Value Beyond Cost Savings - Green Building Finance Consortium

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Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/ExamplesICC or cost savings.As generally applied, if the NPV metric is greater than zero,the decision is accepted.4. Discounted CashFlow Analysis –Internal Rate ofReturnAs is the case with most underwriting analysis, the NPV andIRR metrics are two sides of the same coin. If the NPV isgreater than zero, then the IRR exceeds the discount ratehurdle. If the IRR exceeds the discount rate hurdle, the NPV isgreater than zero.The IRR calculation is based on the same cash flowprojections as the NPV analysis and determines the IRR thatequates to an NPV of zero.IRR = f (S1…S10, ICC)WhereIRR = Internal Rate of Return (percent)S1…S10 = present and future Net AnnualEnergy Savings (dollars)ICC = Initial Capital Costs (dollars)This approach takes into consideration both the time value ofmoney and changes in future energy prices. It can be appliedsolely to the annual energy savings over the expected usefullife of the investment, or it can also include the anticipatedchange in property value and net sales proceeds at the end ofthe holding period.When analyzing investments with limited durations, this metricwill have similar applicability as the NPV metric and is a robustmeasure, applicable to higher-ICC investments or where thereare data uncertainties surrounding ICC or cost savings.When the IRR metric is applied to investments with ongoing,permanent benefits, it becomes a robust measure of the meritsof the investment, including changes in property valuation. It232
Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/Examplesthen becomes analogous to looking at the CAV-DCF metricand solving the same equation for a different variable – theIRR. Importantly, this model, when implemented for a realestate property investment, enables direct consideration of theimpacts of sustainable investment on revenues and risk, inaddition to costs, and thus is the basis of the financialmethodology presented in Chapter IV.As generally applied, the decision will be accepted if the IRRexceeds an internally established threshold such as thecompany’s cost of capital or return on other competinginvestments.5. After-Tax CashFlow AnalysisAfter-tax cash flow is just an extension of the DCF analysisthat incorporates tax consequences. Because of the individualand often temporary nature and complexity of tax analysis,valuation professionals and financial analysts typicallyevaluate properties on a before-tax basis. However, given thesubstantial tax advantages available to sustainable propertiesfrom many levels of government, after-tax analysis can beimportant considerations in making go-no go decisions onsustainable property investment, particularly for specificdecisions regarding renewable energy investment or otherenergy efficiency investments.See discussion and sample model framework in section G of ChapterV. and in Expanded Chapter V, Appendix V-D.6. Total OccupancyCost AnalysisFor space users—both corporate owner occupants ortenants—real estate decisions are based on a fullconsideration of occupancy cost, of which the cost of the realestate, or rent, is only one component. In fact, according toRyan Morris in his article “Occupancy Cost Managers ExamineMore Than Rent,” rent is no longer the major component ofoccupancy costs. Today, most such costs are outside of thelease parameters. Current percentages of the total occupancycost are work environment (70%), technical infrastructure(22%) and real estate (8%). 100 Some of the key considerationsto include in a total occupancy cost analysis are:Measuring the Added Value of Corporate Real Estate Management--Beyond Cost Minimization is a good overview article and model for thetypes of non-cost factors that are critical to corporate/owner occupantreal estate decisions.http://www.tkk.fi/Yksikot/Kiinteisto/sivut/lisaarvo/j/Eres2005%20paper_final.pdfThe IPD Occupiers International Cost Code is a well-recognizedstandard for measuring cost internationally. This code aims to capturethe total cost of property occupation, which includes occupational,facilities, and management costs. This code can be downloaded athttp://www.ipd.com/Home/GlobalEstateMeasurementStandards/HowdoI100 “Occupancy Cost Managers Examine More Than Rent,” Puget Sound Business Journal, Ryan Morris (President and Managing Partner of Real Estate Partnerships andAlliances, Inc.), Sept. 23, 2005.233
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Value Beyond Cost Savings - Green Building Finance Consortium

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