Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable Properties8. New Sustainable “Sub-Financial” AnalysisSustainability sub-financial analyses are those analyses and models that providequantitative insight/data that is typically combined with other information and analyses toaid valuers/financial analysts in their specification of key financial assumptions (rent, rentgrowth, occupancy, absorption, tenant retention, and operating costs) in a DCF analysis, orrelated traditional real estate financial model.Sustainable sub-financial analyses include Comparative First Cost Analysis, DCF Lease-Based Cost-Benefit Allocation Modeling, Health Benefits Analysis, Sustainability OptionsAnalysis, Enterprise Value Analysis, and Risk Analysis and Presentation (RAP). Whilemany sustainability sub-financial analyses are uniquely derived for specific propertysituations, the importance of quality independent analyses of this type is critical to thearticulation of value and risk in sustainable properties.The key point in understanding sustainability sub-financial analyses is that in most casesthese analyses do not result in specific data inputs that you can input directly into a DCFanalysis. As their name implies, these types of analyses provide information and insight,which is combined with non-sustainable considerations in the final selection of key inputssuch as rent, absorption and occupancy.For example, there are scores of studies that demonstrate the relationship between buildingoutcomes, such as increased ventilation rates, and improved health (reduction in sickbuilding syndrome or asthma, for example). However, even if a specific dollar health costsavings could be estimated for a building, further analysis (new “sustainable sub-financialanalysis) would have to be done to determine how the health cost savings would accrue toa potential space user.A health related sustainable sub-financial analysis for an owner-occupied building(corporations, governments, institutions, non-corporate business entities) would generatean analysis of potential occupant benefit that would depend on the level of health costspaid by the building owners for their employees and a few other factors. Much of thepotential health cost savings would accrue to the building owner-occupants.However, for an investor owned building, the key issue in estimating the financial impactsof health cost savings is to look at how tenants value such potential benefits, and then howthey value these benefits in the context of all the other benefits and factors that enter intotheir selection of space. Accordingly, any health cost benefits analysis is only acontributing factor to the development of financial inputs for a traditional real estateanalysis. However, such analyses, if independently done and appropriately presented, cansignificantly influence leasing and/or investment decisions resulting in improved financialperformance.157