GREEN 14: High Perf Bldg Apprasial Techniques UCLA-08-23,2010 -J Finlay8
1. Valuation Techniques
of High P f
f Hi h Performance
“Green” Real Estate
Green
James Fi l
J Finlay
VP, Commercial Appraisal Manager
Wells Fargo - RETECHS
UCLA – Real Estate Market Analysis
“Green Development/Valuation”
August 23, 2010
Mark S Ruff, Marcus & Millichap
2. Wells Fargo Environmental Commitment
July 2005: announces 10-point environmental
commitment
Environmental Initiative Team
My role: appraisal management, risk analysis, trends
M
More than $3.25 billion for high performance
th $3 25 billi f hi h f
designed projects – LEED, Energy Star, solar
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4. Presentation goals:
Overview of Appraisal-valuation problem, solutions
Will apply standard appraisal methodology
app y a da d app a a odo ogy
3 Approaches to Value – Income, Comparable Sales, Cost
Look at key value/risk differences between
y /
Energy efficiency
On-site power generation like solar photovoltaic [PV]
Differences in Scopes of Work w/major property groups
1. SFR
2. Small commercial/investment
3. Large commercial/investment
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5. Integrated building design = High Performance
LEED is a site specific design spec
a rediscovery of resource limitations and conditions of place
Old school = Design, Bid, Build
h l D i Bid B ild
Inside the parcel, today’s purpose only
New school = Integrated design, charrette team
Inside & outside the parcel. Today’s and tomorrow’s use
Today s tomorrow s
Balanced building systems
g y
Envelop and HVAC, lights and daylight
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6. Breaking down & defining the valuation question
Fundamentally: Is it worth more, valued higher?
Retrofit or new construction: appraisal process is the same
Same fundamentals of worth as any other property
Need to identify the specific value points of high
performance property so they can be measured
Still being clarified, not clearly understood/defined
Framing the problem is the first step
Appraisal needs to use standard tools and methods
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7. Three Appraisal Approaches –
goal is to mimic the market
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Income Approach: best to frame the problem
A h b tt f th bl
Comparable to stocks, bonds, other investments; pure
Sales Comparison Approach: intuitive, but
weakened by lack of Close, Recent, Similar data
Cost Approach: simple, sets bottom bar. Good
studies exist for home upgrade cost value
cost-value
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8. Income Approach - Four Influences to Value
Income based value analysis is most “granular”
Has
H 4 major worth categories:
j th t i
1. Income
2. Vacancy
3. Expenses
3 E
4. Risk
Under each category are more specific elements.
Evident in the investment discounted cash flow
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9. Identifying Specific Elements of Value
Discounted cash flow [DCF] software programs like
Argus have dozens of data input fields
Cover all facets of a 10-year investment holding period
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From these many inputs, certain specific fields are most
th i t t i ifi fi ld t
influenced by high-performance design:
The Green 14
This number of DCF software input fields is
approximate. Input influence might go up or down or
be similar to “normal” buildings
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10. The Green 14
VALUE
INCOME VACANCY EXPENSES RISK
Market Rent Absorption Utilities Discount rate
Stabilized Vacancy Maintenance Terminal Cap rate
Tenant retention % Management
Lag Vacancy
g y Marketing
g
Tenant improvemts Insurance
Property taxes
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11. Re-useable demising walls – LifeSPACE, Hayworth
Speed, flexibility, extended economic life, rapid depreciation at a first cost premium of 2%
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12. Intangible Value - Trophy, Quality , brand labeling
Reputational value is a key corporate asset
Identity branding is similar in real estate
Identity,
Appraisals recognize positive and negative reputation
“Trophy value” for architectural design, unique location
Branding value of LEED Energy Star has value
LEED,
Greater value from strict, high confidence standards
“Stigma is negative reputation: the “brown” building
discount for poor interior environmental quality, high
quality
energy use
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13. The Green 14 plus One
On-site power generation is the +One factor
Goal now is to get to Net Zero Energy
Distributed power produces a measureable,
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predictable, easily comparable/valued output
y p p
Power has far lower prediction risk than EE
[Energy Efficiency]
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14. Why appraising on-site power is easier than EE
Energy efficiency [EE] value is projecting a worth today
of something in the future that does not happen
EE highly impacted by occupancy, use, operations
Financing p p
g proposed EE = chicken & egg problem
gg p
Because EE is tough to prove, it needs lots, lots of data
On-site power value is based on easily measured output
Specific utility comparable energy rate
Consistent + easy measure + known price = low risk =
higher value
Defined risk allows financing to happen
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15. Three value “points of view” for distributed power in
an appraisal
Example: Solar PV
1. True First Cost for Initial Investment – Establishes true, all in,
out-of-pocket cost basis. Lots of tax issues.
