SHOW ME THE GREEN

Revealing value in green buildings

Vann Joines | U.S. Green Building Council

ROADMAP

 Energy Savings ≠ Value  Current Valuation Techniques

  10yr DCF Analysis

 Green Office Value Studies   Fuerst | Pogue | Kok

 How to Convince Lenders   Standardization & Data

 How to Convince Owners   Tenants, Financing, Data

 Opportunities?   Retrofits

ENERGY SAVINGS = INCREASED VALUE?

 Green Buildings: LEED and Energy Star  Savings in Utilities = More Valuable Buildings  BUT many Owners do not pay the Energy Bills

THE 7 TRIBES OF REAL ESTATE

  Single Family Homes   1 to 4 Units

  Small C& I   Mom and Pop / Owner-User   May not have an income

approach   Typically under $2MM

  Medium C & I   Larger Owner-User   Part Owner – User   Local Investor   $2MM to $10MM

  Large C & I   Multi Tenant Leased

Investment   Over $10MM   Owner Individual to REIT

  Multi-Family   Medium Large Investment

Grade Apts   Condos   These are where a new

approach needs to be taken   Specialty

  Gas Station   Fast Food   Hotel/Motel   Theatre   Data Center

  MUSH   Municipality   University   Schools   Hospitals

(Finlay, “The Retrofit Triangle.” 2011)

THE TEAM TO CONVINCE

 Everyone needs to agree in Increased Value  Not just a snapshot, but long-term  Tricky Problem

(Finlay, “The Retrofit Triangle.” 2011)

HOW IS MARKET VALUE DETERMINED?

  Income / Sales Comps / Cost  MF,C&I: 10 Year Discounted Cash Flow Analysis

CASH FLOWS

Now Year 1 2 3 4 5 6 7 8 9 10

✚

Discounted % depending on Risk

WHERE IS GREEN VALUE?

  INCOME   Higher Market Rent

Assumption

 Vacancy   Absorption Time   Stabilized Vacancy   Tenant Retention or

rollover percentage   Lag Vacancy   Tenant Improvements

 Expenses   Utilities   Repairs and Maintenance   Management   Marketing Promotions   Insurance   Property taxes (PACE)

 RISK   Discount Rate   Terminal Cap Rate

(Finlay, “The Green 14.” 2011)

INCOME: US OFFICE STUDIES HIGHER RENTS – (FUERST AND MCALLISER)

  2008   +4% Energy Star   +5% LEED

  2009   +6% Energy Star   +6% LEED

ANNUAL INCOME HIGHER RENTS – (POGUE, CBRE 2011)

ANNUAL INCOME HIGHER OCCUPANCY – (POGUE, 2011)

Survey Set +3.16%

LEED +3.14%

ANNUAL INCOME HIGHER RENTS – YES! EKQ 2010

  Market Rents   +3.3% for Energy Star   +5.2% for LEED

 Occupancy Rate +11%

  Effective Rents   +9% for LEED   +7% Rated

(Eichholtz, Kok, Quigley, “Doing Well by Doing Good?” 2010)

RISK + INCOME INCREASED VALUE AT SALE – YES!

 Fuerst and McAllister   +25% Energy Star

+26% LEED(2008)   +31% Energy Star,

+35% LEED (2009)

 Eichholtz, Kok, Quigley   +15.8% to 16.5%

Certified Bldgs

  10% decrease in energy use leads to 1% increase in value over certification level increase

  $1 of Energy Savings correlates to   +$0.95/sf Rental rates   +$13/sf Transaction prices   4.9% Premium in Market Capitalization

  (http://www.nilskok.com/ Prezi Slide: accessed March 15, 2012)

 Effect Varies by Market   Premium for Green Retrofits is Larger in smaller markets

  (EQK “Doing well by doing good” 2010)

  Opportunity for NOLA Investors

SURPRISING FINDING ENERGY SAVING ~ VALUE

WHO & HOW TO CONVINCE?

