustainable, or where the cost to cure potentialobsolescence from sustainability is not financially feasible.Additional surveys, anecdotal evidence, and actual valuation evidence will increase in thefuture, improving the capability to analyze this issue. One important caution in trying todetermine the incremental effect of sustainability on property value is the tremendousincreases in value between 2005 and 2007 and the subsequent substantial decreases invalue starting in early 2008. Given these substantial valuation changes, as much as 2% amonth during certain time periods, any statistical efforts to isolate sustainability willcontinue to be difficult.I. Valuation ConsiderationsThe bulk of Value Beyond Cost Savings: How to Underwrite Sustainable Properties isapplicable to valuation. Chapter II on investment decisions addresses critical issues inclearly specifying the valuation assignment. Chapter III on evaluating a property’ssustainability addresses the implications of certifications and performance measurementon value. Chapter IV presents new valuation-focused performance frameworks andcomprehensive sustainable property performance data. Chapter V provides detailedguidance on financial modeling and a six-step process for implementing the IncomeApproach to Value (Discounted Cash Flow Analysis). Chapter VI provides additionalinsights into sustainable property risks and risk mitigation, giving valuers betterunderstanding of how capital sources think about sustainability, and also provides detailedguidance on underwriting service providers, energy, space user demand, regulatordemand, and potential health and productivity benefits.This section summarizes some of the Consortium’s key findings and conclusions that arisefrom our research regarding valuation of properties with sustainable attributes:1. Sustainable properties should be more valuable2. Valuation is not just about formal full narrative reports3. Valuers have skills to make significant contributions to sustainability4. Fundamental valuation methodologies do not need to change5. Sustainable valuation must look beyond costs6. Public value has increasing importance to private value7. The income approach is critical to understanding sustainable value8. Valuers need to get better at integrating risk analysis into value9. Valuers must prove value of sustainability one property at a time10. Performance measurement is key to sustainable property performance11. Energy is a more critical issue for sustainable property valuation136
Value Beyond Cost Savings: How to Underwrite Sustainable Properties1. Sustainable Properties Should Be More ValuableSustainable property performance evidence presented in Chapter IV supports a compellinggeneral argument that sustainable properties should be more valuable. Development costsare only marginally higher, and can often be mitigated or successfully managed. 74Operating costs are lower. Revenues are higher as a result of regulator incentives andsubsidies and enhanced space user demand. Investor demand is up as they begin torespond to potential regulator and space user demand increases and other investor climatechange pressures. A detailed assessment of the “net” risks of sustainable properties is quitepositive, lowering required discount and capitalization rates. Finally, many of the real risksof sustainable properties can be mitigated through contracts, insurance, and otherstrategies that have developed as the industry has matured.2. Valuers Must Prove the Value of Sustainability One Property at a TimeThe general business case for why sustainable properties should be more valuableprovides a valuable “hypothesis” that must be tested for individual properties beingvalued.One of the biggest challenges for valuers is that the general research methodologies anddata supporting why sustainable properties should be more valuable is of limited use inquantifying the value of a specific property with its own unique combination ofsustainable attributes. General statistical studies that support higher rents, higher values,lower energy use, better occupant satisfaction, and similar conclusions are typically basedon average results from scores to thousands of properties. These studies, if appropriatelyapplied, can help with property specific valuation assumptions, but the conclusions cannotbe easily applied. There are no easy solutions to valuation of sustainable properties—theyneed to be valued the old fashion way—one property at a time. (Much more on thisconcept and its importance in interpreting current sustainable property performanceevidence is presented in Chapter IV, Section F: Market Performance).3. Valuation is not Just About Formal Full Narrative ReportsMany sustainable property investment decisions do not require formal full narrativevaluation reports. 75 Formal full narrative valuation reports are typically required whenthird-party finance is involved, but in most other investments by corporations or investors,formal full narrative valuation reports by third-party valuers are not required or used in74 Substantial information on initial sustainable development costs indicate a 0-5% premium for new sustainabledevelopment costs, with experienced providers more likely to achieve the 0% premium. Research on premiums formajor or minor retrofits is more limited, and it is more difficult to make general statements about initial developmentcosts for existing buildings due to the wide variations in the types of retrofits and initial conditions in existingbuildings.75 Valuation reports can include varying levels of analysis, documentation, and reporting depending on their purpose,the valuer, and the language used in the report.137
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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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