Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesClear delineation of the decision and investment context is critical to selecting the bestanalytic methods, determining data requirements, assembling the underwriting team, andpreparing effective support for decisions. For example, the underwriting of a newcorporate-owned 50,000 square foot suburban office property in Phoenix will differdramatically from the underwriting for a retrofit of an existing strip mall in Massachusettsor the tactical decision about the phasing of sustainable retrofits for an existing portfolio ofproperties. Perhaps easiest to understand, a new project involves construction risk and therisk of not achieving modeled performance; while an existing property involves moredetailed assessment of the existing asset performance, lease structures, etc.Thinking explicitly about what will constitute an effective investment package 5 will alsomake documentation of the work product much easier. Some investment decisions requireformal appraisals and due diligence reports, while other decisions can be made based onbrief business case white papers and/or oral presentations. Most lenders require formalthird-party appraisals and have structured underwriting requirements, while investors andcorporations typically have their own customized formats for their real estate decisions.B. Level of Investment DecisionThe level of decision—strategic, tactical or property specific—is critical to properunderwriting, as shown in Exhibit II-2.Exhibit II-2Multiple Levels of Investment DecisionsSTRATEGICShould we invest?Posture/position?Enterprise implications?TACTICALWhich properties?Which attributes?Phasing?Underwriting changes?Structure/systems/people?PROPERTY-SPECIFICUpside?Default risk implications?What is the collateral’s value?Are returns sufficient tocompensate for risks taken?1. Strategic DecisionsStrategic decisions are those made by pension or corporate boards or other organizationleaders that are responsible for setting policy and allocating resources. These types of5 Investment package refers to the written or digital product of an underwriting/due diligence process. This could be anunderwriting summary and all the supporting loan write-ups and third party reports, closing binders, etc. that would betypical for a mortgage; or a memo, financial schedule and/or PowerPoint presentation typical for many higher levelstrategic decisions.10