6 VALUATION AND FUNDING OF SUSTAINABLE PROPERTY

Slide header copyIn This Chapter

> Fundamentals of valuation> Planning the analysis> Linking performance to value> Funding for green buildings

1-16-1

Slide header copyMarket Size

1-2

> Multiple ways to consider value:- Direct monetary benefits for

the owner- Indirect benefits to the owner- Indirect benefits to society

Considerations of Value

6-2

Slide header copyExercise: Value Discussion Starter

1-11-36-3

> 12-story, mixed-use building in downtown Kansas City:- Benefits indirect to owner?- Benefits direct to owner?- Benefits seen only by tenants?- Benefits to city? - Benefits to society?

Slide header copyApproaches to Valuation

1-46-4

> Comparable sales approach> Income approach> Cost approach

Slide header copy

1-11-5

Comparable Sales Approach

6-5

> Not commonly practiced for sustainable property- No two sustainable properties

have exact location, features, or performance

Slide header copyIncome Approach

1-66-6

> Income (I) / Rate (R) = Value (V)> Cap rates are derived from recent

sales of comparable properties> Standard assumptions for what is

a comparable property for a given sustainable property are not used

Slide header copyData Gathering for Cost Approach

1-16-7

> According to Appraisal Institute:> “It makes sense to cost an exact

replica of green building appraised… Trying to find replacement cost requires large amounts of judgment and tradeoffs.”

Slide header copyPlanning the Analysis

1-66-8

> Counseling client on feasibility of proposal, reliability of cost estimates, and forecasts of cash flow require:- Market analysis/feasability study- Financial projections for project- Recognizing rate of return impacts from

sustainable feature costs

Slide header copyLinking Performance to Value

1-16-9

> You may be asked to provide reporting system on performance of property.

> Reporting systems should show how measures are influencing value on an ongoing basis.

Slide header copyDiscussing the Debt Market with Clients

1-66-10

> Common source of funding for green projects is debt market - Banks- Insurance companies that

address risk

Slide header copySearching for Funding

1-16-11

> Check “DSIRE” and EPA Web sites> Inquire among contacts> Conduct your own search

Slide header copyThe Underwriter Perspective

1-66-12

> Unique challenges to projecting risk:- Methods of projecting financial return do not account

for financial gain of risk avoidance and revenue gains- Buildings may not perform over time- More sophisticated and explicit analysis and

documentation of risk required- Different financial models, analysis, and data may be

required

Slide header copyThe Appraiser Perspective

1-16-13

> Risk profile consists of:

- Potential for greater construction and delivery risks

- Different pattern of lease-up and absorption risks

- Fewer peers- Different tenant reduction

and turn-over risks

- Different re-tenanting costs- Different pattern of periodic

capital replacements- Different reversion price- Low exposure to

obsolescence- High exposure to green

obsolescence

Slide header copyThe Underwriter Perspective

1-66-12

> Unique challenges to projecting risk:- Methods of projecting financial return do not account

for financial gain of risk avoidance and revenue gains- Buildings may not perform over time- More sophisticated and explicit analysis and

documentation of risk required- Different financial models, analysis, and data may be

required

Slide header copyExercise: Valuation Concepts

1-16-15

DCF analysisThe equity marketThe cost approachComplex sustainable property risk profileDSIREIncome capitalizationComparable sales approachGovernment sector owner-users

B.

E.

H.

G.

F.

A.

C.

C.