Valuation Techniquesof High P f f Hi h Performance“Green” Real Estate GreenJames Fi lJ     FinlayVP, Commercial Appraisal ...
Wells Fargo Environmental Commitment July 2005: announces 10-point environmental  commitment Environmental Initiative Te...
Wells Fargo Environmental Finance Report                                           2
Presentation goals: Overview of Appraisal-valuation problem, solutions Will apply standard appraisal methodology       a...
Integrated building design = High Performance LEED is a site specific design spec   a rediscovery of resource limitation...
Breaking down & defining the valuation question  Fundamentally: Is it worth more, valued higher?    Retrofit or new cons...
Three Appraisal Approaches –         goal is to mimic the marketI Income Approach: best to frame the problem        A    ...
Income Approach - Four Influences to Value Income based value analysis is most “granular” Has H 4 major worth categories: ...
Identifying Specific Elements of Value Discounted cash flow [DCF] software programs like  Argus have dozens of data input...
The Green 14                             VALUEINCOME        VACANCY              EXPENSES         RISKMarket Rent   Absorp...
Re-useable demising walls – LifeSPACE, HayworthSpeed, flexibility, extended economic life, rapid depreciation at a first c...
Intangible Value - Trophy, Quality , brand labeling Reputational value is a key corporate asset Identity branding is sim...
The Green 14        plus   One On-site power generation is the +One factor Goal now is to get to Net Zero Energy Distri...
Why appraising on-site power is easier than EE Energy efficiency [EE] value is projecting a worth today  of something in ...
Three value “points of view” for distributed power in                    an appraisal  Example: Solar PV   1. True First ...
DCF is detailed, but complex - Two Simple Income  based valuation methods for EE or solar PV First determine the reliable ...
Cost Approach value of Efficiency upgrades Cost does not equal value. True, but it matters Null hypothesis false:“Don’t ...
Cost Approach Studies of unsophisticated owners/investors show cost  app oac s st o g  approach is a strong influence & m...
Sales Comparison Approach                     p        pp Not much is Close, Recent, Similar But let’s consider solar PV...
Managing appraisal process, reviewing the report Find best local appraiser – competent, open Generally is not experience...
Many are watching the upside, but bigger impact                 is downside                 i d     id Conversation today...
Moving forward, watch for: Standardized audit report –   Green PCA or Resource Appraisal Report is needed   Energy, Wat...
Energy Measures                  22
Role of Behavior Economics in         Resource/Energy Efficiency         R         /E      Effi iH Humans react t stimulu...
Ambient Devices Energy Orb ~ Making electricityvisible.visible SCE test with 120 customers got a 40% reduction inpeak elec...
Human productivity & biophilia : powerful &  complex value issues of high performance featuresProductivity - Hundreds of s...
Closing thoughts                    g     g Th  There are no ex-environmentalists.                     i      t li t The...
Thank you!              James Finlay               213 614 4850               213-614-4850       James.F.Finlay@WellsFargo...
Links, more info.1.   Green Building Finance Consortium GreenBuildingFC.com - Underwriting     Sustainable Property, by Sc...
31 Tannery Rd, Branchburg, NJFirst net zero electric commercial bldg in US                                                29
Net Zero - 31 Tannery Road, New Jersey Efficiency + Energy + real time monitoring http://www7.nationalacademies.org/ffc/...
The “Rosenfeld” energy efficiency unit – UC Davis Named for Art Rosenfeld started working on energy issues at  Berkeley L...
CA vs. USA energy use per capita                                   32
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GREEN 14: High Perf Bldg Apprasial Techniques UCLA-08-23,2010 -J Finlay8

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"Green 14" appraisal and valuation topics around high performance commercial real estate. Illustrates concepts using a discounted cash flow model.

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GREEN 14: High Perf Bldg Apprasial Techniques UCLA-08-23,2010 -J Finlay8

  1. 1. Valuation Techniquesof High P f f Hi h Performance“Green” Real Estate GreenJames Fi lJ FinlayVP, Commercial Appraisal ManagerWells Fargo - RETECHSUCLA – Real Estate Market Analysis“Green Development/Valuation”August 23, 2010Mark S Ruff, Marcus & Millichap
  2. 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 V6 1
  3. 3. Wells Fargo Environmental Finance Report 2
  4. 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 3
  5. 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 4
  6. 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 5
  7. 7. Three Appraisal Approaches – goal is to mimic the marketI 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 6
  8. 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 7
  9. 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 F 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 8
  10. 10. The Green 14 VALUEINCOME VACANCY EXPENSES RISKMarket 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 9
  11. 11. Re-useable demising walls – LifeSPACE, HayworthSpeed, flexibility, extended economic life, rapid depreciation at a first cost premium of 2% 10
  12. 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 11
  13. 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, p predictable, easily comparable/valued output y p p Power has far lower prediction risk than EE [Energy Efficiency] 12
  14. 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 13
  15. 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 14
  16. 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 15
  17. 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” 16
  18. 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 17
  19. 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 18
  20. 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 19
  21. 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 20
  22. 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 21
  23. 23. Energy Measures 22
  24. 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 -) 23
  25. 25. Ambient Devices Energy Orb ~ Making electricityvisible.visible SCE test with 120 customers got a 40% reduction inpeak electric power use, more than numerical display 24
  26. 26. Human productivity & biophilia : powerful & complex value issues of high performance featuresProductivity - Hundreds of studies show positive y p reactions to natural daylight, good air, natural views Healthier, happier, more productive Attracts and keeps talented workersBiophilia – 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 25
  27. 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. 26
  28. 28. Thank you! James Finlay 213 614 4850 213-614-4850 James.F.Finlay@WellsFargo.com Im I’m LinkedINChair, Commercial RE & Finance Subcommittee, US Green Building Council LA Chapter General questions: Environmental.Affairs@WellsFargo.com http//Blog.WellsFargo/Environment 27
  29. 29. Links, more info.1. Green Building Finance Consortium GreenBuildingFC.com - Underwriting Sustainable Property, by Scott Muldavin. Exhaustive resource, huge bibliography, free, constantly updated2.2 PACENow.org – tracks developments with PACE fi PACEN k d l ih financing i3. US Green Building Council National – Commercial RE Newsletter4. US Green Building Council, LA Chapter, Commercial RE & Finance subcommittee – join h j i other real estate transaction professional l i f i l5. Precourt Energy Efficiency Center, Stanford - Annual conference on Behavioral Economics and EE6.6 UC Davis Energy Efficiency C t D i E Effi i Center7. Periodicals: “Dwell”, “Natural Home”, “Green Source” by McGraw Hill8. My occasional blog: GreenPeriscope.com9. Dept of Energy EERE newsletter http://apps1.eere.energy.gov/news/enn.cfm10. Envir Valuation & Cost-Benefit News - http://www.envirovaluation.org/index.php11. Environmental design + construction magazine/website http://www.edcmag.com/ 28
  30. 30. 31 Tannery Rd, Branchburg, NJFirst net zero electric commercial bldg in US 29
  31. 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 30
  32. 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. 31
  33. 33. CA vs. USA energy use per capita 32
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