Value Beyond Cost Savings - Green Building Finance Consortium

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Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/ExamplesCost of Capital = Return (expressed as a %), reflecting thecombination of both debt equityBy including a project’s Cost of Capital as an expense, EVAallows decision-makers to accept only those projects thatenhance overall shareholder wealth since a positive EVAindicates an excess profit beyond a company’s Cost of Capital.The EVA methodology can be used for decisions at thecompany level, the department-level, the store or branch-level,and/or the project level. A number of firms including WholeFoods use EVA for determining incentive compensation.C. Sustainability Sub-Financial Analyses1. Comparative FirstCost AnalysisFor reasons discussed below, conducing a comparative firstcost analysis should either not be done, or done very carefullyto avoid making bad decisions. Fundamentally, sustainabilityshould not be viewed as something to be added, versus anintegrated part of building design. Most importantly, a first costanalysis that compares initial buildings costs of a sustainablebuilding to a “non-sustainable” building ignores potentialoperating cost savings or any value implications. However,despite the logic that the question does not make a lot ofsense, procurement officers, CFOs, developers, and facilitymanagers are often confronted with short-term budgetconstraints and the anticipated “premium” for sustainablebuilding still gets cited as one of the most important barriers tofurther adoption of sustainable property investment. 103The question of comparative cost is also very difficult toanswer on a general basis. However, it is much more feasibleto address the question of how much sustainability will cost ona specific project. In answering the question for a specificproject, you must specify explicitly the level of green orsustainability goals and consider the role of integrated designin promoting trade-offs that enable reduced costs in someareas to offset increased costs of some sustainable features.Many of the ideas in this appendix and in the book relating tocomparative first cost-analysis emanated from Peter Morris at DavisLangdon. His article in the Pension Real Estate Quarterly provides thebest concise summary we have seen on some of the issues that needto be considered in thinking about this question. “What Does GreenCost”, PREA Quarterly, Summer 2007.http://www.davislangdon.com/upload/images/publications/USA/Morris%20Article.pdfThe best analysis of comparative cost to date is shown in: “The Cost ofGreen Revisited: Reexamining the Feasibility and Cost Impact ofSustainable Design in the Light of Increased Market Adoption,” LisaMatthiessen, Peter Morris, David Langdon, 2007http://www.davislangdon.com/USA/Research/ResearchFinder/2007-The-Cost-of-Green-Revisited/The 2007 Davis Langdon report updates a prior report in 2004 andexamined a larger sampling of buildings and additional building types.The report demonstrates that costs for LEED and non-LEED projectsare quite variable, and that LEED certification is not correlated withhigher costs.http://www.davislangdon.com/USA/Research/ResearchFinder/2004-Costing-Green-A-Comprehensive-Cost-Database-and-Budgeting-103 Much of the information in this section is derived from conversations with Peter Morris of David Langdon and a review of his article, “What Does Green Really Cost?”published in the PREA Quarterly in the summer of 2007. This article is available on the Green Building Finance Consortium website at [insert web link here].236
Appendix FSustainable Property Financial Analysis AlternativesAnalysis/Model Description/Commentary Key Links/ExamplesFor example, improved energy efficiency due to improvedinsulation, window replacements, improved controls, ormanagement changes can offset the new or replacementcosts for HVAC systems.The next part of the analyses is to determine what you aregoing to compare sustainable costs to. One approach is tocompare the cost of green to the original budget or the originalanticipated cost. A limitation to this approach is that it assumesthat the original budget was adequate and that no otherchanges or enhancements were made. Is it reasonable toassume that the building would have been designed to aminimum energy standard, or would some of the “sustainable”features have been designed in anyway? As the marketplacehas become more accepting of sustainable property investing,the base for an original building budget has been moving.Equally important, investors’ and space users’ assessment ofbuilding quality is also changing as sustainable features andoutcomes become more important than other expensivebuilding features that used to be required for a top qualitybuilding.Another method of comparing cost is to look at the individualcost of added green features. Again, this approach fails toconsider offset costs and assumes that features or outcomescan be separately priced. Perhaps most importantly, doing acomparison of initial costs for specific sustainable materials orfeatures ignores important advantages in life cycle operatingcosts and value due to improved appeal to tenants andinvestors, as well as regulators.Perhaps the biggest cost barrier for sustainable propertyinvestment is not measured in dollars, but in implementationtime and risk. For example, you can show a developer thatstudies have shown that a sustainable building will only cost1% to 2% more, but from the developer’s perspective, who hasset up a smooth process with his contractors andsubcontractors, architects, and others in the developmentprocess, the sustainable process will require new types ofcontracts, leases, insurance, subcontractors, contractors, andrequire a more integrated design and project managementprocess, different than what the developer has been used to.Methodology/Greg Katz and a group of contributing authors have recently completeda study, “Green Buildings and Communities: Costs and Benefits,” thatlooked at 150 buildings from the U.S. and ten other countries andconcluded that the additional cost for building sustainable versusconventional non-green buildings was approximately 2% (median of1.6%, mean of 2.5%). The detail necessary to analyze the relevanceand applicability of this work to specific properties is not publiclyavailable, but may become available when the findings are published ina book in 2009. For example, given that thousands of green buildingshave now been built, the specific randomness of the selection of the150-building sample will be key to interpreting the results. (The 150buildings were located in 33 states and 10 countries and built from theperiod 1998 to 2008.) http://www.goodenergies.com/news/-pdfs/Web%20site%20Presentation.pdfThis recent work confirms the earlier work authored by Mr. Kats, “TheCost and Financial Benefits of Green Buildings: A Report to California’sSustainable Building Task Force,” that was completed in 2003 andfound that the green premium on average was about 2% of the originalcost of a building.http://www.greenbuildingfc.com/Home/DocumentDetails.aspx?id=398The GSA commissioned a Study by Stephan Winters on LEED costswhich was generally supportive and consistent with other findings.http://www.greenbuildingfc.com/Home/DocumentDetails.aspx?id=1007A somewhat outdated study by the David and Lucille PackardFoundation in October of 2002 provides an interesting methodologicalapproach, looking at six different sustainability scenarios and evaluatingcosts and benefits. This study resulted in higher premiums for the firstcost for sustainable buildings, although life cycle analysis provided apositive conclusion about sustainable investmenthttp://www.greenbuildingfc.com/Home/DocumentDetails.aspx?id=485237
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