Value Beyond Cost Savings - Green Building Finance Consortium

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Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/Examples• Rent• Operating expenses• Taxes• Insurance• Amortization of buildout• Commissions• Telephone/electrical/data• Lights• Signage• Moving costs• Telecom equipment• Furniture and equipment• Security systemsmeasurecost/tabid/1381/Default.aspxA presentation by Michael Flynn provides some additional detail onTotal Occupancy Cost Management:http://www.expensemanagement.com/article.cfm?id=310A framework, glossary and definitions for An Asset Lifecycle Model forTotal Cost of Ownership Management were created through an industryConsortium. The publications have many formulas and detaileddefinitions for measurement and analysis.http://www.ifma.org/tools/research/Asset_Lifecyle_Model.pdfThis article has some interesting information on the relative importanceof rent in many occupancy decisions “Occupancy Cost ManagersExamine More than Rent”http://www.bizjournals.com/seattle/stories/2005/09/26/focus11.html?from_rss=1Additionally, sophisticated models need to includeassessments of things like churn costs, tenant turnover andretention, infrastructure support costs, transactions costs, andother less direct costs.The IPD International Total Occupancy Cost Code hascategorized occupancy costs into five broad categories (IPD2001):Some introductory information on the Balanced Scorecard Approachthat has been used for some time in business to address measurementof non-financial criteria and is beginning to be more widely used in thereal estate industry.http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx1. Real estate occupation costs2. Adaptation and equipment costs3. Building operation costs4. Business support costs5. Occupancy management costsIn addition, although not always included in the totaloccupancy cost analysis, disruption costs can be important.Disruption can occur due to several internal and externalfactors. Among these is absenteeism due to sick building101 Whole Life Cycle Costing: Risk and Risk Responses, Halim A. Boussabaine, Richard L. Kirkham, Rockwell Publishing, 2004 (insert web page)234
Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/Examplessyndrome, and organizational changes, i.e. staff movementfrom one location to another within an occupied space due topromotion or movement due to a new business environment.This will result in disruption to business activities and lostproductivity. These costs are estimated as a function of therate of movement of individuals in an organization within theoccupied space. This rate is particularly high during the earlyyears of occupancy when occupants are getting accustomedto their new working environment.101The critical point of total occupancy cost (cost of ownership)analysis is that space users make the decisions about the typeof space they need on reasons well beyond real estate costand/or sustainability or energy efficiency requirement. Asdiscussed in more detail in Chapter VI, the specificunderwriting/due diligence guidelines for space usersincorporate more than total occupancy cost, focusing initiallyon the relationship of the space to overall strategic goalcompliance including such issues as increasing the value oftheir assets, promoting marketing and sales, increasinginnovation, increasing employee satisfaction, increasingproductivity, increasing flexibility, and/or reducing costs. Othertools, such as the balance scorecard and other structuredprocesses for incorporating nonfinancial considerations areoften used in decision making.7. Economic ValueAddedEconomic Value Added (EVA 102 ) is a financial performancemethod to calculate the true economic profit of a corporation.The basic formula for EVA is: EVA = NOPAT – (InvestedCapital x Cost of Capital)WhereNet Operating Profit After-Taxes (NOPAT) = Net Sales –Operating Expenses – TaxesInvested Capital = ($amount of debt + $ amount of equity)Forbes’ Investopedia provides a description of EVA detailing how tocalculate NOPAT, Invested Capital , and how to interpret the results:http://www.investopedia.com/university/EVA/For a description of how the grocery store chain Whole Foods Marketuses EVA, see: http://www.wholefoodsmarket.com/company/eva.php102 EVA is a registered trademark of the consulting firm Stern Stewart & Co.235
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Value Beyond Cost Savings - Green Building Finance Consortium

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