Value Beyond Cost Savings - Green Building Finance Consortium

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Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/ExamplesR0 = Going In Capitalization Rate (percent)ICC = Initial Capital Costs (dollars)S = (AES x EC) – AOC + ROCAES = Annual Energy Savings (kBtu)EC = Energy Costs (dollars/kBtu)AOC = Additional Operating Costs (dollars)ROC + Reduced Operating Costs (dollars)This metric presumes that the benefits are ongoing andpermanent. Similar to the metrics discussed above, this metricis considered “simple” because it does not take intoconsideration the time value of money nor does it considerchanges in future energy costs, or in most cases, as used,potential non-cost related benefits of energy/carbon reduction.An advantage is that it incorporates at least some of theelements of change in property value through changes in NOI,to the extent that the decision-maker is able to determine all ofthe impacts on NOI.If the increase in property value resulting from the investmentexceeds the Initial Capital Cost, the metric is greater thanzero, and would suggest a positive investment decision.4. Simple ROI andGeneral Cost-Benefit AnalysesAs discussed above, simple ROI provides an analysis of thesimple return of an initial capital investment based on the costsavings, presuming the cost savings continues indefinitely. Fordecisions where the Simple Return on Investment is high, andaccordingly the Simple Payback time period would be short,nothing else is typically necessary to support the decision.However, as payback periods get longer, and capitalinvestments become greater, some investors have beensupplementing simple ROI or Simple Pay-Back analyses witha summary of their a project’s other potential benefits.As a starting point, general Cost-Benefit Analysis shouldinclude a discussion of potential productivity or health costsaving benefits, potential churn cost savings, recruiting oremployee retention benefits for space users, and a generalreduction in litigation risk, energy cost volatility, regulatory risk,exit risk and other issues.General industry cost-benefit studies can be found in the ResearchLibrary and Industry Resources links section of the Green BuildingFinance Consortium website (index code 3.0),Sections D. and E. in Chapter IV also provide a detailed evaluation ofsustainable property costs-benefits and guidance on assessing theirapplicability to specific sustainable property processes and features.220
Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/ExamplesThe effectiveness of the additional Cost-Benefit Analysis willbe based on how it is articulated. For a specific property-leveldecision, the discussion of potential benefits needs to beproperty specific. An assessment of potential productivitybenefits needs to address the specific evidence for productivitybenefits for the types of occupants, and an assessment of howsuch occupants will value such potential benefits. The moredetail that can be provided to give decision-makers some ideaof the magnitude and direct applicability of a potential benefitfor a specific property will be very beneficial. To date, this typeof detailed property-specific analysis is in its infancy.At its best, the Simple ROI and general articulation of theCost-Benefit Analysis can be quite powerful, even if moreprecise financial analysis (see Steps 4 and 5 in Chapter V,Sections F and G.) is required to truly understand the financialimplications of sustainable investment. As discussed in detailin Chapter V, true understanding of potential implications ofsustainability on financial performance requires specifictranslation of how potential costs and benefits affect DCF inputassumptions like rent, vacancy, and tenant retention.Perhaps most importantly, the most successful articulation of aCost-Benefit analysis will not just speak to benefits, but alsoaddress the specific risks and/or additional costs, and providea discussion and articulation of potential ways the risks havebeen mitigated, or that the pricing has appropriately addressedthe additional risks.5. Life Cycle CostAnalysis (LCC)Life Cycle Cost Analysis (LCC) takes into account all of thecosts of acquiring, operating/maintaining and disposing of abuilding or building system. LCC can be used to makedecisions about whether an investment in a particular systemhas a positive net present value, but its primary purpose is forcomparing building feature alternatives (with different initialcosts and operating savings) to determine the alternative thatmaximizes net costs savings. LCC is considered a morerigorous analysis than either Simple Payback or Simple ROIcalculations because it relies on a present value methodology,which considers variable cost savings over time andincorporates the investor’s cost of capital through the choice ofSee, “A Business Case for Green Buildings in Canada,” MorrisonHershfield, Mark Lucuik et al, March 31, 2005, pp. 21-22.http://www.cagbc.org/resources/market_value/articles105.htmThe Whole Building Design Guide (WBDG) website contains a 10 page,detailed description of how to implement a Life Cycle Cost Analysis andhas a variety of helpful links on the subject.http://www.wbdg.org/resources/lcca.php“Life Cycle Costing for Facilities,” (Stephen J. Kirk & Alphonse Dell’Isola– 2003), published by RS Means can be purchased for $99.95. Thisuseful guide provides a number of examples of how LCC can work for a221
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Appendix GSustainable Property Cost
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Appendix HDiscounted Cash Flow Anal
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Value Beyond Cost Savings - Green Building Finance Consortium

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