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 120o Property coverageSee Chapter IV, Section C: Process Performance foro Casualty coveragemore detail on this topic.o Business interruption• Inadequate commissioning• Insufficient measurement and monitoring• Insufficient training of property management3. Operating costunderperformanceFailure on these processes has been found to lead directlyto building underperformance and poor financialperformance. (See Chapter IV of “Sustainable PropertyPerformance” for more detail)• Product or system failures/underperformance• Excessive lease analysis / administrative costs• Insufficient training / cooperation of propertymanagers / occupants• Reliability / accuracy of energy forecasts• Sensitivity to potential declines in energy prices• Reliability of water use forecasts4. Revenue underperformance Revenues are the most significant cost component of netcash flow, so risks must be assessed. Key risks include:• Delays due to regulator problems• Space user demand underperformanceo Risk of overimprovemento Prioritizing the wrong systems upfrontsuch that the assets competitive positionis diminished relative to peer group.o Incomplete assessment of building useso Market changeo Insufficient consideration of leaseimpacts (separate meters, etc.)o Insufficient value recognition bycommercial brokero Insufficient value recognition byappraisers• Loss of utility mark-up revenuesEach of these issues needs to be evaluated in the contextof the specific circumstances with the subject propertybeing analyzed.The potential for risk in revenue performance is a functionof the aggressiveness of assumptions in the pro-formaregarding sustainability premiums. While historicallyrevenue enhancement has not been an important part ofsustainable property decisions, it will, and should be moreimportant going forward, so more attention will have to bepaid to this issue.5. Value / Sales Price • Inaccurate / overassessment of investor demand Value/sales price underperformance can be assessed byevaluating the aggressiveness of sales price/value290
Appendix GSustainable Property Cost-Benefit ChecklistPotential Property Costs Description of Cost Applicability Analysis 120Underperformance • Insufficient commercial sales broker recognition ofvalueassumptions, the level and quality of analysis of mostlikely buyers, and a consideration of broker and appraiser• Insufficient appraiser recognition of valuerecognition of value. For projects with projected salesmore than a year or two in the future, and certainly forten-year projection periods, the rapidly changing investorattitudes towards sustainable property investment need tobe considered in selecting residual capitalization rates.G. Limited/No Increase in Investor Demand1. Increase/no change incapitalization and discountrates• Investors in subject market not educatedenough/don’t care• Non-sustainable factors dominate pricing/investordemand• Less sophisticated/smaller property owners• Liability limits ability to market advantages• Property improvements built to wrong standard:changing investor “sustainability” requirementsInvestors are significantly influenced by space-userdemand and the priority that sustainability issues arebeing given by the providers of capital. Capitalization anddiscount rates are market derived based on a detailedunderstanding of many of the issues identified in thisAppendix.2. Energy cost declines increasepay-back periods, reducevalue of sustainableinvestment3. Existing leases limit ability topass costs to tenants--capture sufficient benefits tojustify costs4. Failure of appraisers/brokersto accept value/enhancedperformanceResource use could meet expectations but if energy orother resource costs go down, revenues and investorinterest could suffer.• Existing leases in place limit cost pass-throughson green retrofits• Net leases constrict ability to pass-through higherfirst cost investments in a competitive marketNegative effect on value and financingEvaluate sources and cost history of resources for thesubject property.Evaluate lease structure and potential for lease changesat rollover dates.Market research and interviews with local community willhelp address these concerns.291
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Appendix FSustainable Property Fina
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Page 256 and 257: 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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