Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable Propertiesexpenses and revenues. More definitively, if one does not at least conceptuallyunderstand the DCF methodology, it is difficult if not impossible to accurately assessthe financial implications of sustainable property investment. The DCF methodologyforces one to make explicit links between sustainable property performance and financialinputs like rents, and reinforces that such analysis can not be done in isolation of all theother non-sustainable factors that also influence financial inputs, like rents.The Market, or Sales Comparison Approach, is also important for commercial and multifamilyproperties. In this methodology, “comparable” sales (to the subject property beingvalued) are identified, and sales price adjustments are made between the subject andcomparables based on a review of their comparability on key issues such as location,zoning, access, size, market quality, property quality, date of sale, etc. The valuer typicallymakes a series of qualitative adjustments to each variable based on quantitative andqualitative analyses of the subject and comparable sales. The importance of the marketapproach is enhanced if there are numerous high quality comparable sales in thesubmarket and high quality data is available on the key attributes of properties that valuersjudge are important to sales price.As of early 2010, the Market Approach has significant limitations in most sustainableproperty valuations due to a lack of a sufficient number of comparable sales, limitations onthe availability of key sustainable property performance data on subjects and comparables,insufficiently detailed property descriptions in sales comparable databases, and thechallenges inherent in the broader market due to the reduction in the number of salestransactions and significant value declines (upwards of 50% in many cases) which makedate of sale adjustments difficult and sometimes unreliable.However, the Market, or Sales Comparison Approach, can still provide significant insightsinto the behavior of regulators, space users, and investors that will provide context forinterpreting Income Approach results and determining key financial model inputs.Additionally, the Income Approach also extensively relies upon property marketcomparisons as a basis for selection of rents, occupancies, absorption, tenant retention andexpenses.The Cost Approach can be important for commercial properties, primarily as a cross checkfor the Income and Market Approaches. The Cost Approach is typically more reliable withnewer properties, where depreciation estimates are more reliable due to the limitedpassage of time. (In the Cost Approach, the cost to build a new property is adjusted fordepreciation). Depreciation, which is calculated by evaluating a property’s physical,economic and functional obsolescence can be quite complicated to calculate and involvesmuch of the market, economic and comparables analysis that is done in the otherapproaches from a different perspective.For sustainable properties, the cost approach has limitations due to data availability, thedifficulty of properly incorporating positive functional and economic obsolescence, andother factors. In particular, in the corporate world real estate assets are often booked at143