Greening the Commercial Real Estate Industry

8/14/2019 Greening the Commercial Real Estate Industry

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Greening the Commercial Real Estate Industry

By: Joan Pino

overv i ew

11150 SU N SET H I L LS ROAD, SU ITE 300 | RESTON , VA 20190

500 N WEST SHO RE B OULEVARD , SU ITE 605 | TAM PA , FL 33609

M ID -ATLAN TIC 7 FOX D EN PLAZ A , SU ITE 100 | M CH EN RY M D 21550


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TABLE OF CONTENTS:

CommercialRealEstate&theGreenBuildingMovement

WhatIsBuildingGreen?

GreenBuildingClassificationPrograms&RatingSystems

GreenBuildingPerspectives&BottomLineBenefitso Developerso Ownerso Tenants

GreenLeases

GovernmentIncentives&MandatesforPrivateCommercialBuildings

GreenBuildinginaDownEconomy

SuccessfulCommercialGreenBuildingProjects


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COMMERCIAL REAL ESTATE & THE GREEN BUILDING MOVEMENT

Themuchanticipatedgreenbuildingmovement,whichstartedwithdedicatedgrassroots

environmentalactivists,hasfinallyreachedthecommercialrealestateindustry.Globalcorporationsaswell

asfederal,state,andmunicipalgovernmentsareseeingtheneedforinterventionontheirbehalftogreen

buildingsfor

anumber

of

reasons.

Currently,

buildings

use

immense

amounts

of

key

resources

and

produce

anexcessivequantityofwasteandpollution,whichisdetrimentaltothesurvivalofourplanet.Untilthis

pointintime,theadjustmentinconventionalpracticesrequiredbyprofessionalsintheindustrycoupled

withwidespreadspeculationregardingthegreencostpremiumcurtailedthedevelopmentofsustainable

buildings.Growingnumbersofsuccessfulnewgreenbuildingsandexistingbuildingretrofitssupplyevidence

thatconfirmsfeasibilityofsustainable,costeffectivebuildings.Withrisingenergycosts,existingand

loominggovernmentmandates,andsocialresponsibilityattheforefrontofconcernforcorporations,the

shifttobuildingnewandupdatingexistingbuildingswithsustainabledesignandhighenergyefficiency

standardsisheretostay.

AstudyreleasedbyCoStarGroupin2008statednongreenbuildingsaregoingtobecome

obsolete.1Thisstatementmayseemexaggeratedandimpracticable,yetitisaneverimpendingtruthwhich

thecommercialrealestateindustrymustconsider.Anindustryprofessional,LeeArnold,CEOofColliers

Arnold,saidinarecentinterviewonTampaBaysStudio10daytimetalkshowyouwillnotseecommercial

officebuildingsthatarecompetitiveinthefutureiftheyarenotgreen,itwillimpacttheircapratesand

value.2Althoughsomeleadersintheindustryareembracingthemovement,othershavebeenslowto

realizethatsustainablebuildingsarenotjustatrendyfad.Theyprovideampletangibleandintangible

benefitstoallwhoareinvolvedwiththem,fromdeveloperstotenants.Whetheritsincreasedassetvalue,

significantlydecreasedoperatingcosts,oraboostinemployeeproductivity,everyonehassomethingtogain

fromthetransformationofcommercialrealestateintoasustainableindustry.

1 Miller, Norm, Jay Spivey and Andy Florance. Does Green Pay Off? The Journal of Sustainable Real Estate (8 July 2008). 29 June 2009

2 Commercial Development Turns Green. Studio 10. Gannett Broadcast Station. WTSP-TV, St. Petersburg.


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U.S. Buildings Account For...

14%

30%

4 0%38%39%

72%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Electricity

Consumption

Energy Use CO2

Emissions

Raw Materials

Use

Waste Output Potable Water

Consumption

WHAT IS BUILDING GREEN?

Currently,conventionalbuildingsintheU.S.haveanenormouscarbonfootprint(seetable1)1

whichcanbepreventedandreversedthroughtheconstructionofnewandretrofittingofexistingbuildings

tobeenvironmentallyfriendly,orgreen.2Greenbuildingsaredesigned,constructed,andoperatedto

maximizeoperational

efficiency

and

minimize

environmental

impact.

There

are

several

different

green

elementsthatcanbeincorporatedintoabuildingthatnotonlyreduceenvironmentalimpactbuthavealso

proventobecosteffectiveinvestments.

1 The numbers in the chart are representative of the impact of all buildings in the U.S., including commercial, residential, industrial, and infrastructure

construction, on the U.S. environment.

2 U.S. Green Building Council. 2008. U.S. Green Building Council.

Table 1


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Thewidelymisunderstoodcostofgreenbuildingmaterialscontinuestodeferdevelopmentand

constructionofenvironmentallyfriendlybuildings.Intheearlystagesofthegreenbuildingmovement,it

wasinfactmoreexpensetobuildagreenbuildingratherthanaconventionalbuildingduetotheextracost

ofgreenmaterials.However,asindustryprofessionalshavebecomeinformedonandexperiencedwith

greenbuildingpractices,thegreencostpremiumhasbeguntodisappear.Thiscouldbeattributedsimply

todemandduetoincreasedmarketadaptation,whichstimulatedavailabilityandthusloweredprices.

Comparativecoststudieshavebeenconductedtoshowthatgreenbuildingsdonotrequireanincreasein

capitaloutlay.Forexample,DavisLangdon,aglobalconstructionconsultancyfirm,releasedastudyin2007

thatfound:

Thereisnosignificantdifferenceinaveragecostsforgreenbuildingsascomparedtonon

greenbuildings.Manyprojectteamsarebuildinggreenbuildingswithlittleornoadded

cost,andwithbudgetswellwithinthecostrangeonnongreenbuildingsandsimilar

programs.

Thisparticularstudyalsoexaminedandconsideredtheabilitytoachievegreenbuildingstandardsthrough

lowercoststrategies,3whichisbecomingapopularcosteffectivemeanstocertificationandrecognition.