Value in Exchange, worth to the next buyer, loan
V l i E h th t th tb l
collateral
2.
2 Sophisticated – 25 35 year discounted cash flow
25-35
3. Simple – quick, back of envelop method
Watch for big culture differences per property classes:
1. SFR
2.
2 Small commercial/investor
omme ial/in esto
3. Large commercial/investor
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16. DCF is detailed, but complex - Two Simple Income
based valuation methods for EE or solar PV
First determine the reliable annual energy saving –
1. Debt relief offset; varies by mortgage interest
@ 5% mortgage: value = 20x annual energy savings
Published in Appraisal Institute Journal 1998
2. Investment rate of return
@ 10% rate of return: value = 10x annual energy saving
Power Purchase Agreements, large solar deals
Market value might be somewhere between them
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17. Cost Approach value of Efficiency upgrades
Cost does not equal value. True, but it matters
Null hypothesis false:“Don’t know” does not equal zero
u ypo a o o do o qua o
Cost basis shown to be important for setting baselines
for both EE and distributed power values
p
Long-lived upgrades that save energy, add quality and
extend life include 2 value components
p
Value during holding period and the Value at sale (residual)
Simple ROI (Return on Investment) often presumes
the value at sale is zero; which is wrong
“What if I sell the house in 5 years, but ROI is 7 years?”
Ignoring value at resale is a mistake, is not “credible”
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18. Cost Approach
Studies of unsophisticated owners/investors show cost
app oac s st o g
approach is a strong influence & measure of worth
ue ce easu e o o t
Hanley-Wood’s “Remodeling Magazine” Cost vs Value
Hanley Wood s Remodeling Magazine vs.
Report. 33 projects, 80 cities. Over 10 years
2009-10 report
National averages
60% have resale range between 65%-85%
Range 50.7% to 128.9%, average 70.0%
Windows replacements average 74%
Back up generator 58 9% ($14,304 installed)
Back-up 58.9% ($14 304
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19. Sales Comparison Approach
p pp
Not much is Close, Recent, Similar
But let’s consider solar PV panels (kind of a Cost basis)
Used panels on the curb per eBay last night (5/24/2010)
Sharp 175 watt 24 volt used, 4 yrs old $300 vs. $560 = 54%
Evergreen ES-190 190 watt 6 mos $460 vs. $968 = 48%
S 90 90 $ 60 8%
Mitsubishi PV-MF165 164 watt (vs 185) $355 vs $550 – 65%
Check eBay values, other re-seller sites on-line
Higher incident of thefts
g
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20. Managing appraisal process, reviewing the report
Find best local appraiser – competent, open
Generally is not experienced in HP property
a y o p d p op y
I interview the property “champion” and get as
much info as possible about bldg features, design
p g , g
Assist appraiser, supply articles, information
Show where the null hypothesis is incorrect
Appraiser determines final value
Review appraisal, 95% of which is typical
appraisal
I might value the “wasting” items like incentives or
on site
on-site power (solar PV) if not done by appraiser
Timing and fee delta: plus a week, +10% fees
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21. Many are watching the upside, but bigger impact
is downside
i d id
Conversation today often about upside, value increase
But the real pain is in the downside of “brown” design
The “New Normal” is tipping with occupant expectations
Brown = premature functional obsolescence
Oversized floor plates, limited flexibility, poor light & air, energy
plates flexibility air
Portfolios being purged of difficult-to-green buildings
gp g g g
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22. Moving forward, watch for:
Standardized audit report –
Green PCA or Resource Appraisal Report is needed
Energy, Water, Waste, Carbon/GHG + IEQ
R l time di l
Real ti disclosure, smart meters – TED 5000
t t
Social competition – Google Power Meter
Carbon price risk is coming –
SRECs in New Jersey
y
Major new financing option – On property or energy bill
PACE property tax lien, CA AB 811
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24. Role of Behavior Economics in
Resource/Energy Efficiency
R /E Effi i
H
Humans react t stimulus : personal & social
t to ti l l i l
E
Energy/environment f db k di l
/ i t feedback displays
leverage devices that monitor & measure
Prius mpg display – both real time and historic
Feedback and display taps competitive nature,
social prestige pressure (+ or -)
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25. Ambient Devices Energy Orb ~ Making electricity
visible.
