Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable Propertiespractice. However, less formal valuation is used by many decision-makers and in almostall sustainable property investment decisions the concepts of value need to be morerigorously applied. Even if a formal report is not completed, applying the methods andpractices of valuation will enable capital seekers to accurately assess and present therevenue and risk implications of sustainable property investment that are either left out, orpoorly presented today.The specific role of value, or a more formal full narrative evaluation or appraisal report,will vary based on the type of investor and investment decision. For example:Corporate Real Estate DecisionsCorporate sustainable property investment decisions do not typically require or involve aformal full narrative real estate appraisal or valuation report. However, sustainableproperties have value beyond reductions in energy, water or maintenance expense.Potential health or productivity benefits, recruiting, employee retention, and reputationvalue, reductions in liability and regulatory risk, and other benefits of sustainableproperties or investment in sustainable property features are important.Corporate owner/users have many of the same considerations and motivations asinvestors, however the primary difference is that all of the benefits of energy efficiency,and related higher sustainability ratings, flow directly to the owner/user. Some of thesebenefits include:• Energy savings (both in the short- and long-run)• Better recruiting and retention• Improved corporate image• Access to Socially Responsible Investment capitalInvestors/LandlordsThe majority of commercial and multi-family equity investment decisions are not typicallybased on a formal full narrative appraisal report, but discounted cash flow analysis andinternal rate of return analyses and risk assessments. Because of the reliance on discountedcash flow analysis for decision-making, the important concepts of value can be integratedinto investment decision-making, with the key constraint being the availability of data andknowledge of how to effectively do that. Value is explicitly considered in the selection ofa residual capitalization rate and discount rates.DevelopersSustainable investment decisions made by developers are significantly influenced byformal appraisals because appraisals are required for construction and/or permanent takeoutloans necessary to move development projects forward. Less formal valuationconsiderations need to be more rigorously used by developers during the design and138
Value Beyond Cost Savings: How to Underwrite Sustainable Properties“value” engineering process. Developers have the most difficult challenge with valuationbecause they are dependent on assessments by third-party valuers hired by capital sourceswho may not yet have the education and experience to properly value properties withsustainable features.LendersLenders, particularly if they are federally regulated in the United States, require formalmarket appraisals prepared by licensed appraisers following the Uniform Standards ofAppraisal Practice (USPAP), governed by the Appraisal Foundation prior to originating acommercial mortgage. 76Lenders have been slow to recognize the benefits of sustainability and/or energy efficiencyin their underwriting practices. Some smaller banks are offering more favorable financingterms for green buildings, including higher LTVs and lower interest rates. Some largerbanks are in the process of developing programs that provide some recognition ofsustainable property attributes, but both larger and smaller bank lending policies andprocedures are undergoing significant change, beyond sustainability, due to currentfinancial market upheavals.4. Valuers Have the Skills Necessary to Make Significant Contributions toSustainabilityValuers, underwriters, or brokers, not engineers or architects, are better positioned andtrained, and have the requisite skills and experience to judge how space users andinvestors will respond to a building’s sustainable performance (resource use, occupantperformance, etc.). In fact, as illustrated in GBFC’s Sustainable Property PerformanceFramework discussed in Chapter IV, valuers and brokers play a critical role because thereis no way to assess the financial implications of sustainable property investment withoutmeasuring the market’s response to a building’s sustainable property performance.For example, once the science is clearly presented about how a sustainable property couldaffect occupant health, it is up to the valuer, underwriter or broker to judge whether theoccupants for a particular subject property will “value” such benefits, and at what level, inthe context of the particular types of occupants expected in a building, current marketconditions, and the many other factors driving occupant space decisions.Not only should all certified valuation professionals have the requisite skills to contributeto sustainable property valuation (with appropriate additional education), they will needsuch skills to value any property in the future. As sustainable attributes and outcomesbecome more important to regulators, space users and investors, no credible valuation of anon-sustainable property will be possible without consideration of potential sustainability76 The Appraisal Foundation has international representation, not purely U.S. direction. Sixty countries support the InternationalValuation Standards Committee.139
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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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