3 Matthiessen, Lisa Fay and Peter Morris. 2007 The Cost of Green Revisited. Davis Langdon, 2007.


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LEEDCertificationProcessOverview

DecideifLEEDisalignedwithoverall

goalshttp://www.usgbc.org/Displa

yPage.aspx?CMSPageID=1718

RegisterprojectwithUSGBC&

assembleprojectteam

https://www.leedonline.com

Prepareapplication(utlizetemplates/forms

andtools)

Projectadministrator

submitsprojectforreview

Formalapplicationreview

conductedbyGreenBuildingCertification

Institution

Certification

projectteamcaneitheracceptorappealdecision

GREEN BUILDING CLASSIFICATION ROGRAMS & RATING SYSTEMS

Classificationprogramsandratingsystemshavebeencreatedin

ordertoeducateprofessionalsandsupporttheirgreenbuilding

aspirations.At

this

time,

the

two

most

common

classification

systems

are

theU.S.GreenBuildingCouncils(USGBC)LEEDGreenBuildingRating

SystemandtheEnvironmentalProtectionAgencies(EPA)ENERGYSTAR

forBuildingslabel.

USGBCcreatedLEED,whichstandsforLeadershipinEnergyand

EnvironmentalDesign,withthegoalofprovidingacomprehensivesystem

fordesigning,constructing,andoperatinghighperformance,sustainable

buildings.USGBChighlyrecommendsandencouragesimplementationof

LEEDintheearlystagesofaprojecttoavoidcomplicationsandpotential

addedcosts.Tobegintheprocess(seetable2),aprojectteammust

registertheirprojectwithUSGBCwiththeintentofachievingcertification

fortheirproject(registrationis$450formembersoftheUSGBCand$600

fornonmembers)4.Onceregistered,USGBCprovidestheprojectteam

withavarietyoftoolsandresources,includingreferenceguidesand

templatesfordocumentation.Uponcompletionofthegreenbuildingand

projectapplication,USGBCsGreenBuildingCertificationInstitute(GBCI)

awardsoneoffourlevelsofLEEDtorecognizethebuildingsdegreeof

achievementandperformanceinfivekeyareas:sustainablesite

development,watersavings,energyefficiency,materialsselectionand

indoorenvironmentalquality.

4 Process Overview. 2008. Green Building Certificate Institute. 10 July 2009. www.gbci.org

Table 2


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100 base points plus 6 possible Innovation in Design and 4 Regional Priority

points:

Certified:4049Points

Silver:5059Points

Gold:60

79

Points

Platinum:80+Points

Applicable LEED Rating Systems for Commercial Real Estate:

NewConstruction

ExistingBuildings:OperationandMaintenance

CommercialInteriors

o Insupport

of

the

tenant

improvement

market

CoreandShell

Retail

o Addressesthespecificanddistinctiveneedsofretailspaces

Healthcare

o Addressesthespecificneedsofhealthcarefacilities

ThefeeUSGBCchargesforcertificationisdifferentforeveryprojectbecauseitisdeterminedbased

onavariety

of

factors,

such

as

size

and

type

of

building,

credits

selected

to

complete,

level

of

certification,

andUSGBCmembership.Thiscostisacontributortothegreencostpremiumandaddsonaverage$2,000

tothetotalcostofabuilding.5ThecostofLEEDdoesnotincludesoftcostssuchasthetimeandexperience

neededtocompletetherequireddocumentationforcertification.Inanattempttofurtherencouragethe

developmentofgreenbuildings,USGBCmadeLEEDfreeforprojectsthatreceivethehighestlevelof

certification,platinum.

TheoveralltotalcostdifferenceofbuildingtoLEEDstandardsversusconventionallyhasbeena

sourceofdebateamongmanyexecutivesinthecommercialrealestateindustry.Understandably,people

arenotwillingtoincreaseinitialcapitaloutlaywhentheyareseekingshorttermprofitsandmaynotrealize

thekeylongtermbenefitsgreenbuildingsoffer.TheDavisLangdonfirmconductedastudyon600buildings

in19statesinordertoaidprofessionalsinunderstandingthetruecostofLEEDcertifiedbuildingscompared

totraditional,nongreenbuildings.ThestudiesmainfindingswerethatconstructingabuildingtomeetLEED

silverstandardsaddsonaveragelessthana2%premium.Thestudyfurtherstatedtherewasnostatistically

5 FAQ: LEED Green Building Classification System. U.S. Green Building Council. 2008.

'LEED' and related logo is a trademark owned by the U.S.

Green Building Council and is used by permission.


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significantcostdifferencebetweenaLEEDcertified(thelowestlevelofcertification)andanongreen

building.6AlthoughLEEDcertificationisntnecessarytoconstructagreenbuilding,itsuppliesthirdparty

verificationthatabuildingismaximizingoperationalefficiencywhileminimizingenvironmentalimpact,

whichmaybeimportanttoperspectivetenantsandclients.

AsaU.S.federalgovernmentagency,theEPAhasseveralmonetaryandeducationalresources

availabletoutilizeintheadvancementofitsoverallgoaltoprotecthumanhealthandtheenvironment.The

EPAcreatedtheDesignedtoEarntheENERGYSTARandtheENERGYSTARforBuildingslabelprogramsto

guidetheU.S.inmeetingaggressiveenergyperformancetargetsneededtocombatglobalwarmingwhile

boostingbusinessesbottomlines.Theseprogramsprovidequality,freealternativestoUSGBCsLEEDGreen

BuildingRatingSystem.TheENERGYSTARprogramratesbuildingsbycomparingthemtoanationwide

industrydatabasemadeupofanalogousbuildings(typeandsize)andscoringthemonascalefrom1100.

Buildingsmustscoreaminimumof75points(top25%)toqualifyfortheENERGYSTARlabel.

