Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable Properties14. Actual variations in weather: Energy models are based on assumptions aboutlocal historical weather patterns. In the first year a new building is benchmarkedagainst modeled performance, weather may be more severe than assumed duringthe design phase.15. Improper weather benchmarking: In locations that are subject to micro-climatevariations (such as the Bay Area of California), weather at the site may differfrom the weather at the location from which historical data was taken in themodeling process, for example, at an airport.16. For existing buildings, prior deferred maintenance in relation to upgrades leads toincreased energy use.17. Actual energy prices may differ from those used to forecast energy cost savings.Energy models typically include forecasts of energy costs for the building as wellas consumption.Proposed Best Underwriting Practices for Energy Efficiency ForecastingThis section presents our summary of proposed best practices for underwriting energyefficiency forecasting in real estate. Keeping in mind that underwriters will approach thesedecisions using tried and true fundamental methodologies, it is a summary of things tolook for and questions to ask that are distinctly different when considering energyefficiency investments. It starts with an overview of the impacts on the underwritingprocess of recognizing the “value” of energy, followed by the special considerationsrelating to forecasts of energy performance, qualifications of key service providers, andthe issues of split incentives and capital and operating budget conflicts.Overview of the Energy Efficiency Underwriting ProcessTo aid in understanding where energy forecasting fits, we provide an overview to thebroader question of underwriting energy efficiency investment. A stakeholderunderwriting an energy investment decision needs to go through the followingcomprehensive analytical process:• What is the menu of features available? (See Appendix III-A of the expandedbook.)• What combination of features is optimal in my situation?• What is the initial cost of the set of features?• What are the forecast energy cost savings and offsets from the investment?• What situations can cause such a forecast to be inaccurate? (See detailed list ofquestions for vetting an energy forecast below.)• What are the non-energy savings and offsets from the investment?168
Value Beyond Cost Savings: How to Underwrite Sustainable Properties• What are the risks associated with implementing the feature(s)?• What are the risk mitigants associated with implementing the feature(s)?• Who benefits from the feature(s)?• Will I pay for the entire cost or will some other private party share it?• What is the best way to finance the investment (See ESCOs.)?• What are the tax benefits of implementing the feature(s)?• What is the success or failure experience associated with implementing thefeature(s)? (e.g. case studies)• What problems have others encountered in implementing the feature(s) and howdid they solve them?• What is the theoretical link between the feature(s) and all possible beneficialfinancial outcomes (such as higher rents, lower expenses)?• What are the financial, non-property-specific benefits of the feature(s), such ascorporate reputation, recruiting benefits, access to SRI capital, etc.?• What are the public, non-monetized benefits of the feature(s), such as cleaner air,etc.?• What evidence supports the linkages noted above?• What are the strengths and weaknesses of the evidence?• How does the evidence apply to my property type?• What must I do to ensure that integrated design concepts are incorporated intomy proposed set of features?By finding the answers to these questions, real estate stakeholders will come closer tomaking optimal decisions regarding energy efficiency investments in real estate.Assessing the Reliability and Accuracy of Energy Performance ForecastsGiven the importance of assessing the reliability and accuracy of energy forecasts, wehave prepared a list of questions that will assist the underwriter in this process.Questions to Vet Forecasts of Energy Cost Savings• What benchmark data is available from comparable conventionally designedproperties?• Have clear and aggressive energy use targets been identified?• Which combination of energy efficiency strategies would be most effective forthis project?• Are there any design features that are outside of the range of the energy model’scapabilities?169
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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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Value Beyond Cost Savings - Green Building Finance Consortium

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