Valuing Energy Efficiency in Commercial Real Estate Leonard Kolstad Tysons Sustainability Summit April 28, 2016
Commercial Property Valuation What are the drivers of property value? Location Condition of structure Highest and best use Operating history Energy consumption
But how important is energy?
How do high-performance building features impact property value? IMT and the Appraisal Institute have published two guides For Owners For Lenders
Increase Owner Net Operating Income (NOI) 1) Reduced Operating Expenses Lower utility bills Lease type important Reduced maintenance costs http://magnifierenginesystemconsumerreview.com/ Increased durability
Sidebar - Green Leasing What is a green lease? A lease in which landlords and tenants agree to include sustainability concepts, and assign costs and benefits of sustainability improvements. The primary goal is to align split incentive. http://hollyjeantampa.com/2014/03/tipsfor-negotiating-a-commercial-office-spacelease/
Sidebar - Green Leasing Example Green Clauses Change building operating hours to limit building-wide HVAC use Require landlord to benchmark building in ENERGY STAR Portfolio Manager, and report score to tenant annually Require a build-out above existing code or to LEED for Commercial Interiors
Sidebar - Green Leasing Green Lease Leaders Recognition program for owners, tenants, brokers Sets standards for what constitutes green lease www.greenleaseleaders.com
Increase Owner Net Operating Income (NOI) 2) Increased Revenue Higher rents tenants willing to pay premium for highperformance spaces Greater occupancy reduced revenue loss from vacant spaces Tenant retention reduced revenue loss from tenant turnover
Market Evidence
Market Evidence
Translating NOI into Property Value
Market Evidence
The Process
IMT s Commercial Lender Survey Inspiration and Purpose Many specialized financing mechanisms (PACE, OBF, ESA) and lenders Commercial banks have potential to greatly scale building energy efficiency, but they are often on the sidelines why is this the case?
IMT s Commercial Lender Survey Methodology Survey of 30 commercial lenders
IMT s Commercial Lender Survey Methodology Interviewees mostly senior level
IMT s Commercial Lender Survey Questions Asked Are you seeing demand for financing commercial building energy upgrades? Is your institution incentivizing building energy efficiency through specific loan products or programs? How do you perceive the risks of lending to support building energy efficiency? To what extent do you incorporate building energy data into your underwriting and appraisal processes?
IMT s Commercial Lender Survey Key Findings Demand and Supply Low perceived demand for energy efficiency finance: Largely as a result, lender not incentivizing building energy efficiency
IMT s Commercial Lender Survey Key Findings ESG Policies Majority stated that their institution has an Environmental, Social, and Governance (ESG) policy None said energy efficiency finance integrated into these policies I don t know of any bank that does include energy efficiency in their environmental policy, which is more related to mold, asbestos, groundwater contamination, and other things like that. http://www.investinvethic.com/socially-responsible-investing/
IMT s Commercial Lender Survey Key Findings Appraisal Most saw value of incorporating energy data into appraisal process Half recognized importance of hiring appraisers with experience valuing high-performance buildings Recommendation Opportunity for federal banking regulators to issue guidance on appraising high-performance buildings
Industry Leadership Appraisal Foundation 2011 Memorandum of Understanding with DOE Valuation of Green and High Performance Property: Background and Core Competency Soon to be released exposure draft to offer more detail on valuing high performance commercial buildings http://evanmills.lbl.gov/pubs/pdf/06- Valuation%20of%20Green%20and%20High% 20Performance%20Property- Background%20and%20Core%20Competency %20060215.pdf
Industry Leadership Appraisal Institute Valuation of Sustainable Buildings Professional Development Program IMT has sponsored multiple CE courses Registry of appraisers http://www.appraisalinstitute.org/assets/1/29/ai_821_green_commercial_interactive.pdf
Valuing Net Zero Energy Buildings Appraisal Institute webinar Speaker: Tim Runde, MAI, LEED AP 1) Present the basics of NZE buildings 2) Demonstrate how the unique design and features of these buildings affect value 3) Investigate the specifics of cost and value impacts through the use of case studies drawn from the presenter's own work http://www.appraisalinstitute.org/v aluing-net-zero-energy-buildings/
Webinar: Valuing High-Performance Buildings IMT Webinar Series Valuing High-Performance Buildings Tuesday, May 17 th, 2-3 PM ET Co-presenter: Tim Runde, Runde & Partners, Inc. Green Physical Needs Assessments TBD in June
Thank You Lenny Kolstad Senior Program Associate, Market Engagement Team lenny@imt.org Institute for Market Transformation www.imt.org