DesignedtoEarnENERGYSTARisaprogramforthedesignofnew,energyefficientbuildingswhich

confirmstheyaremeetingstrictenergyperformancestandards.Althoughthisprogramisonlyfornew

buildings(definedbytheEPAasoneswhichhavenotgeneratedutilitybills),thesestandardscanbemetby

existingbuildingsthroughvariousimprovementsandincorporationofproductsthathaveearnedthe

ENERGYSTAR.ExistingbuildingsthatmakethenecessarychangescanearntheENERGYSTARforbuildings

label.Currently,over1billionsquarefeethavequalifiedfortheENERGYSTAR.7

6 Costing Green: A Comprehensive Cost Database and Budgeting Methodology. Davis Langdon, 2004.

7 Spring 2009 ENERGY STAR Snapshot. Measuring Progress in the Commercial and Industrial Sectors. 2009: 1-2. ENERGY STAR.


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ENERGY STAR for Buildings Space Types Applicable for Commercial

Real Estate:

Offices

Retailstores

Hospitals

Hotels/motels

Supermarkets/grocerystores

Banks/financialinstitutions

Medicaloffice


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GREEN BUILDING PERSPECTIVES & BOTTOM LINE BENEFITS

Thequestionofwhoseresponsibilityitistotransformcommercialrealestateintoasustainable

industryhasbeeneagerlydebatedoverthepastdecade.Whilesomefeelitisataskfordevelopers,others

assertthatifownersandtenantsdemandit,greenbuildingswillbecomereadilyavailableinresponse.

Althoughall

sides

of

the

debate

have

valid

grounds,

the

reality

is

that

the

responsibility

of

greening

the

industryrestsinthehandsofeveryoneinvolved.

Developers

Speakwithanydeveloperandtheywilltellyouthattheirgoalistodelivertotheirclientthebest

buildingaspecifiedbudgetandadefinedtimeframewillallow.Someclaimthatgreenbuildingsarevirtually

impossibletobuildasaresultofthesestrictlimitations,especiallyintougheconomictimeswhenclientsare

watchingeveryextradollaraprojectrequires.Whilethisjustificationmayhavebeenrelevantinthepast,

whengreenconstructionmaterialshadapremiumduetothelackofknowledgeandavailabilityinthe

industry,itisnolongergermane.Nowthatthecostsofgreenbuildingmaterialsarebecomingcompetitive

withconventionalmaterials,developerswhopreviouslydismissedgreenbuildingsshouldtakeasecond

look.Greenbuildingshavebeensustainablydesignedandconstructedwithinroughlythesamebudgetsand

timeframesasconventionalbuildingprojectsacrossthecountry.Decreasedmaterialcostscoupledwith

costsensitive,strategicchoicesofintegratedsustainabledesignelementshavemadegreenbuildingsa

superiorinvestment.

Althoughdevelopers

must

make

an

initial

investment

to

learn

green

building

techniques,

they

can

gainafairlycompleteunderstandingfromcompletingasingleproject.Itishighlyrecommendedtoseek

assistancefromagreenbuildingconsultantorhavesomeoneknowledgeableaboutgreenbuildingonthe

projectteam.Afterthisinitialobstacleisaccomplished,greenbuildingpracticeshaveproventobeeasily

adaptableandasstraightforwardasconventionalapproaches.Theinvestmentineducationcanbequickly

recoveredthroughprofitsmadefromanincreaseinthenumberofprojectsacquiredsimplybecauseof

greenbuildingknowledge.Studieshavealsoshownawillingnessofcompaniestopaymoreforgreenspace.

A2007studyconductedbytheJonesLangLaSallefirmsurveyedcorporatecommercialbuyersdemandfor

green

space

and

found

that

77%

would

pay

more

for

green

office

space.

8

Additionally,

a

2008

CoStar

Group

studyfoundbuildingsthatearnedtheENERGYSTARsellonaveragefor$61persquarefootmorethan

comparablenongreenbuildings.9

8 This survey was preformed again in 2008 to update for changes in the economy. The results show that 40% of corporate real estate executives will pay

up to 10% more to rent or occupy a sustainable building.



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Developerswhohavetakenthetimetoeducatethemselvesingreenbuildingtechniquesand

practicesareproudoftheirmodernapproachtodesignandnoteworthysuccess.Companiesare

increasinglyseekingoutdeveloperswhoareknowledgeableaboutgreenbuildingandcanoffera

comprehensiveservicethatwillensuretheirbuildingmeetshighenvironmentalandenergyefficiency

performancestandards.Greenbuildingsofferadegreeofqualitysimplyunattainablebynongreen,

conventionalbuildingsandthisfactisbecomingmoreapparentasthenumberofgreenbuildingsgrows.Ina

recentinterviewwithMHN,MarnieAbramson,principalofTheTowerCompanies(arealestate

developmentcompanybasedinRockville,MD),said

Therearenomoreexcusesfordeveloperstoignoresustainabledesign.Iftheydo,their

propertieswillbedingeddowntheline.Youjustcantcompeteanymorewithoutagreenand

sustainablestrategy.10

TheTowerCompaniesisanexampleofoneofmanytopcommercialrealestatedevelopmentcompanies

thatholdthisview.Asemphasisoncorporateresponsibilitycontinuestoincreaseandgovernmentsacross

thecountrymandategreenbuildings,theflighttofirmsfamiliarwithsustainabledevelopmentwill

undoubtedlysoar.

Owners

Intheslowyetnecessaryprocessofconstructingandconvertingbuildingsintoenvironmentally

conscious,

sustainable

operations,

owners

net

leasing

their

buildings

may

feel

as

though

they

are

incurring

thebulkofthecostwhiletheirtenantsreaptheevidentfinancialbenefits.Althoughthisistruetosome

extent,ownersofnetleasedpropertieshavetheopportunitytorealizekeybenefitswhichmakegreening

theirbuildingsfinanciallyandeconomicallysensible.Ownersthatmakethedecisiontogreentheir

propertiessoonerratherthanlaterhavethepotentialtobenefitfromsomegovernmentincentivesanda

clearcompetitiveadvantage,bothofwhichwillinevitablyslowlydissolveasmorebuildingsaregreenedand

exceedinglyfeasiblegovernmentmandatesareimplemented.

