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
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2. Introduction
I am a financial analyst for KSDG. My tasks are constructing financial models, analyzing cost- benefits,
and researching upon green value of KSDG's green energy- efficient projects. Through discussion with
our 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 from
GGU. We also compare the cases for both with energy charges and without energy charges in order to
show how much KSDG energy efficient buildings can contribute to our financial aspects by reducing
costs and increasing profits. In addition, we collect data on green market and government policies for
demonstrate that our business strategies are in the future major trend. This information will be showed to
our investors for creating financial and environmental benefits to our community. We will see more
details 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 boss
in a company is an art of life. It's very hard to make everything perfectly and efficiently. It's also difficult
to manage people and solve various problems. I noticed that Kevin is always very patient to listen to
everybody and discuss our tasks efficiently in limited time. I also learned a lot about tax and humor from
Mark. He is a nice teacher who is patient and can give very detail explanation on topics. Cooperating
with 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 are
so 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 real
word 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 Value
During 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 words
in the next decades. Businesses not only need to care about profitability but also care about working
quality and energy efficiency. Green Value is the additional net present value that a green building
generates or saves by having the energy efficiency strategies compared to that of an identical normal
building. In the future, this might become the major trend of our world, including working and living
environment. The benefits of environment, health, working quality, and other indirect benefits are more
than twice of the benefits of green direct benefits. Large parts of U.S. constructions are about 20- 30
years old, and they need to be retrofit and become green and energy- efficient for improving living
quality and achieving sustainability. As a result of this, green buildings are hot in future and worth us to
pay more attention to.
Direct Green Benefits
1. Energy- Savings
According to Green Building Performance (2011), green buildings have 66kBtu/sf/yr energy use, which
is a 25% lower than that of national averages 88kBtu/sf/yr. 41% of projected energy use in buildings
might be reduced by 2050, and about 11.5 gigatonnes (Gt) of CO2, 40% of current global fossil CO2
emissions 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 reducing
energy expenditures, KSDG’s energy efficient buildings provide a cost- effective hedge against the risk
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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 utilities
as 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 energy
savings would be 5% to 6% or $290 per unit when total building expenses is $5000 to $6000 per unit. In
a 2009 study, researchers found commercial building price premiums of 10% and 31%, respectively, for
Energy Star and LEED- certified buildings. The estimated mean internal rate of return of LEED
buildings is 126% with a 10% profitability of achieving an IRR of 50% or less. Buildings with an
Energy Star certification achieve a mean IRR of 140% with virtually no profitability (1.6%) of achieving
an IRR less than 50%. In GGU’s Fin 100 and Fin 300, NPV is more useful than IRR. But in green
business case such as KSDG’s projects, we use IRR more frequently because it shows investors and
managers exactly number of profitability. It’s more than making an investment decision by checking a
positive or higher NPV. Because we need to know how much higher return will be for energy efficient
buildings compared to normal buildings. So, without IRR, we can not get the direct benefits from being
green. According to the knowledge from GGU’s MATH 240, we can see the distribution of IRRs for
both of the LEED and Energy Star are left- skewed.10% of LEED IRRs are below 50%, and the mean of
IRRs for both LEED and Energy Star is about 90% （ Greening Our Built World, 2010 ； Energy
Efficiency, 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
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4. building generally achieves energy saving of 20% to 50%. The median of green premiums is 1.5% by
comparing the cost of normal building with the cost of green building. The present value of saving on
energy of 20- year is between $4/sd and $16/sf. Typical energy- saving enhancements include more
efficient 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 be
mention in later section of this paper. A recent study by McKinsey and Company suggested that a $160
billion investment in energy efficiency in buildings and appliances and a $90 billion investment in
industrial efficiency across the U.S. through 2030 could result in $300 billion savings from avoiding
investment 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 not
only how much the costs will be for improving our living environment in certain extent but also how
valuable 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 than
80%, 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 Certified
buildings, 36% for Sliver, 39% for Gold, and 55% for Platinum（Greening Our Built World, 2010）.
