The Recent View of Green       Buildings             University: Golden Gate University         Faculty Internship Supervi...
IntroductionI am a financial analyst for KSDG. My tasks are constructing financial models, analyzing cost- benefits,and re...
of future inflation and volatility in energy prices. Based on the knowledge from GGU’s ECON 202,when the inflation and ene...
building generally achieves energy saving of 20% to 50%. The median of green premiums is 1.5% bycomparing the cost of norm...
energy savings over 20- year from green buildings is estimated to be between $6/sf and $18/sf. For bothoccupants and emplo...
3. CO2 ReductionsAccording to Green Building Performance (2011), green buildings have 36% fewer CO2 emissions. CO2reductio...
4. Lower Operation and Maintenance Cost    According to Green Building Performance (2011), green buildings have aggregate ...
KSDG’s exit strategy is selling the fund to big institutions or turning to REIT. This is almost the same asthe real estate...
institution’s bankruptcy because they can be bailed out by governments. But no one can bail out thegovernment if they go b...
the current analyst position. Maybe I can apply them in other position like real estate investment fund ifI extend the int...
ReferencesDavis Langdon. (2011). The cost and benefit of achieving green buildings. Davis Langdon and SeanInternational.De...
Principles for Responsible Investment. (2011). Why environmental externalities matter to institutionalinvestors. PRI Assoc...
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The Recent View of Green Buildings

  1. 1. The Recent View of Green Buildings University: Golden Gate University Faculty Internship Supervisor: Steve Hawkey Internship Company: Kevin Stephens Design Group, LLC Internship Employer Supervisor: Kevin Stephens Internship Term: 2012 Spring Internship Position: Green Investment Analyst Student: Gangming Liang GGU ID#: 0555970 Major: MS- Finance- Investment Management Concentration 1
  2. 2. IntroductionI am a financial analyst for KSDG. My tasks are constructing financial models, analyzing cost- benefits,and researching upon green value of KSDGs green energy- efficient projects. Through discussion withour management team and finance team, I assist with revising input assumptions, future return, leverage,mortgage repayments, taxes, fees, and other calculations by applying skills and knowledge learned fromGGU. We also compare the cases for both with energy charges and without energy charges in order toshow how much KSDG energy efficient buildings can contribute to our financial aspects by reducingcosts and increasing profits. In addition, we collect data on green market and government policies fordemonstrate that our business strategies are in the future major trend. This information will be showed toour investors for creating financial and environmental benefits to our community. We will see moredetails about green value in the first part of the paper. I learned a lot from Kevin about how to deal with people in a very nice manner. Being a qualify bossin a company is an art of life. Its very hard to make everything perfectly and efficiently. Its also difficultto manage people and solve various problems. I noticed that Kevin is always very patient to listen toeverybody and discuss our tasks efficiently in limited time. I also learned a lot about tax and humor fromMark. He is a nice teacher who is patient and can give very detail explanation on topics. Cooperatingwith Charlie and Tracy on financial models, communicating with Tyler, Cindy, Healther, Alicia, John,and other co- workers, realizing how environmental benefits to our working and living environment areso much fun! The above real experience cannot be learned from university courses. However,researching on green buildings and constructing financial spreadsheets also help me to connect realword practice with knowledge learned from Golden Gate University. So, in the later part of the paper,we will see more discussion about the difference between GGU course and KSDG internship.Green ValueDuring the past decades, the green development on real estate is becoming more important and well-known to our lives. Green, lower costs, clean, sustainable, and energy efficient will be the hottest wordsin the next decades. Businesses not only need to care about profitability but also care about workingquality and energy efficiency. Green Value is the additional net present value that a green buildinggenerates or saves by having the energy efficiency strategies compared to that of an identical normalbuilding. In the