Tenantsacrossthenationarebeginningtodemandthegreeningofspacetheyleaseduetothe

economic,environmentalandhumanhealthbenefitsgreenbuildingsoffer.Asurveyoftenantsconductedin

2008byCoreNetGlobalandJonesLangLaSallefoundthat76%considerenergy/sustainabilityamajorortie

10 Russo, Mike. Top 10 Rules for Green Success. Multi-Housing News Online. (5 May 2009). 20 July 2009


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breakerfactorintheirlocationdecisions.11ForwardthinkingtopU.S.companies(andexcellenttenants)

whichhavestartedtooperateoutofUSGBCLEEDcertifiedorENERGYSTARlabeledbuildingsinclude:

Walgreens PizzaFusion Starbucks

REI PNCBank Subway

ChipotleMexicanGrill BestBuy McDonalds

WholeFoods OfficeDepot Staples

Commercialrealestateownersofgreenbuildingscangainacompetitiveadvantagebysecuring

andretaininghighquality,desiredtenants.Recentstudiesshowthatgreenbuildingsgenerallyhavehigher

occupancyratesandrents.Forexample,a2008CoStarGroupstudy(seetable3)12

foundthatLEEDcertified

buildingshavea4.1%higheroccupancyrateandrentfor$11.33persquarefootmorethanconventional

buildings.13

Green Office Buildings v. Non-Green Office Buildings

Building Type Occupancy Rate Rental Rate ($/ft)

ENERGY STAR Labeled 91.50% $30.55

Non-ENERGY STAR 87.90% $28.15

LEED Certified 92% $42.38

Non-LEED 87.90% $31.05

Althoughtenantdemandservesasthepivotalreasonforownerstogreentheirproperties,

increasedasset

value

and

risk

aversion

are

other

distinct

advantages

of

green

buildings.

Using

the

income

approachtoassetvaluation,assetvalue=NOI/capitalizationrate,theNOIearnedbytenantsisanimportant

factorincalculatingthevalueofabuilding.Netleasetenantsoccupyingenergyefficientbuildingshave

higherNOIsduetoavarietyoffactorssuchasincreasesinproductivityandsignificantsavingsonenergy

costs.Buildingsupgradedwithefficientsystemstypicallysavebetween10and2opercentonoperating

expenses.14

ThissavingsisdirectlyreflectedinNOIsinceNOI=revenuecosts.Forexample,alimitedservice

restaurantoperatingoutofabuildingthatachievesa10%reductioninenergycostscanincreasenetprofit

11 The Green Phoenix: A Flight to Quality in Challenging Times. Perspectives on Sustainability. April 2009. Jones Lang LaSalle. 22 July 2009

.

12 This study compared all USA based ENERGY STAR rated office buildings (many of which are LEED certified) to a large sample of non-ENERGY

STAR rated office buildings.


14 Commercial Real Estate: Looking For Energy Solutions. U.S. Environmental Protection Agency. 24 July 2009

.

Table 3


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marginsbyasmuchas4%.15

Therefore,ownersofgreennetleasedbuildingscanbenefitfromincreased

assetvaluethroughtenantsattaininghigherNOIsviaenergyefficiency.

Ownersofnetleasedpropertiesareessentiallylookingforalowrisk,fixedreturnsimilartothatof

acertificateofdepositorgovernmentbond.Fundamentally,greenbuildingsaremoresecureinvestments

thanconventionalbuildingsbecausetheyarelesssusceptibletomarketvolatility,acentralcomponentof

riskininvesting.Thiscanbedistinguishedfromstudieswhichhaveconfirmedtheirhigherrental,

occupancy,andretentionrates.Theyarealsorecognizedforexcellenceinquality,whichmitigatesseveral

healthrisksassociatedwithconventionalbuildingsheldtolowerstandardsofindoorenvironmentalair

quality.Forexample,SickBuildingSyndromehasbeenthesourceofanumberoflawsuitsagainst

unsuspectingbuildingownersoverthepastseveralyears.16

SickBuildingSyndromecanbeavoidedingreen

buildingsbecausetheyadheretostrictindoorairqualitystandards.

Commercialrealestateinvestorsdebatingwhetherbuyinggreenbuildingsorretrofittingtheir

currentpropertieswillpayoffshouldregardtheundertakingasawaytoensurecompetitiveassetsinthe

future.AsmorebuildingsconstructedandretrofittedtostandardssuchasLEEDandENERGYSTARproffer

competitiverents,tenantswillcertainlychoosetooccupythemovernongreenpeerbuildings.Allthings

considered,greenbuildingsoptimizelifecycleeconomicperformance,17

establishingthemashighquality

realestateinvestments.

Tenants

Greenbuildingsofferanidealspaceforalltenantstooccupy.Occupantsofgreenbuildingsareable

toenjoymanyadvantagesunattainableinnongreenbuildingssuchas:

Reducedoperatingcosts

Improvedworkingconditionsandindoorairquality(IAQ)

o Reduceabsenteeism

o Boostproductivity

o Increaseworkersatisfaction

o Higheremployeeretention

Enhancedpublicimage

Governmentfinancialincentives

15 ENERGY STAR for Retail. Environmental Protection Agency. 24 July 2009 .

16 Hochman, Bonnie Y. and Laurence S. Kirsch. Protecting Occupants and Owners From Indoor Air Problems. Building Operating Management. Oct.

1990: 42.

17 U.S. Green Building Council http://www.usgbc.org


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Theseadvantageshavebeenconfirmedbyoccupantsofgreenbuildingsacrossthecountry.Greenbuildings

achievethesebenefitsthroughsustainabledesignandefficientsystemswhichsaveenergyandcreatea

healthierspacetooccupy.

