Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesVerification is an important part of the labeling process because it gives third partydecision-makers confidence in the reliability and accuracy of the rating and theinformation provided to get it. Further, the verification confirms the existence of otherattributes that are important to investors.In order to receive the ENERGY STAR label, a Professional Engineer (PE) must certifyinformation submitted to ENERGY STAR.ENERGY STAR’s Target Finder: A second EPA ENERGY STAR tool, called TargetFinder, allows users to enter data on a proposed building’s basic characteristics (the sameas Portfolio Manager with the exception of energy use) and a target EPR (75 or higher tobe ENERGY STAR labeled), and generates the projected energy use required to meet thetarget. The estimated design energy use can then be compared to the target use to see if theproposed building will meet its goal. If it does not, the building can be redesigned to bemore energy efficient to the extent necessary to meet its target.Target Finder uses the same statistical framework as Portfolio Manager, flipped around tosolve for a different variable. It should be noted that energy modeling or forecasting toestimate design energy use is conducted outside of Target Finder.3. The Importance of Energy PricesEnergy prices impact the underwriting of sustainable properties in several important ways– in estimating energy cost savings, in projecting cash flows and determining value, and inassessing risk.First, energy cost savings anticipated from an investment in energy efficiency are definedas the quantity of energy saved times the price of energy. In modeling energy cost savings,engineers typically utilize the then current rate schedule from the utility companies thatserve or will serve the subject property. Higher than anticipated energy prices result inhigher savings, and lower than anticipated energy prices result in lower savings, for thesame level of investment, all other things being equal.Secondly, the absolute level of energy prices will determine future operating expenses andthereby impact projections of NOI and the appraised value of the subject property.Finally, the risk associated with rising and/or volatile energy prices will be mitigated byreductions in energy consumption at the subject property, and conversely will remain unmitigatedin the absence of such reductions. The perception of reduced (increased) risk cancause cap rates and discount rates to be lower (higher).Historical energy prices for electricity, natural gas and all energy sources (Total Energy)have demonstrated volatility over time. While prices are generally trending upward, spikesand fluctuations occur in the short run. This volatility is even more apparent whenassessing monthly data. One indication of the uncertainty regarding energy prices is the163