 Data and Standardization

 Different Approach for each group

LENDERS OWNERS

FOR LENDERS STANDARDIZATION COVERS RISK

ASTM  Building Energy Performance Assessment

  Used to gauge a building’s current energy use

 USPAP changes   Increased Cash Flow, Decreased Expenses, and

Increased Valuation at Reversion   DOE: Database | Appraisal Foundation: Techniques

FOR LENDERS DOE & AF SEE VALUE

"If better performing buildings have a higher value, it will

help enable the upfront investment for energy efficiency upgrades."

–Steven Chu, Sec. of Energy

(DOE Press Release, June 13, 2011 http://www.eere.energy.gov/pdfs doe_taf_mou_signed_6-10.pdf )

LENDERS OR OWNERS? APPRAISERS RESPOND TO THE MARKET

“The theory that the problem lies in the appraisal is mostly real, but the first crisis of confidence is in the property owners themselves”- James Finlay

COULD THE OWNERS BE THE PROBLEM?

OWNERS: TENANTS BIG DESIRABLE TENANTS Big Companies = Reduced Risk   2010 CBRE Survey of Office Tenants

  Big Companies care more about green!

OWNERS: DATA COSTAR WORKING TO STANDARDIZE  Co-STAR

  Most Comprehensive Database of Real Estate Information

 De-couple buildings from land   5 star building is a 5 star building   5 star property is a five star property

 Compare Green Bldgs to Green Bldgs

OWNERS: DATA UNPACK THE PLAQUE

 Green Building Information Gateway   Allows users to see LEED score on

each property   Compare LEED buildings between

markets   Compare one LEED market to

another

 Real Time Performance of LEED Bldgs

(Pyke, “Building the Economic and Social Case for Sustainable Development Practices.” 2011)

OWNERS: DATA CMP: FINANCIAL VALUE INDEX

  Index to Score a building’s attributes that will   Increase Long Term Financial Value   Decrease Risk Profile

 Utilizing 3rd Party Verification   LEED certification data   Location based data

 Like a Green FICA Score for Buildings   Range from 0 to 100   Great for owners, lenders, equity investors, &

securities industry (Winters & Katz, 2011)

OPPORTUNITIES? EXISTING BUILDING UPGRADES

EBOM Outpacing NC

Focus of LEED EB: Large “Bang for your $”

(EQK 2011)

OPPORTUNITIES? LEED EBOM HIGHER RENTS!

 Higher Rents +7%  Higher Effective Rents +9%

(EKQ, “The Economics of Green Retrofits.” 2011)

Median Cost: $438,957!

OPPORTUNITIES? NEW FINANCING AVAILABLE

 Deutsche Bank   $150MM in NY Building Retrofit Program

 Green Leases – NRDC and PlanNYC   7 World Trade

  Silverstien Properties and WilmerHale   210,000 SF 4 floors

 PACE for Commercial Buildings   Miami area and Sacramento   Requires multiple partners

  Ygrene Energy Fund   Barclays Capital   Lockheed Martin   Energi Insurance Co   Hannover Re

OPPORTUNITIES? NEED BETTER MANAGEMENT CONTRACTS

 Energy Savings Performance Contracts   Now only for the Feds   Federal Agency and Energy Service Company

  Audit-Program-ESCO guarantees savings – Gaurantee covers the loan over a period of time

 CBRE wants to set the goal of taking a performing building to Net Zero only through operations

 Advanced Energy in Raleigh, NC   Guarantee Energy Use post Retrofit!   http://www.advancedenergy.org/

OPPORTUNITIES? LOUISIANA #4 ENERGY EXPENSES -10% Energy Use = +1% Value

Higher in Smaller Markets

(www.energy.gov)

CONCLUSIONS  Studies Show

  Higher Rents   Less Vacancy   Less Risk   Higher Reversions

 Opportunities in Retrofits  Higher Value = More Green Buildings

(Finlay, “The Retrofit Triangle.” 2011)

THANK YOU & QUESTIONS?

Vann Joines | U.S. Green Building Council