StudieshaveshownthatIAQdirectlyrelatestoemployeeproductivity,whichaffectsbusinesses

bottomlines.AccordingtotheEPA,buildingrelatedillnessesaccountfor$60billioninlostproductivityin

theU.S.annually.18

AgroundbreakingstudyconductedbytheRockyMountainInstitutequantifiedindoor

airqualitybenefitsofgreenbuildingsanddemonstratedthatthebenefitsofgreenbuildingsarefarmore

thanjustenergycostsavings.Intheeightgreenbuildings(retrofittedornew)examinedinthestudy,

improvedairqualityfosteredimprovementsinproductivityofupto20%andreducedabsenteeismbyupto

25%.19

Thesenumberscouldpotentiallycontributetoreductionsinotherindirectcostssuchashealth

insurancepremiums,offeringtenantsseveralcompellingreasonstooccupygreenbuildings.

Researchhasshownastrongpositivecorrelationbetweentimeandmoneyspentbyconsumersin

storeswithincreasedlevelsofnaturallight,akeydesignelementinalmostallgreenbuildings.Astudy

conductedbytheCaliforniaEnergyCommissiononananonymousretailerconfirmedthiscorrelation.The

retailerexperiencedincreasesinsalesofupto40%instoresthathadnaturallighting.20

Thisisjustone

exampleofstrongpositiveconsumerresponsetogreenbuildings.Consumersgenerallyexpectcompanies

toupholdhighenvironmentalstandardsaspartoftheirsocialresponsibility.Onesurveyfoundthat75%of

consumersthinkitisimportantforcompaniestoprovideinformationonenvironmentalimpactand73%

thinkitisimportantforcompaniestohaveagoodenvironmentaltrackrecord.21

Inviewofthis,companies

thatchoosetooperateoutofgreenbuildingsenhancetheirpublicimageinamannerexceptionally

appealingtoconsumers,demonstratingyetanotheradvantageenjoyedbygreenbuildingtenants.

Differentleasestructuresfurtherenhancetenantbenefitsgarneredthroughoccupancyofgreen

buildings.Whether

tenants

are

responsible

for

taxes,

maintenance,

and/or

insurance

costs

of

their

buildings

willlargelyaffecttheirabilitytoacquirekeyquantifiablefinancialbenefits.Forinstance,NNNleasetenants

occupyinggreenbuildingsacquireasignificantadvantageovercompetitorsthroughdecreasedutilitycosts;

asavingswhichdirectlyincreasestheirprofitsandprovidesprotectionfromunstableenergyprices.With

energycostsincreasingatarateof68%peryear,22

tenantsneedtoseriouslyevaluatedifferencesinenergy

efficiencyamongbuildingstheyoccupy.TheNewBuildingsInstituteconductedastudyonenergy

performanceofgreenbuildingsandfoundthataverageenergyuseofLEEDcertifiedbuildingsis2530%

betterthanthenationalaverage.23

Furthermore,tenantsofgreenbuildingswhoareresponsibleforpaying

realestatetaxesareeligibleforfinancialincentivesofferedbysomemunicipalgovernments.

18 Fisk, William J. Health and Productivity Gains from Better Indoor Environments, The Role of Emerging Energy-Efficient Technology in Promoting

Workplace Productivity and Health. Lawrence Berkeley National Laboratory, Feb. 2002.

19 Browning, William D. and Joseph J. Romm. Greening the Building and the Bottom Line. Rocky Mountain Institute, Dec. 1994.

20 Daylight and Retail Sales. California Energy Commission, Oct. 2003.

21 Boston Consulting Group Global Green Consumer Survey, 2008; BCG Analysis.

22 Conserve Solutions for Sustainability. National Restaurant Association. 2009. 28 July 2009 .

23 Turner, Cathy and Mark Frankel. Energy Performance of LEED for New Construction Buildings. New Buildings Institute. 4 March 2008.


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GREEN LEASES

Acquisitionsoftriplenetleasedbuildingshavebecomeextremelypopularaspassiveinvestors

lookingforbondlikereturnsincommercialrealestatecontinuetoenterthemarket.InaNNNlease,several

oftheidentifiablebenefitsofgreenbuildingssuchaslowerutilitycostsandimprovedoccupantproductivity

flowdirectly

to

the

tenants

bottom

line.

Many

owners

of

NNN

leased

buildings,

content

with

their

existing

nongreeninvestmentsandunconvincedbyotherbenefits,consequentlyfindlittleincentivetoincur

greeningcostsfromwhichtheydonotdirectlyprofit.Greenleaseshavebeensuggestedasaremedyfor

thevalidapprehensionofownersregardingthedisproportionatefinancialburdeningreeningtheir

buildings.

Althoughgreenleaseisafairlynewtermincommercialrealestate,itissomewhatcomparableto

theconceptoftenantimprovement,1arecognizednotionintheindustry.Greenleasesarestructuredto

createincentivesandflexibilityforbothownersandtenantsingreeningcommercialbuildings.2Theyallow

ownersto

pass

on

some

or

all

of

the

costs

incurred

in

retrofitting

their

properties

to

achieve

green

building

standardssuchasLEEDtotenants,whichovercomestheaforementionedownerpredicament.Tenantshave

readilyacceptedgreenleasesasameanstogreeningbuildingstheyoccupybecauseoftheirconsiderable

savingsinoperatingcostsandotheradvantageousbenefits.Asforowners,greenleasesenablethemto

increasethevalueoftheirinvestmentthroughsustainableupgradespartiallyorfullypaidforbytheir

tenants.Inaddition,greenleasesaddressseveralspecificgreenmeasuresofwhichtraditionalleases

commonlypresentbarriers.Forexample,mosttraditionalleasesrequiretenantstouseonlynewmaterials

intenantimprovementsorinitialfitouts.3Thiswouldpossiblyexcludetheuseofrecycledmaterials,

presentinganeedlessbarriertotenantintegrationofsustainablematerials.

PassiveinvestorsinNNNleasedbuildingsshouldrecognizegreenleasesasasavvyapproachto

greeningtheirportfolios.Theyeliminatetheneedforextensiveownercapitaloutlayandensuretenant

satisfaction.Giventhatleasesoftenrepresentlongtermagreements,ownersandtenantswhooptfor

greenleaseswillbenefitfromresiliencyduringthedevelopmentofanticipatedgreenbuildinggovernment

mandatesinthefuture.

