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Four Steps To Higher Value for Green Build

January 28, 2019

If there's one thing that stops people from building super-green buildings, it’s the belief that they can’t make money doing it. In fact, the two reasons I’ve routinely heard for skipping the high-performance track are tied to money. First, it’s too expensive, and second, ‘too complicated and a time sink, which can cost money.

 

While both these beliefs can be true, they don’t have to be, especially if a project is managed right.

 

We’ve identified four simple steps that can drive a project from pricey green fail to high-performance winner, benefitting both owners and occupants. The first two steps fall squarely in the realm of engineering, and the second two fall in the real estate sphere. While these two disciplines have historically been siloed, they have to marry up here to increase the likelihood of an addition to value. When owners tell me they didn’t get more money for high-performance building, one or more of these steps has fallen out.

STEP ONE – IDENTIFY HIGH-PERFORMANCE FEATURES THAT ADD VALUE

 

Step one identifies anything that impacts the energy and water use – above-code insulation, glazing with small “U-values” (thermal transmittance), high-efficiency systems like chillers, boilers, heat pumps and economizers, and low-flow plumbing fixtures.

 

Of course, ‘solar or wind if worked into the project. And yes, urban wind is doable even though it’s not prevalent now because building codes haven’t caught up to allow it. If considering wind, owners must roll it in upfront to properly direct and disperse turbine vibrations.

 

So there are a number of ways to identify these features. The construction drawings (CDs) themselves should spotlight them. If you’re unable to read CDs or the building is a mysterious cobbling, an ASHRAE Level I or II audit can zoom in on these features and systems. And often, utilities will subsidize ASHRAE clipboard audits or even the gold standard, a full-blown energy model.

 

Have efficiency features been identified before? Is the building certified, like LEED or ENERGY STAR? If so, the documentation for those should also point out like neon arrows what’s in the building.

 

And never forget the front-line people – building engineers. They work with systems 24/7, 365 days a year, and they’re the building’s institutional memory. They know what’s what.

 

STEP TWO – QUANTIFY THE BENEFITS

 

This is the place where engineers can literally hand value to real estate professionals by quantifying how these features impact the operating expenses in a building.

 

In real estate finance, a capitalization rate (“cap” rate) is defined as the net operating income (NOI) in a building divided by its value – a sale price or an appraisal. It’s one metric that helps owners and investors get a quick handle on building value. So if a building sold for, say, $1 million and had an NOI of $100,000, its cap rate would equal 10 percent.[i]

 

To drill this down, NOI is the annual income generated from an income-producing property after adding all income and deducting operating expenses (Schmidt, NOI, 2014). Repeat – deducting operating expenses. Part of those operating expenses are utility bills – energy, fuel, water and waste.

 

The delta is the key – the difference between old and new that demonstrates value, whether that’s in thousand BTUs (kBTUs), megawatt hours (MWhs), therms of gas, or tons of biomass. This resource use can (can) add value when it’s compared to older codes or prior building iterations.

 

In new construction, building code-minimum is the worst home or building allowed by law. And while energy codes are good, they don’t spin meters backwards. Any builder renovating an existing building is erasing obsolescence and bringing it, and its resource use, up to current standards. Renovating an older building by default provides a delta between old and new. Those differences in fuel and electric amounts, water, carbon and waste have a dollar value. And in fact, clean-energy finance instruments like PACE loans (Property Assessed Clean Energy) count that delta as income – expenses not incurred because the building supersedes the norm (code minimum).

 

STEP THREE – MARKET THOSE BENEFITS

CoStar is the commercial multiple listing service (MLS), and while there are a lot of similarities between the residential and commercial MLSs, there are some big differences. Here in Colorado, brokers are required by law to update MLS listings within 24 hours to accurately reflect a property. This is more important and more closely monitored in the residential MLS where the potential for harm is greater (people swindled out of homes or life savings). Commercial is where the deep real estate waters churn, and while brokers should update listings, they’re notoriously inaccurate.

 

If I had $10 every time I’ve seen high-performance buildings have their benefits buried in marketing (if they show up at all), I could retire now. I’ve seen gorgeous, green-certified properties with zero mention of their high-performance features. That’s a loss and inexcusable.

 

Unfortunately, the design of CoStar’s listing pages don’t help. The search features for “green fields” (features) and certifications are tucked away on collapsible tabs so listing agents have to know where to look – features like electric vehicle charging stations, solar, and recycling facilities. And the only two certifications in searchable fields are ENERGY STAR and LEED, both predominant in commercial.

 

Also, there’s no standard format for downloadable property flyers, and while better commercial brokerages advertise sustainability in a building, not all do.

 

STEP FOUR – HIGHER VALUATION FOR SALE OR REFI

 

The best laid green plans can be a colossal waste of time and money if a property doesn’t appraise up – by ordering an appraisal to update book value, when a building rolls out of its construction loan into its permanent mortgage (perm), or at sale. While there’s no guarantee that the best data and even comparable buildings (comps) provided to the appraiser will raise building valuation, it can increase the likelihood.

One thing to demand is an appraiser who’s trained and tested in green buildings. The standard operating procedure for a lender converting a construction loan to a perm is to order an appraisal from an AMC – appraisal management company. Owners should insist that AMCs dispatch “competent” appraisers for such an assignment, and the appraisers themselves define this.

 

“Competency may apply to factors such as, but not limited to, an appraiser’s familiarity with

a specific type of property or asset, a market, a geographic area, an intended use, specific laws and

regulations, or an analytical method. If such a factor is necessary for an appraiser to develop credible

assignment results, the appraiser is responsible for having the competency to address that factor or for

following the steps outlined … to satisfy this COMPETENCY RULE” (Appraisal Standards Board, The Appraisal Foundation, 2018, p. 11).

 

Another critical tool for appraisal is the “Commercial Green And Energy Efficient Addendum,” a 12-page document published by the Appraisal Institute. This is where real estate professionals need to reach back to their good friends in the engineering world for designers, LEED Accredited Professionals, savvy owners and developers, and any green pros to identify and quantify green features. It’s also the time to provide solid documentation to the appraiser like energy models, operating expenses or projections compared to code minimum, certifications and documentation.

 

These four steps are simple, yet each of them can be a deep dive. And while there’s never a guarantee a high-performance building appraises up, snapping all these pieces together greatly increases the odds it will.

 

 

 

[i] One way to think of a cap rate is that it’s a return on investment (ROI) on an all-cash transaction based on a single year’s NOI (Schmidt, 2013).

 

References

Appraisal Standards Board, The Appraisal Foundation. (2018). 2018-2019, Uniform Standards of Professional Appraisal Practice (USPAP). Retrieved Jan. 25, 2019, from USPAP.org: http://www.uspap.org/files/assets/basic-html/page-3.html

 

Schmidt, R. (2013, June 3). What You Should Know About The Cap Rate. Retrieved Jan. 24, 2019, from Property Metrics: https://www.propertymetrics.com/blog/2013/06/03/cap-rate/

 

Schmidt, R. (2014, March 5). Understanding Net Operating Income in Commercial Real Estate. Retrieved Jan. 24, 2019, from Property Metrics: https://www.propertymetrics.com/blog/2014/03/05/net-operating-income/

 

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