Value Beyond Cost Savings - Green Building Finance Consortium

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Appendix GSustainable Property Cost-Benefit ChecklistPotential Property Costs Description of Cost Applicability Analysis 120A. Increased Development Costs1. Certification, energymodeling, legal andcommissioning costs2. Higher cost specializedservice providers3. Higher cost products andsystems4. Higher tenant improvementcosts for green improvements5. Higher finance costs—morehigh cost equity; increasedconstruction interest6. Project delaysOne of the most hotly debated issues in the sustainableproperty sector is whether sustainable properties orretrofits cost more than conventional properties. This “firstcost” analysis is discussed at some length in Section F-3 ofChapter V and in more depth in Chapter IV, Section E-1 onDevelopment Costs. As fully discussed in those sections,the clarification of the cost question, as well as a fullconsideration of cost-increasing and cost-decreasingattributes of a sustainable project are critical to addressingthis issue.Sustainable properties do have additional costs comparedto conventional properties. Sustainable certifications, moresophisticated energy modeling, and higher legal andcommissioning costs increase development costs overconventional projects. Higher costs for products, materials,systems, and specialized service providers are possible,and to be expected in some cases, but this will varydramatically by project and geography, as well as theparticular market conditions relative to the contractorbidding climate and other factors.There have been dramatic improvements in the cost andavailability of sustainable products, systems and materialsin recent years, and growing sophistication and capacity ofservice providers. However, projects seeking a leadershipposition as to their sustainability rating, or in the use ofpioneering products or systems, will experience bothhigher costs, and greater uncertainty than conventionalproperties.We have not seen specific evidence of higher tenantPotential increased development costs can be evaluatedthrough assessing development budgets, sustainableprocess and feature issues, and other mitigationstrategies. The potential for increased development costscan be mitigated through an evaluation of the integrateddesign process, contracts, service provider capacity, anda review of the nature of the sustainable features andsystems to check for any pioneering or higher risk designand construction elements.Another key issue in thinking about the incremental costof sustainable construction is to be careful to not attributetoo much of any construction cost increase, or volatility, tosustainability alone. For example, in the four years prior tothe economic collapse in 2008, the Producer Price Index(prices of materials and components for the constructionindustry) went up 40%, compared to just 18% for theconsumer price index. 121 Some of the key inputs into theconstruction process increased at a much faster rateduring this time period:Crude oil: 301%Diesel: 252%Asphalt: 190%Gasoline: 167%Copper and brass: 146%Iron and steel: 114%Concrete: 36%Consumer Price Index: 18%The rapid increase in the cost of fuel during this time120 This column provides select guidance on assessing the applicability of a general cost-benefit to a specific property.121 Smart Construction: Economical Building Solutions to Offset Soaring Materials Prices, Leo Pardo Construction, Bureau of Labor Statistics, Jan. 04 to Jan. 08 Time Period,2008.274
Appendix GSustainable Property Cost-Benefit ChecklistPotential Property Costs Description of Cost Applicability Analysis 120improvement costs or higher financing costs, but both arepossible. Higher tenant improvement costs could resultfrom the use of relatively expensive glass or lightingsystems in internal spaces, or from product or serviceprovider capacity and experience issues. Financing costscould be higher if lenders do not recognize the value ofsome sustainable improvements, increasing the amount ofhigh cost equity that is needed. Additionally, with greaterup front expenditures for planning and other activities,construction interest may also increase due to earlier andlarger loan draws.Development costs can also increase through projectdelays due to the complexity of sustainable construction,delayed product or system deliveries, or capacity issuesrelative to contractors and subcontractors. Such delayscan increase construction cost due to timing andmanagement problems and an increase in constructionperiod interest.period influenced most costs. It affects petroleum-basedmaterials such as asphalt, plastic, rubber, PVC, insulationand roofing shingles, and every single constructionmaterial requires manufacturing and transportation,sometimes across thousands of miles, which consumesfuel. Accordingly, while fuel prices are significantly downin 2009, sustainable products and practices (emphasis onlocal materials) can both mitigate construction costs andconstruction cost volatility.It is also important to remember when evaluating potentialincremental increases in development costs forsustainability, that it is often difficult to get a statisticallysignificant answer, given the relatively high variance inbids by contractors for the same construction plan. Whileestimates of bid variance of 5% to 10% for constructioncontracts is a reasonable rule of thumb, a recent study ofcommercial interiors projects found that average bidswings for many components, such as ceiling tile andcarpets, had an average bid swing of 5%, while electricalbid swings pushed as high as 20%. This was important inthat approximately 25% of the interior construction costswas spent on electrical, based on the study’s results. 122While this type of analysis is important for any project, itshould be noted that the key issue in making asustainable property investment decision is not whetherthe initial costs are more than a conventional project, butwhether the additional costs, if any, are supported bysufficient benefits to justify potentially higher initial costs.B. Increased Development RiskConstruction riskSustainable property investment can increase constructionrisk, which is defined as the risk that a project will not becompleted on time or within the allocated budget. Some ofthe key issues that can increase construction risk include:• Pioneering design and construction• Contractor bidding climate and uncertainty:An evaluation of construction risk is similar to theevaluation of the potential for increased developmentcosts above. While much of the risk can be mitigatedthrough using experienced contractors and serviceproviders; limiting untested or pioneering design,construction and features; and engaging an experienced122 Ibid.275
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Appendix FSustainable Property Fina
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Page 312 and 313: Property Type: CBD OfficeSquare Fee
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