future, this might become the major trend of our world, including working and livingenvironment. The benefits of environment, health, working quality, and other indirect benefits are morethan twice of the benefits of green direct benefits. Large parts of U.S. constructions are about 20- 30years old, and they need to be retrofit and become green and energy- efficient for improving livingquality and achieving sustainability. As a result of this, green buildings are hot in future and worth us topay more attention to.Direct Green Benefits1. Energy- SavingsAccording to Green Building Performance (2011), green buildings have 66kBtu/sf/yr energy use, whichis a 25% lower than that of national averages 88kBtu/sf/yr. 41% of projected energy use in buildingsmight be reduced by 2050, and about 11.5 gigatonnes (Gt) of CO2, 40% of current global fossil CO2emissions might be reduced by available technologies. Leadership in Energy and Environment Design(LEED) - certified buildings has median energy savings of 23%, which is from $7/sf to more than$15/sf. For Silver, the figure is 31%; For Gold, 40%; and for Platinum. 50%. For instance, by reducingenergy expenditures, KSDG’s energy efficient buildings provide a cost- effective hedge against the risk 2
  3. 3. of future inflation and volatility in energy prices. Based on the knowledge from GGU’s ECON 202,when the inflation and energy prices increase, KSDG’s green buildings will reduce the costs on utilitiesas a result of green design with Energy Star and LEED (Building Sector, 2009).(Energy Efficiency, 2010)According to 2011 Deutsch bank Americas Foundation/ Living Cities study reports, annual energysavings would be 5% to 6% or $290 per unit when total building expenses is $5000 to $6000 per unit. Ina 2009 study, researchers found commercial building price premiums of 10% and 31%, respectively, forEnergy Star and LEED- certified buildings. The estimated mean internal rate of return of LEEDbuildings is 126% with a 10% profitability of achieving an IRR of 50% or less. Buildings with anEnergy Star certification achieve a mean IRR of 140% with virtually no profitability (1.6%) of achievingan IRR less than 50%. In GGU’s Fin 100 and Fin 300, NPV is more useful than IRR. But in greenbusiness case such as KSDG’s projects, we use IRR more frequently because it shows investors andmanagers exactly number of profitability. It’s more than making an investment decision by checking apositive or higher NPV. Because we need to know how much higher return will be for energy efficientbuildings compared to normal buildings. So, without IRR, we can not get the direct benefits from beinggreen. According to the knowledge from GGU’s MATH 240, we can see the distribution of IRRs forboth of the LEED and Energy Star are left- skewed.10% of LEED IRRs are below 50%, and the mean ofIRRs for both LEED and Energy Star is about 90% ( Greening Our Built World, 2010 ; EnergyEfficiency, 2010; An Evaluation, 2009).(An Evaluation, 2009)In 2007, green building costs only 2%, which is about $3- $9/ sf, more than normal buildings. Green 3
  4. 4. building generally achieves energy saving of 20% to 50%. The median of green premiums is 1.5% bycomparing the cost of normal building with the cost of green building. The present value of saving onenergy of 20- year is between $4/sd and $16/sf. Typical energy- saving enhancements include moreefficient lighting, greater use of day lighting and sensors, more efficient heating and cooling systems,and better- insulated walls and roofs. These enhancements can bring indirect benefits that will bemention in later section of this paper. A recent study by McKinsey and Company suggested that a $160billion investment in energy efficiency in buildings and appliances and a $90 billion investment inindustrial efficiency across the U.S. through 2030 could result in $300 billion savings from avoidinginvestment in new power generation. From the graphs bellow, as we go green, the construction costs,occupancy rates, and capital value will increase, and the carbon emissions will decrease. We can see notonly how much the costs will be for improving our living environment in certain extent but also howvaluable the green business will be in future(Greening Our Built World, 2010).