Aresourcethatcouldbeextremelyhelpfultoownersandtenantslookingtomakegreenupgrades

toexistingbuildingsistheENERGYSTARBuildingUpgradeValueCalculator.Thisfreetoolprovidedbythe

EPAallowsuserstoanalyzethefinancialvalueofcapitalinvestmentsinenergyefficiencymeasuresin

commercialreal

estate.

Even

though

it

was

originally

developed

for

office

properties,

the

majority

of

the

1 Changes made to a commercial or industrial property by its owner to accommodate the needs of a tenant. Who bears what portion of TI costs is

negotiated between the lesser and the lessee and is usually documented in the lease agreement.

2 Brooks, Michael. Green Leases and Green Buildings. 1 May 2008.

3 Brooks, Michael. Green Leases and Green Buildings. 1 May 2008.


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functionalityisapplicabletoallbuildingtypes.Belowisanexampleofusingthetooltoevaluateenergy

efficientupgradesinahypotheticalcasualdiningrestaurant:4

Property Information

Property Name Casual Dining Restaurant

Square Footage 6,500 +/-

Annual Utility Bill $63,600

Energy Project Information

Energy Efficiency Measure Cost Annual Savings

Demand Defrost Controller $500 $150

Tankless Water Heater $1,500 $1,700

Commercial Kitchens Ventilation System $3,000 $4,000

Replace Pre-Rinse Spray Valve with Energy Efficient Low

Flow Pre-Rinse Spray Valve

$50 $500

Replace Incandescent Blubs with CFLs $50 $400

Sub Total $5,100 $6,750

Additional Annual Savings for Labor and Supplies

Rebates (if any)

Financial Information

Analysis Term (years) 10 years

Discount Rate 8%

Capitalization Rate 8%

Financial Summary

Net Investment Cost $5,100

Net Investment Cost per SF $0.78

Simple Payback Period (SPP) .84 years

Return on Investment (ROI) 118%

Net Present Value (NPV) $35,425

Internal Rate of Return (IRR) 118%

Potential Impact on Net Operating Income (NOI)* $6,039

Potential Impact on Asset Value* $75,493

*Specifictoofficepropertiesandthereforemaynotberelevanttothisexample

4 Everything the tool is capable of calculating (such as loan financing) is not shown in the example. The tool can be accessed at:

http://www.energystar.gov/index.cfm?c=comm_real_estate.building_upgrade_value_calculator


18/27

17

GOVERNMENT INCENTIVES AND MANDATES FOR PRIVATE

COMMERCIAL BUILDINGS

Ultimately,governmentmandateswillendtheongoingdebateovertheoptiontodevelop,own,

and/oroccupy

green

buildings.

Although

the

federal

government

does

not

currently

have

green

building

mandatesforprivatecommercialbuildings,severallocalgovernmentsacrosstheU.Sdo,including:

AlbuquerqueCity,NM AlexandriaCity,VA AnnapolisCity,MD BabylonCity,NY BaltimoreCity,MD BatteryParkVillage/Town,NY BostonCity,MA BrisbaneVillage/Town,CA CalabasasVillage/Town,CA ChambleeCity,GA CutlerBayVillage/Town,FL DallasCity,TX DoravilleCity,GA FayettevilleCity,AR GaithersburgCity,MD HealdsburgCity,CA

LakewoodCity,

OH

Long

Beach

City,

CA

LosAngelesCity,CA MontereyCity,CA MontgomeryCo,MD MountainVillage/Town,CO NapaCity,CA NormalCity,IL PaloAltoCity,CA PasadenaCity,CA PleasantonCity,CA RohnertParkVillage/Town,CA SanAntonioCity,TX SanFranciscoCity,CA SanJoseCity,CA SanRafaelCity,CA SantaCruzCity,CA SantaRosaCity,CA SonomaCity,CA StocktonCity,CA TaosVillage/Town,NM WashingtonCity,DC WestHollywoodCity,CA WindsorVillage/Town,CA

Alloftheabovecity,townandcountygovernmentsrequireprivatecommercialbuildingstomeet

specifiedgreenbuildingguidelinesorachievegreenbuildingcertification,eitherthroughUSGBCoranother

approvedstandard.5Manystates,citiesandlocalgovernmentsthatdonotyethavegreenbuilding

mandatesforprivatecommercialbuildingsofferincentiveswhichcanonlybereceivedthroughgreen

buildingcertification.Theseincentivesincludetaxabatement/credits,bonusdensity,expeditedpermitting,

grants,technicalassistance,permit/zonefeereduction/waiver,andrebates.

5 The requirements for private commercial buildings differ based on square footage and whether it is new construction. For example, the Taos

Village/Town, NM ordinance requires all new private commercial buildings greater than 6,000 sq. ft. to achieve LEED certification, whereas the green

building mandate in Baltimore, MD requires private commercial buildings of 10,000 sq. ft. or greater to a achieve a minimum of LEED Silver.


19/27

18

Virginia Incentive Programs:

State

HB239(July1st,2008)

o

Declaredenergyefficientbuildings(definedasmeetingtheperformancestandardsof

LEED,EnergyStar,GreenGlobesorEarthCraft)tobeaseparateclassoftaxationfrom

otherrealproperty;Providesforlocalitiestolevyequalorlessertaxesonenergyefficient

buildings

Arlington County

GreenBuildingDensityInitiativePolicy(March14th,2009)

o Allowscommercialprojectsandprivatedevelopmentstodevelopsitesathigherdensity

levels

.05FARforLEEDCertified,.15FARforLEEDSilver,.35FARforLEEDGold,and.45

FARforLEEDPlatinum

Thereisalsoaheightbonusdensityofupto3stories

o Allprojectsmustcontributetoagreenbuildingfund6

Thecontribution($0.045persq.ft.GFA)isrefundedtoprojectsthatearnLEED

Alexandria City

GreenBuilding

Policy

(April

18th,2009)

o RequiresallnewcommercialbuildingstoachieveaminimumofLEEDSilvercertification

6 The money collected goes toward county-wide education and outreach activities.


20/27

19

Florida Incentive Programs:

Hillsborough County

UpdatetoDevelopmentReviewProceduresManual(January1st,2008)

o

ExpeditesplanreviewsforprojectswithacompletedscorecardfromeitherUSGBCor

FGBC

Jacksonville City

JacksonvilleSustainableBuildingProgram

o OffersincentivestonewcommercialbuildingsthatachieveLEEDcertificationorother

recognizedgreenbuildingclassificationsystem

Fasttrackdevelopmentreview

Designation

Refundofcertificationexpenses

Miami Beach City

GreenBuildingOrdinance(April22,2009)

o Establishedincentivesforprivatecommercialgreenbuildingprojects

Expeditedplanreviewandbuildinginspections

Developerscanreceivearefundoftheapplicationandreviewfeesfor

certification

Designationandacknowledgementofachievementoncitywebsite

Miami Lakes Village/Town

TownofMiamiLakesGreenBuildingProgram(July10th,2008)

o Permitfeereductionforcommercialapplicantsthatproveminimumcompliancewith

LEEDstandards

Sarasota County

Resolution#2006174

o Fasttrackbuildingpermitincentiveand50%reductioninthecostofbuildingpermitfees

forprivatecontractorsusingLEED


21/27

20

Tampa City

CityofTampaSustainabilityOrdinance(June26th,2008)

o Offersdevelopersofcommercialbuildingsa2080%rebateonbuildingpermitfees,

dependinguponthelevelofLEEDcertificationearnedbythebuilding

Incentivesand

mandates

for

private

commercial

buildings

in

other

parts

of

the

county

have

thus

far

beenmoreaggressivethanthoseinVirginiaandFlorida.MunicipalitiesinCaliforniacurrentlyhavethemost

mandatesforprivatecommercialgreenbuildings.Thesemunicipalitiesfosteredthegrowthofgreen

buildingsbyintroducingandencouragingdevelopmentwithincentives.Theincentivesweresubsequently

replacedwithmandates,apatternthatwillundeniablymaterializeinotherstates.Mandateshavealso

continuedtobecomemoreprogressive.Forexample,theSanFranciscoBuildingCode,establishedinAugust

2008,currentlyrequiresnewcommercialbuildingsover5,000sq.ft.toachievegreenbuildingcertification

ordocumentationofcompliancewithgreenbuildingstandards.Italsooutlinesfuturemandates,

designatingLEED

Gold

or

equivalent

as

the

minimum

certification

level

achieved

by

2012.

GreenbuildinglawmaysoonbreaknewgroundinPortland,Oregonwithaproposedgreen

buildingprogram.Theproposedprogram,dubbedthefeebateprogram,wouldallowthecitytoassessa

feeagainstdeveloperswhoconstructbuildingsthatonlymeetstatebuildingcode.Thefeewouldbewaived

fordeveloperswhoconstructbuildingsthatmeetaminimumofLEEDSilver.Furthermore,developersof

buildingsthatmeetLEEDGoldorPlatinumstandardsreceiverebates.

Federal Incentive Programs:

TheEnergyPolicyActof2005 CommercialBuildingTaxDeduction

o Establishedataxdeductionforexpensesrelatedtothedesignandinstallationofenergy

efficientbuildingsystems

Buildingownersortenantsareeligibleforataxdeductionofupto$1.80persq.

ft.fortheinstallationofsystemsthatreducetotalbuildingenergycostsby50%

ormorecomparedtoareferencebuilding

Partialdeductions

of

$0.60

per

sq.

ft.

are

available

for

improvements

to

one

of

threebuildingsystemsthatreducetotalheating,cooling,ventilation,water

heatingandinteriorlightingenergyusebyspecifiedpercentages

Thedeductionsareonlyavailabletobuildingscoveredbythescopeofthe

ASHRAEStandard90.12001andbuildingsorsystemsplacedinservicefrom

January1st,2006throughDecember31st,2013


22/27

21

Proposed Federal Legislation:

TheAmericanCleanEnergyandSecurityActof2009(H.R.2454) Section201

o Requiresnewconstructionandrenovationprojectstomeetstringentnationalenergy

efficiencystandardswhichexceedtheexistingenergycode(ASHRAE90.1)by30%

immediatelyand50%by2015

o Theproposedactprovidesfor5%increasesevery3yearsthrough2030,resultinginan

eventual75%reductionovercurrentstandards

DepartmentofEnergycanincreaseordecreasereductiontargetsbasedon

feasibility

Stateandlocalgovernmentcodesmustmeetorexceedtargetsestablishedby

theact

Thebill

passed

in

the

U.S.

House

of

Representatives

on

June

26th,

2009

and

is

expected

to

reach

thesenatebymidSeptember


23/27

22

GREEN BUILDING IN A DOWN ECONOMY

Despitethecurrentdowneconomy,theoverallgreenbuildingmovementcontinuestoexperience

growth.Onecandrawthisconclusionbysimplylookingatthenumbers.Forexample,Greenbuild,the

worldslargest

conference

and

expo

dedicated

to

green

building,

had

more

than

28,000

attendees

in

2008,

whichisanincreaseof25%fromGreenbuild2007.Moreover,inAprilof2003,amere84buildingshad

receivedLEEDcertification.ThemostrecentnumberofcertifiedprojectsreleasedbytheUSGBCwas2,878

inMayof2009.Thisnumberwillonlycontinuetogrow,evidencedbythe21,252projectscurrently

registeredseekingLEEDcertification.Thesustainedgrowthinthissectormaybebafflingtothosewho

believeinstickingtowhattheyknowduringhardeconomictimes;however,departurefromconventional

buildingsmaybeexactlywhatisneeded.

