Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable Propertiesrelated economic or functional obsolescence. As sustainable considerations increase inprominence, valuer sales comparison analysis, lease/rental comparables analysis, operatingexpense analysis, etc. for non-sustainable properties will have to appropriately considersustainability.5. Fundamental Valuation Methodologies Do Not Need to ChangeThe fundamental approaches to value, in most cases, do not need to change. Fortunately,discounted cash flow analysis (Income Approach) is well suited to deal with thechallenges of integrating the new information and “sub-financial” analyses necessary toaccurately assess the implications of sustainability on value. Valuers will need to thinkabout the world, and properties a bit differently, but the changes required, whilesignificant, are analogous to changes necessary to deal with globalization, outsourcing,warehousing and industrial sector technology changes, the Internet, significantdemographic transformations, and the increased technology component of buildings. Forthese game-changing trends, valuers just had to get smarter, and do some new types ofanalysis without changing fundamental methods, and sustainability is no different.A few areas that need to evolve include building performance measurement, propertydescriptions (for both subject properties and comparables), and enhanced considerationand presentation of risks. 776. Sustainable Valuation Must Look Beyond CostsValuation is critical to sustainable property investment. To date, most sustainable propertyinvestment decisions have been based on simple-payback or simple return on investmentanalyses that factor in development costs and operating cost savings, but fail to properlyconsider revenue and risk implications. This failure to properly integrate revenue and riskconsiderations has contributed to bad decisions historically, but with recent (since 2008)dramatic increases in the demand for sustainable/energy efficient properties by regulators,space users and investors, the problem has escalated. Relying on such practices in thefuture will erode the quality of sustainable property investment decisions further.Regulator, space user, and investor demand are critical to value, as discussed throughoutValue Beyond Cost Savings: How to Underwrite Sustainable Properties and illustratedbelow in Exhibit V-9. If valuers only consider resource use (energy costs, etc.) and ignorethe affect of sustainable property investment on market demand, key value issues affectingentitlements, rents, cap rates and other issues would be ignored. In essence, revenue andrisk considerations would not factor into decision-making, a recipe for long-termunderperformance.77 It could be argued that these are fundamental changes in methodology, but we see them more as data andpresentation issues rather than changes in basic methods.140
Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesFor example, the benefits of investment in sustainable features that lead to significantenergy efficiency extend well beyond energy cost savings to potential increases in tenantdemand due to corporate sustainability requirements, the ability to utilize governmentincentives, the general reduction in the risk of projected cash flows due to reduced energycost volatility and protection against future government regulatory actions effectingenergy efficiency.Exhibit V-9Sustainability Demand Affects Value InputsResource UseEnergy CostsWater CostsRegulator DemandSpace User DemandRegulatory ComplianceEntitlement BenefitsTax BenefitsFinancial IncentivesRentsOccupancyAbsorptionTenant RetentionInvestor DemandCapitalization RatesDiscount RatesThe Consortium’s mission is to enable private investors to evaluate sustainable propertiesfrom a financial/fiduciary basis. Accordingly, Value Beyond Cost Savings: How toUnderwrite Sustainable Properties focuses primarily on market value:The most probable price, as of a specified date, in cash, or in terms equivalent to cash,or in other precisely revealed terms, for which the specified property rights should sellafter reasonable exposure in a competitive market under all conditions requisite to afair sale, with the buyer and seller each acting prudently, knowledgably, and for selfinterest,and assuming that neither is under undue duress. 78In considering owner-occupant real estate decision-making, the concept of investmentvalue, or worth is appropriate to consider. In such situations, decision-makers are not justconsidering a property’s market value, but the value of the property to their specificenterprise, which may go beyond what typical market participants consider.78 The Appraisal of Real Estate, 12 th Edition, The Appraisal Institute, 2001, page 22141
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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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