(The Cost and Benefits, 2011)2. Water- Related Savings:Compare to normal building, green building reduce indoor potable water use from 0% to more than80%, with a median of 39%. The 20- year present value of water saving is between $0.5/sf and $2.0/sf.Water savings generally increase with LEED level. Median reported water savings are 21% for Certifiedbuildings, 36% for Sliver, 39% for Gold, and 55% for Platinum(Greening Our Built World, 2010).Indirect Green Benefits1. Health and Productivity BenefitsGreen buildings can not only reduce water and infrastructure costs but also increase health andproductivity gains. According to Green Building Performance (2011), green buildings have 27% higheroccupant satisfaction. 79% of employees surveyed were willing to forgo income to work for a firm witha credible sustainable strategy. 80% of employees surveyed said they felt greater motivation and loyaltytoward their company due to its sustainability initiatives. These benefits are more than twice thefinancial gains from green building owners and occupants. The total direct and indirect present value of 4
  5. 5. energy savings over 20- year from green buildings is estimated to be between $6/sf and $18/sf. For bothoccupants and employees, the present value of a 1% reduction in health costs over 20 years would beabout $2/sf, and this benefit would be worth roughly $13/sf over 20 years. According to William Fisk, ofLBNL, improving indoor air quality in buildings across the country could reduce $1/sf, which is from $7to $18 billion in 20- year savings from reduced respiratory illness, allergies, and asthma, including directand indirect savings. Reducing sick- building syndrome would yield $10 to $30 billion in potentialproductivity benefits nationally, or $150 to $460 for each of the roughly $65 million U.S. office workers.The present value of savings over 20 years would be about $12 to $35/sf ( Greening Our Built World,2010; Building Sector, 2009).Health impacts include an average 43% reduction in symptoms from improved air quality and anaverage 36% reduction in symptoms from access to the natural environment. Green buildings canincrease air quality by an average 5.5% improvement, working environment by an average 0.5%improvement, control over building moisture, control of sources of indoor pollutants, access to windowviews, daylighting by an average 3.2% improvement, and greater natural ventilation. Switching fromincandescent to compact fluorescent light bulbs (CFL) and light- emitting diodes (LED) improvesefficiency by 70% and 88%, respectively. Saving in lighting yields an additional 30- 40% savings incooling. Cool roofs have 10% as a higher solar reflectance and can achieve 35% reflectance when coloris added, which reduce cooling needs by 10%. Retrofitting 80% U.S. commercial buildings with coolwhite roofs having a solar reflectance of 55% can generate annual savings of 10.4 TWh of coolingenergy, $735 million, and 6.23 Mt CO2. In addition, reducing in the occurrence of asthma, headaches,colds, and sick- building syndrome are another aspect of benefits of green buildings. The value of healthand productivity improvements in green versus normal buildings is from less than $10/sf to greater than$50/sf over 20 years. If annual health costs were estimated at $3,000 per occupant and could be reducedby 1% through IEO, Indoor Environment Quality, this improvement would be valued at $30 peremployee in the first year(Greening Our Built World, 2010).2. Job Creation According to DBLC’s report, green building also creates more jobs than conventional construction.Many of jobs created by a shift to green design require specialized skills, and lead to good permanentlocal jobs. The green buildings can yield an employment benefit of about $1/sf over 20 years comparedto conventional buildings. Every $1 million spent on utility bills, energy- related services support 8 to 12job- years, directly and indirectly IN 2009. The job creations are included energy audits, constructorsand construction managers, verification of installation & monitoring and etc. That is to say, for each $1million invested in green building, roughly 20 net job- years are created over 20 years, when comparedwith conventional building. A rapid transition to greening and a deep improvement in energy efficiencyare highly cost effective and would create on the order of a trillion dollars in wealth, about $10,000 perfamily(Greening Our Built World, 2010). San Francisco is a city with a mix of skins. One third of thepopulation is Chinese. Traditional Chinese have a trend to spread international because large populationand globalization. More and more rich Chinese are considering moving to U.S. by investing about $550thousands in the projects backed by state governments in 5 years. 10% of the total investments can beused to establishing businesses on U.S. by investors. This can help increasing U.S. job opportunities. Sodoes green investments in KSDG. Investors’ investments in green buildings can lead to a big portion ofjobs in U.S. in the following years. 5
