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Understanding the Costs and Benefits of the Green Trend

February 8, 2013

By Gary Fineout

 

The way that Scott Muldavin sees it — going green is not just a trendy buzzword.

It’s a significant trend that everyone who deals with real estate must know about and understand. Governments across the entire nation are embracing programs and regulations meant to encourage both energy efficiency and sustainability.

Some states, for example, have altered building codes, while 16 states have passed PACE programs, or Property Assessed Clean Energy, which creates a way for local governments to encourage property owners to reduce energy consumption and increase efficiency. The main idea is to let local governments issue bonds which are then used to provide the upfront money that homeowners and business owners can use to make improvements. These improvements are then paid back through assessments or charges on property tax bills.

Muldavin, who in 2006 founded the Green Building Finance Consortium, says that everyone involved in real estate — whether they are a lender, an investor, a regulator or those selling property — needs to be able to figure out how these trends will affect the real estate market into the future.

Muldavin this past spring released “Value Beyond Cost Savings: How to Underwrite Sustainable Properties”— which is available at www.greenbuildingfc.com — in an effort to help people do just that.

The book has gotten rave reviews from those in the industry. Leanne Tobias, founder and managing principal of Malachite LLC, called the book “the authoritative work on green building underwriting for the commercial real estate industry.”

“This is the most comprehensive and up-to-date publication on this topic that I am aware of,” said Dr. David P. Lorenz, principal and founder of Dr. Lorenz Property Advisors and a professional member of the Royal Institution of Chartered Surveyors (RICS).

While the book itself may seem somewhat academic and dry, Muldavin explains that it is written in a way that reflects how “people with money and real estate think about” property. It includes lengthy references to studies and check lists that could help people evaluate sustainable properties.

“It’s about ‘How will I modify my current underwriting practices to accommodate sustainable projects,’” he said.

But one clear conclusion that he reaches in the book is that “sustainable properties should be more valuable.”

“Development costs are only marginally higher, and can often be mitigated or successfully managed,” Muldavin writes. “Operator costs are lower. Revenues are higher as a result of regulator incentives and subsidies and enhanced space user demand. Investor demand is up as they begin to respond to potential regulator and space user demand increases and other investor climate change pressures.”

Muldavin has had a lengthy career in real estate and has been involved in underwriting for more than 25 years. He was a founding principal and served for three years on the investment committee of Guggenheim Real Estate. He was also a partner and leader of the real estate consulting practice at Deloitte & Touche before he founded his own company in 1999. He is a frequent speaker on real estate and sustainability and authored more than 225 articles published in various real estate and property publications.

Muldavin’s introductory chapter says his book comes at a time when investors and tenants realize that sustainable properties have all sorts of benefits, but they “struggle to integrate benefits beyond cost savings.”

Muldavin says there are 10 key principles for sustainable projects. The first one is that those looking to invest in sustainable projects don’t need to change everything they are doing now. Instead they just need to incorporate some new ways to evaluate sustainable properties.

He also points out that no single definition of sustainability is sufficient. But he also cautions that existing classifications, such as LEED or Green Star, measure environmental outcomes and not financial outcomes, although studies have suggested that buildings that get rated as green may be able to command higher rents. Still he does conclude that many sustainable projects have energy savings of 30 percent or more, which can translate into at least a 2 percent increase in the value of the building.

But he also says that those looking to develop, build or retrofit existing property must understand that sustainability means more than just cutting down electric or water bills. He noted in a paper last year that “regulators across all levels of government and national boundaries have embraced the property sector as ‘low hanging fruit’ in the battle against climate change.” That has translated into certain businesses deciding that they need to look for sustainable property.

His book offers up a list of all the potential public benefits of sustainable buildings, ranging from conservation of natural resources to reducing traffic congestion to increasing worker productivity. The book includes a lengthy cost-benefit checklist that points out that going green means access to more incentives, reduced energy use and even better private financing.

Muldavin’s book is aimed primarily at those in the commercial real estate industry, noting for example that certain types of businesses such as law firms and those in the insurance and financial sector are those who already lease the highest percentage of green office space.

He says there are applications in his book that can be applied to those looking to buy their next home. But he recognizes that right now sustainability concerns may not be as important as other factors such as schools and the size of the home.

“For single-family, the users and the investors are the same, so it is important to think about the realistic demand for sustainable-energy efficient investment by homeowners in a particular community,” said Muldavin. “It is also important to understand that sustainability is only one of many issues that may be important to buyers — and is definitely a secondary concern to schools, floor plans, number of bedrooms or bathrooms, and other features.”

But he notes that homeowners may have to become more cognizant of sustainability if governments continue to add new requirements or add new incentives like the PACE programs.

“It is important to look at government regulations to see if sustainable investment can be subsidized through tax benefits, entitlement benefits, and outright grants and other incentives,” said Muldavin. “Protection against value declines if governments increase the regulation of sustainability on new buyers is also a concern. For example, PACE financing that allows 15-20 years to pay back investment at low rates, and eliminates the up-front capital expenditures for homeowners is an important benefit that is starting to be available through many municipalities.”

Muldavin added that homeowners will probably be given more information in the future that will help them evaluate if it makes sense to move into a particular home.

“The most important issue is not that a home be energy efficient or sustainable, but that the cost to make the property meet future government or buyer requirements be reasonable,” he said.

The book goes into great detail as to what makes a sustainable project, whether it’s an efficient heating and cooling system, low-flow toilets, building on a brownfield or using solar energy to help power the building. He mentions important aspects of sustainable types of development, whether it’s green roofs that incorporate vegetation or day lighting that encourages the use of natural light.

Muldavin lists items that should be considered at each stage of development, whether it’s landscaping that requires no irrigation or deciding what type of windows should be installed.

Muldavin and his consortium have also reviewed more than 200 health and productivity studies and have concluded that “there is a clear positive relationship between sustainable property investment and occupant performance.”

“Sustainable buildings that control moisture, control pollutant sources, improve ventilation and access to outside air, promote access to the natural environment … have been documented to improve health,” notes Muldavin.

But Muldavin also puts in a word of caution to developers, telling them they have to make sure that they do not make claims that are “untrue at the time they make them.” He notes that sometimes projects change and that it’s important to not cite studies without all the caveats.

“Many studies show that actual energy performance is quite volatile with a wide divergence among the individual results that make up an average energy savings,” he writes. “Consequently, if an owner cites these average energy savings in marketing their project, there is a high likelihood they will be wrong.”

Muldavin suggests that there be staff training and review of all promotional and marketing materials to limit the chances that something wrong will be told to would-be buyers.

 

Gary Fineout is an award-winning journalist who covered politics and government for nearly 20 years. He previously worked in the Tallahassee bureau of The Miami Herald and his work has also appeared in The New York Times and several other Florida newspapers. He is now an Independent journalist.


The “Cost of Green” Resources

  • Property Assesses Clean Energy (PACE) Bonds – Innovative funding to accelerate the retrofitting of America’s buildings for energy independence: www.pacenow.org
  • DSIRE – Database of State Incentives for Renewables & Efficiency is a comprehensive source of information on state, local, utility and federal incentives and policies that promote renewable energy and energy efficiency: http://www.dsireusa.org