Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable Properties7. Public Value Has Increasing Importance to Private ValuePublic value has become more valuable to private value because of the increasing demandfor sustainability by regulators, space users and investors. The concept is simple—if abuilding owner can clearly and factually articulate the public benefits that arise from theirbuilding, they are more likely to convince regulators, tenants and investors to pay for thosebenefits.Such “monetization” of public value is created from governments or utility companiesthrough enhanced entitlements/permitting, public grants, favorable financing, tax benefits,and carbon credits or payments, and from private companies through their contribution toEnterprise Value and resulting increases in space user demand. If space user demandincreases, private owners can monetize private benefits through rent premiums, fasterabsorption, higher occupancies, or other direct financial measures.Sophisticated sustainable property investors and developers will conduct their owndetailed assessment of the public benefits of their projects to enable clear articulation toregulators, potential tenants, employees, and capital sources. A starting point for clearlyarticulating public benefits is to have a framework for thinking through and organizingpublic benefits analyses. One such framework is outlined in Exhibit V-4 and discussed inmore detail in Appendix F.While the concept of public interest value, and the move for the valuation industry to takea more direct role in assessing public values is important, the key public values fordetermining private market value are those that can be monetized through governmentincentives, protection against enhanced competitive response to government regulations,and premiums paid by occupiers and/or investors.8. The Income Approach is Critical to Understanding Sustainable PropertyValue 79Valuation involves a consideration of three approaches to value: the Income Approach, theMarket Approach, and the Cost Approach. Final value opinions reflect the valuer’sreconciliation of the three approaches, applying appropriate weighting (consideration) toeach approach based on the specific fact and valuation context.The Income Approach to Value, of which Discounted Cash Flow (DCF) is a primarymethodology, is most important in most cases in valuing commercial properties. Forproperties with sustainable attributes, the income approach offers the best method to factorin the “value” of sustainability because it is based on detailed revenue and expenseinformation, forecasts of performance, and explicitly addresses risk and the timing of79 These observations are a general discussion of a complex and involved topic. The three approaches to value are for amarket value appraisal. There are many other types of value that use different methods and terminology, andterminology will vary by region and country.142