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 120D. Increased Operating Costs1. Higher maintenance costs--training, manuals2. Vendor availability and pricing3. Product or systemfailure/underperformance4. More costly lease analysisand implementation5. Higher real estate taxes6. Costs of required additionalmonitoring/measurementE. Building Operating Problems1. Products underperform2. Service providersunderperform3. New systems learning curvefor engineeringstaff/maintenance staff/etc.4. New/different systems canreduce economies of scale forengineering staff for aconcentrated portfolio ofsimilar assets5. Capacity/seasoning of serviceproviders/contractors6. Tenants do not cooperateIn most cases, sustainable property investment will notresult in increased operating costs, but perhaps operatingcosts that are higher than initially projected. For example,while the original projections could be for a 40% reductionin energy use, insufficient training of engineers,maintenance staff, and tenants, as well as systems orservice providers that do not meet performanceexpectations, could limit the reduction in energy use to alower number, say 25%. Additionally, energy costs couldhave gone down significantly, like they did in 2008,reducing operating cost reductions, while resource usereduction may have met original projections.Additionally, sustainable properties require additionalmonitoring and measurement of sustainability outcomes,and, in addition to the capital cost to put in such systems,there are additional operating costs which will be required,including, at least initially, additional time and expense toadminister and address lease issues.If values go up due to the sustainable property investment,higher real estate taxes could result, increasing operatingcosts beyond historical norms.Building operating problems can occur on sustainableproperties primarily due to products, systems, serviceproviders, maintenance staff, and other factors in theproduction and operation of a sustainable building that aremore pioneering, or untested relative to their reliability.These learning curve issues are more likely to occur in theearly operations of a building, but can also occur later dueto untested durability and functioning over time of somesystems.(See Section I-D of this Appendix)The primary way to address the applicability of thispotential risk is through evaluating the process andfeatures of a sustainable property. Much of the risk ofpotential building operations problems can be mitigatedthrough proper planning, modeling, contracts, and theselection of features and systems with more proven trackrecords.288
Appendix GSustainable Property Cost-Benefit ChecklistPotential Property Costs Description of Cost Applicability Analysis 120F. Increased Cash Flow RiskThe most significant cash flow risk is to underperform proformaprojections, rather than underperform compared to aproperty with no or limited sustainability attributesThe best way to assess potential sustainability relatedunderperformance risk is to carefully consider theinfluence of incremental sustainability investment on keyassumptions in the financial analysis or valuation. If theincremental contributions appear overstated, or are notclearly articulated, the risk of underperforming the proformaprojections will increase.1. Risk of rapid functionalobsolescenceNew technologies in sectors of the industry with substantialongoing research and development investment, like thesustainable property industry, are subject to heightenedlevels of functional obsolescence, which has a directimpact on value, but can also impact space user demandand cash flows.Major expenditures on new products, systems, orstrategies should be evaluated for this risk and mitigatedthrough supplier contracts, phasing of implementation,further research, and other means.For example, if an owner paid one million dollars for a newHVAC system, and two years later you could buy an HVACsystem that was 15% more efficient for 10% less money,the value of the original investment has gone down due tofunctional obsolescence due to the introduction of leapfrogtechnology.13.2. Process Underperformance One of the biggest risks to cash flow is poorly executedsustainable property processes such as those identifiedbelow:• Poor integrated design process• Legal/contractual riskso Design firm professional liabilityo Green leaseso Warrantieso ESCO contractso Misrepresentation and fraud: marketingan leasingo Regulatory complianceo Securities fraud• Insuranceo EnvironmentalTo assess the influence of process performance on cashflow risk, the valuer/underwriter must assess each of thekey processes, particularly those that have led historicallyto underperformance like:• Integrated design process• Contracts• Service provider capacity• Energy modeling• Commissioning• Sustainable certification• Measurement and verification• Occupant and building management training289
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Appendix FSustainable Property Fina
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Page 254 and 255: Appendix FSustainable Property Fina
Page 270 and 271: Appendix GSustainable Property Cost
Page 308 and 309: Appendix HDiscounted Cash Flow Anal
Page 312 and 313: Property Type: CBD OfficeSquare Fee
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Value Beyond Cost Savings - Green Building Finance Consortium

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