  6. 6. 3. CO2 ReductionsAccording to Green Building Performance (2011), green buildings have 36% fewer CO2 emissions. CO2reductions are worth $0.5/sf, $1/sf, $2/sf, more than $3.5/sf over 20 years at $5/ton, $10/ton, $20/ton,and $50/ton respectively. In 2008, McGraw- Hill’s survey found a 10.9% expected increase in greenbuilding value, along with an expected 9.9% increase in return on investment. Green buildings also havebroader benefits for our society for reductions in greenhouse gases (GHGs) and pollution. The costs ofGHGs emissions, over- use of water, pollution and unsustainable resource use amounted to $6.6 trillionin 2008, and these costs will rise significantly in future (Why Environmental, 2011). President Obamahas committed the U.S. to cutting CO2 14% by 2020 and 83% by 2050. By achieving this goal throughenergy efficiency and renewable energy, we can create very large employment, health, and societalbenefits, and make the country economically more competitive ( Greening Our Built World, 2010 ) .From the following charts, we can see how important the reduction of carbon dioxide is to prevent theglobal warming and reduced our costs in future housing utilities.(Annual Energy Review, 2010)(Unlocking Energy, 2009) 6
  7. 7. 4. Lower Operation and Maintenance Cost According to Green Building Performance (2011), green buildings have aggregate operational costs$1.60/sf, which is 19% lower than that of national averages $1.98/sf. From the following charts, we cansee the LEED Gold buildings have 34%, 35%, and 38% lower operational costs, energy costs, andmaintenance costs compared to national buildings respectively.Comparison on Asset Management Strategies and Valuation In GGU’s FIN 340, FIN 347, FIN 350, FIN 346, and FIN 463, we learned about how to construct adiversified portfolio using MPT and quantitative strategies. But in reality, it’s hard to outperform themarket by diversifying a portfolio with over 30 stocks, some debentures, some cash, and somederivatives. Some experienced people might say it’s a mission impossible in reality. Warren Buffettsometimes cannot beat the market. Bill Gates’ software sometimes might go mad. So everyone cannotbeat the market because it is too much to beat. Viridis Funds for KSDG is a fund accumulated by greeninvestors, and they use a different method for the asset allocation. They goes globally, less risky, andmore conservatively for hedging real estate market risks. Right now, the Asian market tends to be thebest one on the world markets. So, we might need to put more attention on emerging markets fordiversification. The following graph shows how well the current markets perform. 7
  8. 8. KSDG’s exit strategy is selling the fund to big institutions or turning to REIT. This is almost the same asthe real estate cases learned from FIN 463. Real estate business is less liquidity, so the asset allocationstrategy should be less risky. The housing bubble of 2008 has given us a very serious lesson. But wecannot avoid investing in it because we all need to house to live around. The only important thing isavoiding inappropriate structure products including debentures, mortgages, and derivatives. Accordingto FIN 380, government influences our economic by adjusting interest rates. This can cause futurebubble indirectly. We can see the following graph on P/E which indicates another new bubble. The redbubbles means the top of the cycle is becoming bigger. This will lead to a crush with crisis in future. Theright side graph is the performance of global manufacture and service by JP Morgan. We can see thebubble is created now. So, we can see where we are in the economic cycle.Lower interest rates on mortgage loan can attract more investors in housing sector. Then the structureproducts can be sold to people who might be default in future. People don’t care about the bid banks and 8
