Value Beyond Cost Savings - Green Building Finance Consortium

Appendix GSustainable Property Cost-Benefit ChecklistPotential Property Benefits Description of Benefit Applicability Analysis 106A specific assessment of the key factors that can reducecost volatility, entitlement risk, and legal risk should bemade for the subject property.2. Reduce carry risk• Reduce time to construct• Reduce time to lease-up• Reduce “carry” risk insurance cost• Increase pre-leasing• Reduced entitlement riskCarry risk addresses the possibility that a constructionloan will default in the payment of interest during theconstruction lease-up period. This risk is most acute in thelater years of the term of a construction or mini-perm loan.Interest reserves are established to cover the expectedtime to build and lease up the project, together with asmall contingency. Insurance policies can also beobtained that backstop loan payments until establishmentof an adequate stabilized debt service coverage ratio(typically 1.0 or better). A letter of credit or an advancingmechanism may also be used, and hedges and caps arealso important in mitigating carry risk.The primary additional attributes of a sustainable projectthat will reduce carry risk are those that support acompelling favorable lease-up story relative to the specificspace users expected to occupy the property. Whilereducing the cost of carry insurance is one potentialbenefit, this is not yet possible in the marketplace as ofearly 2009. 1103. Reduce exit/take-out risk The risk that the construction loan’s balloon payment willnot be executed as planned is referred to as take-outrisk. 111 If a construction loan does not have a highly ratedtake-out lender, then the risk of executing the take-out is afunction of the economics of the completed real estateproject. Accordingly, sustainable properties with provendemand by regulators, space users, and investors, and theresulting increase in value and financial performance willA loan’s potential for reduced take-out risk is directlyrelated to the clear articulation of the subject property’ssuperior economics as a result of increased regulatordemand, space user demand, and investor demand.A property’s exit risk (for equity investors/developers) isalso significantly reduced by anything that increases thedemand from investors or buyers for their final product.This benefit should be common in many sustainable110 Ibid.111 “US CMBS: Moody’s Approach to Rating Commercial Real Estate Construction Loans,” January 20, 2006. This section discussed loan-related take-out risk as well as exit-risk,a similar concept for equity investors/developers, who must eventually sell their property to capitalize on its value.258