PROJECT FINANCE & APPRAISAL Translating the Value of Regenerative Design into Real Estate Speak Matt Macko Environmental Building Strategies
The Developer Role Understand your client! How a developer thinks Definition.???
The Developer Role Understand your client! Pro forma Inputs Outputs Assumptions Sensitivity/Scenarios, etc.
The Developer Role Understand your client! Soft vs. hard costs Soft: architects, engineers, carrying costs, etc. Hard: concrete, steel, gypsum, etc. The main difference?
The Developer Role Understand your client! Carrying costs Debt Service Taxes Insurance Developer s own P&L ( share of rent, lights, copier, etc.)
The Developer Role Understand your client! Debt 70% Equity 30% The Developer Business Model 10/90, 70/30 Waterfalls [CATEGO RY NAME] - [PERCEN TAGE] Developer Capital 10% Private Equity 90%
The Developer Role Understand your client! Revenue vs. Expenses Why expenses like energy don t matter
Financial Terminology Why is it important? DCF LCCA vs LCA Time Value of Money IRR/MIRR/XIRR SIR DCR NOI Cap Rates Promotes Horizon Waterfall Payback/ROI Yield LTV Hurdle Rate Discount Rate WACC Points ( Basis) Real vs. Nominal Rates Leverage
SPP rules of thumb do they make sense? 1980 prime rate: 18.75% 2010 primate rate: 3.25%
Life Cycle Cost Analysis
Cap Rate vs. Value
Time Value of Money - Activity EBS
Time Value of Money EBS
Calculating Payback competing investments Goal: Maximize Return - Choose One Project Period Year 1 Year 2 Year 3 Duck Project $- 20 $10 $10 Goose Project $- 20 $10 $10 Elephant Project $- 20 $0 $20 EBS
Calculating Payback competing investments Anybody like Ducks? Period Year 1 Year 2 Year 3 Year 4 Duck Project $- 20 $10 $10 $100 Goose Project $- 20 $10 $10 $0 Elephant Project $- 20 $0 $20 $0 EBS
Calculating Payback competing investments Somebody s fired... Period Year 1 Year 2 Year 3 Year 4 NPV ( 10%) Payback ( yrs) Duck Project $- 20 $10 $10 $100 $ 72.49 2 Goose Project $- 20 $10 $10 $0 $ - 2.64 2 Elephant Project $- 20 $0 $20 $0 $ - 3.47 2 EBS
The Green 14 Income Market rent assumption Vacancy Absorption time Stabilized vacancy Tenant retention / rollover percentage Lag vacancy Tenant improvements: new construction or re-tenanting Income Expenses Vacancy Risk EBS
The Green 14 Expenses Utilities Repairs & Maintenance Management Marketing Promotions Insurance Property Taxes Risk Discount Rate Terminal Cap Rate Income Expenses Vacancy Risk EBS
The Green 14 Case Study High Performance Features vs. Old Normal Results High Performance Value 4% Higher On Average 2-8% Higher Risk of Obsolescence Risk of not designing to the New Normal EBS
Case Studies
Case Studies How can data enhance your ability to convince people to do the right thing? Where is the data? What resources are you deriving your perspective from? ULI, ILFI, CoreNet, ICSC, NaiREIT, Private Equity groups Be relatable. They don t know what ILFI is and don t care about DOE stats Why are sustainability industry averages ineffective? Because each project is different! Regression to the norm
Interactive Section Who has a scenario to analyze? What issues do you run into with clients? How can understanding project finance help foster deep trusted advisor relationships?
2015 Timothy P. Runde Timothy P. Runde, MAI, LEED AP Carneghi & Partners, Inc.
The Life of a Building Choices made at inception affect building s long term value What is the cost to transition to Life #2? To Life #3? Is it prohibitive? Is it feasible? If a building cannot adapt, is it truly sustainable? What limits this building s successful long term adaptation? Could these limitations be avoided by different design decisions? 2015 Timothy P. Runde
What do we mean by value? Different types of value Assessed Value Book Value and Fair Value Insurable Value Investment Value Sustainable Value (Calculation of Worth) Market Value 2015 Timothy P. Runde
Appraisers focus on market value Must be supported by market evidence comps statistical models/analyses are not value predictors for a specific property Involves empirical evidence combined with appraiser s judgment Appraisers don t create value they are neutral observers of the market 2015 Timothy P. Runde
Valuation Terminology Cap Rate Debt Coverage Ratio (DCR) Loan to Value Ratio (LTV) ROI/payback Feasibility: Value Cost Net Present Value (NPV) Principle of Substitution Market Value/Asset Value 2015 Timothy P. Runde
Key Elements of Market Value Value in eyes of market ( most probable price which a property should bring in a competitive and open market ) Economic terms ( payment is made in terms of cash ) Temporal element ( consummation of a sale as of a specified date ) Market specific 2015 Timothy P. Runde
NSO Market Few or no regulations Green-up limited to compliance Few or no green buildings; those that are green are mandated (eg: gov t bldgs) No local green building community Limited or no evidence of sustainability uptake in community Survey data indicates regional area is trailing on sustainability trends SO Market Many regulations, incentives, especially at the local level Voluntary green-up by landlords Green buildings not uncommon Active local green building community Community uses multiple garbage bins for triple waste stream; farmers markets; hybrid cars common Regional area scores high on green uptake Used with permission of Journal of Sustainable Real Estate; adapted from original article, Integrating Sustainability and Green Building into the Appraisal Process by Timothy P. Runde & S. Thoyre 2015 Timothy P. Runde
Gauging Potential for Bottom-Line Value Impacts Who pays? Who benefits? Who owns the system? Is it operational? 4 key tests for impacts/features: Measureable? Durable? Part of the real property? Will likely buyer/user value it? 2015 Timothy P. Runde
Direct Value Impacts Features that affect income stream or can be directly demonstrated via comps Rents Vacancy/down time between leases Energy, water/sewer, trash Lower insurance costs Reduced TI costs on turnover (UFAD, open floor plan vs. POs) Functional adaptability 2015 Timothy P. Runde
Indirect Value Impacts Features that affect marketability and risk Not getting crossed off the tour list Market differentiator Lower obsolescence risk exposure Greater income growth/lower expense growth Label effect Fulfills occupant s sustainability goals 2015 Timothy P. Runde
Feasibility $/SF $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $- 93% 99% 136% 56% 53% 102% 1 2 3 4 5 6 Cost Approach Income Approach 2015 Timothy P. Runde
Action Steps Know Your Market SO vs NSO Who is the end-user? Educate Inspection = Opportunity Don t let features get overlooked Green/sustainable building design and features still a mystery to most financing professionals Document Cost is not a bad thing 2015 Timothy P. Runde
2015 Timothy P. Runde Timothy P. Runde, MAI, LEED AP Carneghi & Partners, Inc.