visible SCE test with 120 customers got a 40% reduction in
peak electric power use, more than numerical display
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26. Human productivity & biophilia : powerful &
complex value issues of high performance features
Productivity - Hundreds of studies show positive
y p
reactions to natural daylight, good air, natural views
Healthier, happier, more productive
Attracts and keeps talented workers
Biophilia – our hard wired reaction to the natural world
Waterfalls, vistas, wildlife views, fireplaces all trigger
human reactions, demonstrate the value of nature
Grassland = herbivores = protein = survival
p
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27. Closing thoughts
g g
Th
There are no ex-environmentalists.
i t li t
The exact impact of a clean, well lighted
space may not be known, but it is not zero.
p y ,
High performance design is the New Normal
Normal.
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28. Thank you!
James Finlay
213 614 4850
213-614-4850
James.F.Finlay@WellsFargo.com
Im
I’m LinkedIN
Chair, Commercial RE & Finance Subcommittee,
US Green Building Council LA Chapter
General questions:
Environmental.Affairs@WellsFargo.com
http//Blog.WellsFargo/Environment
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29. Links, more info.
1. Green Building Finance Consortium GreenBuildingFC.com - Underwriting
Sustainable Property, by Scott Muldavin. Exhaustive resource, huge bibliography,
free, constantly updated
2.
2 PACENow.org – tracks developments with PACE fi
PACEN k d l ih financing
i
3. US Green Building Council National – Commercial RE Newsletter
4. US Green Building Council, LA Chapter, Commercial RE & Finance subcommittee –
join h
j i other real estate transaction professional
l i f i l
5. Precourt Energy Efficiency Center, Stanford - Annual conference on Behavioral
Economics and EE
6.
6 UC Davis Energy Efficiency C t
D i E Effi i Center
7. Periodicals: “Dwell”, “Natural Home”, “Green Source” by McGraw Hill
8. My occasional blog: GreenPeriscope.com
9. Dept of Energy EERE newsletter http://apps1.eere.energy.gov/news/enn.cfm
10. Envir Valuation & Cost-Benefit News - http://www.envirovaluation.org/index.php
11. Environmental design + construction magazine/website http://www.edcmag.com/
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30. 31 Tannery Rd, Branchburg, NJ
First net zero electric commercial bldg in US
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31. Net Zero - 31 Tannery Road, New Jersey
Efficiency + Energy + real time monitoring
http://www7.nationalacademies.org/ffc/John_Grabowski.pdf
Built 2006, 41,508 SF, light industrial, 37% office,
owner occupied, operated
Yr to date 11/2007, 11/2008 Energy Star 100, net
positive electric (101%)
Net energy -
BTU/SF = kWh + gas therms = 83% on-site
$/SF indust avg $2.49; Actual $0.49/SF
With SRECs = + $1.11/SF positive income
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32. The “Rosenfeld” energy efficiency unit – UC Davis
Named for Art Rosenfeld started working on energy issues at
Berkeley Lab in 1974 and is often credited with being
personally responsible for billions of dollars in energy savings.
the “Rosenfeld effect” explains why California’s per capital
electricity usage has remained flat since the mid-1970s while
U.S. usage has climbed steadily and is now 50 percent h h
S h l b d dl d 0 higher
than it was 40 years ago.
Environmental Research Letters to define the “Rosenfeld” as
o e ta esea c ette s de e t e ose e d
electricity savings of 3 billion kilowatt-hours per year, the
amount needed to replace the annual generation of a 500
megawatt coal fired power plant
coal-fired plant.
He is also behind “Rosenfeld’s Law,” which states that the
amount of energy required to produce one dollar of economic
output has decreased by about 1 percent per year since 1845.
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