  9. 9. institution’s bankruptcy because they can be bailed out by governments. But no one can bail out thegovernment if they go bankruptcy. Under table businesses between rating agency and financialinstitution can also lead to potential buddle in future because they miss- rate financial products. Upon the valuation, the new thing in KSDG is the green environmental value. It includes theproductivity and pollution reduction. But this part of valuation can be varying by a large extent. Wecannot learn all about it both by GGU courses and KSDG internship. The only way is to do moreresearch on the internet and do more analysis on the topic. Talking to professionals for channel checkingis one of the most useful ways to gain knowledge from history and experience.Fin 350 told me that some mutual funds and hedge funds don’t use MPT to outperform the marketbecause MPT approach only creates an outcome that act like the market. Mutual funds have 2% fees andthey usually act like the market. However, Hedge funds have 2% management fees and 20%performance fees. So, they take more risks and have more possibility to gain higher returns than themarket and mutual funds. For KSDG case, their partner Viridis Advisors tend to use MPT approach foraiming at lower risks and stable growth. The Viridis Advisors want to offer a hedge on markets in U.S.,so they use a different strategy. They focus on global diversified portfolios that often include alternativeinvestments which are non- correlated to traditional stock and bond markets. They partner with clientsfor long- term consistency for any market situation. But they do some similar quantitative andqualitative analysis on the investments for track record, fees, performance history, risks statistics,correlations, reputation, consumer base, geographic locations, management style, and so on. Theconservative strategy will avoid high risk investments in divertive because it has less liquidity andhigher risks.Green real estate development has a long way to go for improving awareness and efficiency. It will bemore and more valuable before it become well- known and accepted globally. But they are fixed assetbusinesses, so they have high depreciation amount on costs and tax aspects. This can make the netincome lower if taking depreciation into the calculation. That’s why real estate companies usually don’tgo public to avoid the low stock price caused by huge fixed asset depreciation. According to FIN 463,they use REIT instead for exiting. Investors invest in REIT will received return and dividends on theproperties and obtain a diversification portfolio. In FIN 463, we learned about three real estate valuationapproaches, cost method, sales method, and discount method. In KSDG, we only use the most advancedmethod called DCF method to value its projects.By the Excel skills learned from FIN 307, we apply FIN 463’s real estate valuation approach to valueproperties. Similarity, we use NPV method in the DCF approach and make assumptions for the model.But we have to calculate sales costs, market value for estimated cap rate, NOI and operatingexpenditures for estimated inflation. Another thing we need to pay attention is the interest rate, loanterm, and loan- to- value. In KSDG case, they also negotiate mortgage interest and loan term withFannie Mae. The negotiate results and assumptions by management team will determine the Excelmodel for valuation. In KSDG, we also learned about the calculation on taxes and fees, and these parts of details were notincluded in GGU courses I have taken. Maybe courses in Accounting will involve different levels oftaxes such as federal general tax and California tax. But the KSDG internship has a special content onPAL, which is the Passive Active Loss limitation. The PAL limitation limits the return of investors whoown more than one property in some extent. Upon the investment approaches such as fundamental method and technical method, I didn’t havechance to apply them because of the limitation of industry and internship position. Fin 300, 307, 344,100, and 350 had offered me lots of knowledge about how to invest and how to diversify. Accountreceivable turnover, P/ E ratio, and other valuation ratios are not used in the internship. Because theinternship only involve the ratios in real estate, such as loan- to- value, cap rate, sale cost rate, inflationrate, and mortgage rate. So, these skills and knowledge is limited in the green real estate company and 9
  10. 10. the current analyst position. Maybe I can apply them in other position like real estate investment fund ifI extend the internship or change to other relevant investment company.Green Future Every $ 1 million dollars invested in residential energy efficiency retrofits can help to generate$477,849 in direct GDP and $785,157 or 10 jobs in indirect and induced GDP in 2009. Nearly $40billion were invested annually in residential retrofits nation- wide. On average, $300 per unit of tenantbenefit from direct benefits of utility savings and indirect benefits. Based on a report, about 19% fuelsavings and 7% of electric savings can be achieved by green buildings. In 2008, only 1% of existingbuilding in U.S. is green, and green buildings and homes