Greenbuildingspavethewayforbusinessestoprosperthroughatriplebottomlineencompassing

financial,socialandenvironmentalgoals,whichhasprovenanendearingstrategyduringhardeconomic

times.Someindustryprofessionalshaverecognizedthiseconomicclimateastheperfectopportunityto

greenbusinessandusetriplebottomlinebenefitstosavemoneyandgainacompetitiveadvantageas

otheroptionsarelessobvious.ArecentstudyreleasedbyA.TKearneyfoundthatcompaniesfocusedon

sustainabilityoutperformedindustryaveragesby15%duringthecurrentfinancialcrisis.7Thegreenbuilding

movementwillcontinuetogrowasmorecompaniesrecognizethatasmallupfrontinvestmentingreen

canassistinretainingvalueandprovideprotectionfromavolatilemarket.

7 Green Winners: The Performance of Sustainability-focused Companies in the Financial Crisis. A.T. Kearney, 2009.


24/27

23

SUCCESSFUL COMMERCIAL GREEN BUILDING PROJECTS

PNC Bank LEED Certified

Currently,PNCFinancialServicesGroup,Inc.hasmorecertifiedgreenbuildingsthananyother

companyonearth.8AsofJune2009,thecompanyhadachievedUSGBCLEEDcertificationfor66buildings.

WaysLEEDcertificationhasbenefitedPNCsbottomline:

AccordingtoGarySaulson,PNCscorporatereal

estatedirector,PNChasbeenabletobuildgreen

branchesfor$2.6million,whichisapproximately

$100,000lessthansomecompetitorsare

spendingoncomparablenongreenbranches.9

o Morethan50%ofeachbranchismade

fromrecycledmaterials,includingflooring,

wallcoverings,andcarpet.Manyoftheserecycledmaterialscostlessthannonrecycled

products.

EnergyusageinPNCsgreenbranchesisreducedby50%ormorecomparedtonongreenbranches

duetohighefficiencysystemsandinsulationandmaximumuseofnatural

light(whichhasalsobeenassociatedwithpositiveconsumerresponse).

Waterusageingreenbranchesisreducedby6,200gallonsayear.

Enhancedpublicimage

o Consumers want to do business with socially responsible

companies and PNC is leading the way in the banking

industry.

Neil Hall, PNCs head of retail distribution

Our commitment to significantly reduce our impact on the environment has enabled us to lower

costs, increase efficiency and productivity as well as enhance the communities where our customerand employees live, work and play

-Gary Saulson

8 Patrick McMahon, PNC News Release

9 Roth, Mark. The Thinkers: PNCs Saulson finds its easy being green. Pittsburgh Post-Gazette. 8/25/08.

Photos byPNC Green Branch


25/27

24

Walgreens LEED Registered

Walgreens,thelargestdrugstorechainintheU.S.,openedtheirfirst(andthefirst)environmentally

friendlydrugstoreonJune24th,2009inMiraMesa,California.IthasregisteredwiththeUSGBCandexpects

toreceiveLEEDcertificationwithin4to6months.ThecompanyhasplanstoopenthreemoreLEEDcertified

locationsby

the

end

of

2009,

oneofwhichislocatedin

Chicago.In2007,Walgreens

begantakingasustainable

approachtoreducetheir

carbonfootprintandsave

moneybyinstallingsolarpanel

systemsatselectlocations.10

Theperusal

of

green

building

certificationfurthersolidifies

thecompanysseriouscommitmenttopeople,theenvironment,andachievingeconomicadvancement

throughefficientmeasures.

AsthegreenMiraMesaWalgreenslocationjustopenedafewweeksago,specificquantitativefinancial

benefitsachievedhaveyettoberevealed.Thecompanyhasstatedthatthestoremanagedtoreduce

lightingrelatedenergyuseby50%throughtheuseofskylights,solartubes,LEDlightsandhighlyefficient

coolersand

freezers.

The

buildings

white

roof,

11

another

green

feature,

will

significantly

reduce

cooling

relatedenergyuse.Furthermore,alllandscapingwasdonewithnativeplants,whichwillrequireno

wateringwhatsoever.Theenvironmentallyfriendlybuildinghasalreadygeneratedagreatdealoffree

publicityforthecompany,yetanotherreasonWalgreensmadeanexcellentdecisiontobuildtoLEED

standards.

Inthecompanys2008socialresponsibilityreport,financialsavingsrealizedthroughalreadyinplace

environmentallyfriendlymeasureswerediscussed.Forexample,thecompanysaved$5.7millioninenergy

costsbyusinghighefficiencyfluorescentlightinginover6,000stores.Thecompanysgreenbuildingplans

werealsobrieflytoucheduponandwillhopefullybeevaluatedfrombothafinancialandenvironmental

standpointinthe2009report.

10 63 locations have solar panel systems

11 Studies show that white roofs can reduce air conditioning costs by 20% or more

Photo by Walgreens LEED-registered Walgr eens in Mira Mesa, CA


26/27


27/27

Pizza Hut Energy Star Labeled

EightPizzaHutlocationsinGainesville,FloridahaveearnedtheENERGYSTARlabelfor

Buildingsthroughtheinstallationofeconomicalandefficientsystems.

Property Information

Size +/- 16,000 sf

Annual Savings from Upgrades $2,820

Payback Period 0 Months

Together,theeightlocationsaresavingmorethan$20,000annually.

Someupgrades

to

the

stores

include:

T10lampsreplacedT12fluorescentlamps

LEDexitsigns

o Servicelifeis100,000hours;incandescentexitsignsservicelifeis1,0003,000hours.LED

exitsignsalsorequirefarlessmaintenancecomparedtoincandescentones.

Somelowcost/nocostbuildingtuneups

calibratedthermostat

replacedcoils

and

filters

reducedhotwatersettings

scheduledamaintenanceprogram

Allofthelightingretrofitswerefinancedinterestfreeonmonthlyutilitybillpaymentsthroughcollaboration

withGainesvilleRegionalUtilities(GRU).Theretrofitswereessentiallyfreeofcost,sincetheenergysavings

weregreaterthanthepayments.

This ENERGY STAR partnership promotes a market-based approach to energy conservation and

environmental protection that allows businesses to be more competitive and more apt to change

the way industry views environmental awareness from a burden to a competitive point of

difference.

-Bill Stasiewicz, Pizza Hut of Gainesville Managing Partner

Documents

Greening the Commercial Real Estate Industry