are expected to have higher rents and salesprices. If energy prices rise at 5% per year from 2008, energy savings will be twice the cost of greeningover 20 years. If the energy prices growth rate is 8%, the energy savings would be over three times theaverage cost of greening(Greening Our Built World, 2010; The Benefits, 2012). According to Green Building Performance (2011), the projected increase in energy consumptionby 2030 despite dramatic gains in energy efficiency will by 31%; 20% of U.S. drinking water supply isconsumed by commercial buildings; $2 trillion gallons of water a year would be saved if commercialbuildings reduced their water consumption by 10%.Green buildings are about 30 times more likely thanconventional buildings to include on- site renewable energy (such as solar), or to buy power generatedfrom renewable energy (such as wind, geothermal, or solar). Green buildings become one of the largestand most effective strategies for accelerating a national transition to clean energy. The percentage of newgreen building constructed each year grows from 2010 base of 5% to 25% of new construction.Similarly, the percentage of green retrofits increases from an estimated base of 0.25% to almost 5% by2030. In 2008, nearly 3 times as many states approved green building policies compared to 2005,growing from 13 to 31. Markets for green commercial buildings in the U.S. grow to 20- 25% by 2013.(Greening Our Built World, 2010, Energy Efficiency, 2010). According to the Business Time in the beginning of April, San Francisco mayor, Ed Lee, said thatwe will focus more on Clean Energy Economy. The increasing of green business in the city had reducedunemployment rate by approximately 2% last year. San Francisco’s resource recovery is 70% higherthan other U.S. city, and we have reduced carbon footprint to 12% bellow 1990 levels. The SanFrancisco government and green business program, such as SFMADE and, will enhance morethan 225 green energy saving business, such as KSDG, in the near future for creating job opportunity. Obama had directed the permitting of clean energy on public lands for powering 3 million homes.Obama also proposed allowing responsible homeowners to refinance their mortgages at today’s lowrates, and this will generate an average savings of $250 per month per homeowner (State of the Union,2012). The recent Fannie Mae mortgage rate is 5% and the maximum loan term can be 30 years. If greencompanies can leverage with this good numbers, they can have a very good looking number on theinvestments and a sweet smile on their faces. But we also need to consider the following questions: Willthe mortgage rate increase in future? Is it a good choice to sign a 30- year mortgage than a shorter termmortgages with rolling strategies? Which method will has less risks or less costs? Will you consider andrecommend green investments when considering both the financial and environmental aspects? Howlong and how much will you get the return? Do you use payback period method, IRR, or NPV to makeyour decision? What is the best hedging plan for you for global real estate investments? Is a lowleverage strategy or a high leverage strategy good for the recent economy? How do you collectgovernment information and policy efficiently on green buildings and how do you solve potential legalissues on the ownerships and maintaining the real estate properties? 10
  11. 11. ReferencesDavis Langdon. (2011). The cost and benefit of achieving green buildings. Davis Langdon and SeanInternational.Deutsche Bank. (2012). The benefits of energy efficiency in multifamily affordable housing. LivingCities and HR& A.Gregory, K. (2010). Greening our built world. Washington, NW: OislandPress.GSA Public Building Service. (2011). Green building performance. U.S. General ServicesAdministration.Jackson, J. (2009). An evaluation of LEED and Energy Star. Texas University, College Station, TX.Major Economies Forum. (2009). Building sector energy efficiency. Energy and Climate.McKinsey& Company. (2009). Unlocking energy efficiency in the U.S. economy. McKinsey GlobalEnergy and Materials.Mercer LLC. (2010). Energy efficiency and real estate opportunities for investors. Mercer LLC andCeres.Miller, N. (2008). Does green pay off. Jay Spivey and Andy Florance.Obama, B. (2012). State of the Union 2012: Obama delivers address. 11
  12. 12. Principles for Responsible Investment. (2011). Why environmental externalities matter to institutionalinvestors. PRI Association and UNEP Finance Initiative.U.S. Energy Information Administration. (2010). Annual Energy Review.Washington, DC:U.S. EIA. 12