Indirect Green Benefits
1. Health and Productivity Benefits
Green buildings can not only reduce water and infrastructure costs but also increase health and
productivity gains. According to Green Building Performance (2011), green buildings have 27% higher
occupant satisfaction. 79% of employees surveyed were willing to forgo income to work for a firm with
a credible sustainable strategy. 80% of employees surveyed said they felt greater motivation and loyalty
toward their company due to its sustainability initiatives. These benefits are more than twice the
financial gains from green building owners and occupants. The total direct and indirect present value of
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5. energy savings over 20- year from green buildings is estimated to be between $6/sf and $18/sf. For both
occupants and employees, the present value of a 1% reduction in health costs over 20 years would be
about $2/sf, and this benefit would be worth roughly $13/sf over 20 years. According to William Fisk, of
LBNL, improving indoor air quality in buildings across the country could reduce $1/sf, which is from $7
to $18 billion in 20- year savings from reduced respiratory illness, allergies, and asthma, including direct
and indirect savings. Reducing sick- building syndrome would yield $10 to $30 billion in potential
productivity 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 an
average 36% reduction in symptoms from access to the natural environment. Green buildings can
increase 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 window
views, daylighting by an average 3.2% improvement, and greater natural ventilation. Switching from
incandescent to compact fluorescent light bulbs (CFL) and light- emitting diodes (LED) improves
efficiency by 70% and 88%, respectively. Saving in lighting yields an additional 30- 40% savings in
cooling. Cool roofs have 10% as a higher solar reflectance and can achieve 35% reflectance when color
is added, which reduce cooling needs by 10%. Retrofitting 80% U.S. commercial buildings with cool
white roofs having a solar reflectance of 55% can generate annual savings of 10.4 TWh of cooling
energy, $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 health
and 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 reduced
by 1% through IEO, Indoor Environment Quality, this improvement would be valued at $30 per
employee 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 permanent
local jobs. The green buildings can yield an employment benefit of about $1/sf over 20 years compared
to conventional buildings. Every $1 million spent on utility bills, energy- related services support 8 to 12
job- years, directly and indirectly IN 2009. The job creations are included energy audits, constructors
and construction managers, verification of installation & monitoring and etc. That is to say, for each $1
million invested in green building, roughly 20 net job- years are created over 20 years, when compared
with conventional building. A rapid transition to greening and a deep improvement in energy efficiency
are highly cost effective and would create on the order of a trillion dollars in wealth, about $10,000 per
family（Greening Our Built World, 2010）. San Francisco is a city with a mix of skins. One third of the
population is Chinese. Traditional Chinese have a trend to spread international because large population
and globalization. More and more rich Chinese are considering moving to U.S. by investing about $550
thousands in the projects backed by state governments in 5 years. 10% of the total investments can be
used to establishing businesses on U.S. by investors. This can help increasing U.S. job opportunities. So
does green investments in KSDG. Investors’ investments in green buildings can lead to a big portion of
jobs in U.S. in the following years.
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6. 3. CO2 Reductions
According to Green Building Performance (2011), green buildings have 36% fewer CO2 emissions. CO2
reductions 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 green
building value, along with an expected 9.9% increase in return on investment. Green buildings also have
broader benefits for our society for reductions in greenhouse gases (GHGs) and pollution. The costs of
GHGs emissions, over- use of water, pollution and unsustainable resource use amounted to $6.6 trillion
in 2008, and these costs will rise significantly in future (Why Environmental, 2011). President Obama
has committed the U.S. to cutting CO2 14% by 2020 and 83% by 2050. By achieving this goal through
energy efficiency and renewable energy, we can create very large employment, health, and societal
benefits, 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 the
global warming and reduced our costs in future housing utilities.
(Annual Energy Review, 2010)
(Unlocking Energy, 2009)
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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 can
see the LEED Gold buildings have 34%, 35%, and 38% lower operational costs, energy costs, and
maintenance 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 a
diversified portfolio using MPT and quantitative strategies. But in reality, it’s hard to outperform the
market by diversifying a portfolio with over 30 stocks, some debentures, some cash, and some
derivatives. Some experienced people might say it’s a mission impossible in reality. Warren Buffett
sometimes cannot beat the market. Bill Gates’ software sometimes might go mad. So everyone cannot
beat the market because it is too much to beat. Viridis Funds for KSDG is a fund accumulated by green
investors, and they use a different method for the asset allocation. They goes globally, less risky, and
more conservatively for hedging real estate market risks. Right now, the Asian market tends to be the
best one on the world markets. So, we might need to put more attention on emerging markets for
diversification. The following graph shows how well the current markets perform.
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8. KSDG’s exit strategy is selling the fund to big institutions or turning to REIT. This is almost the same as
the real estate cases learned from FIN 463. Real estate business is less liquidity, so the asset allocation
strategy should be less risky. The housing bubble of 2008 has given us a very serious lesson. But we
cannot avoid investing in it because we all need to house to live around. The only important thing is
avoiding inappropriate structure products including debentures, mortgages, and derivatives. According
to FIN 380, government influences our economic by adjusting interest rates. This can cause future
bubble indirectly. We can see the following graph on P/E which indicates another new bubble. The red
bubbles means the top of the cycle is becoming bigger. This will lead to a crush with crisis in future. The
right side graph is the performance of global manufacture and service by JP Morgan. We can see the
bubble 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 structure
products can be sold to people who might be default in future. People don’t care about the bid banks and
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9. institution’s bankruptcy because they can be bailed out by governments. But no one can bail out the
government if they go bankruptcy. Under table businesses between rating agency and financial
institution 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 the
productivity and pollution reduction. But this part of valuation can be varying by a large extent. We
cannot learn all about it both by GGU courses and KSDG internship. The only way is to do more
research on the internet and do more analysis on the topic. Talking to professionals for channel checking
is 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 market
because MPT approach only creates an outcome that act like the market. Mutual funds have 2% fees and
they 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 the
market and mutual funds. For KSDG case, their partner Viridis Advisors tend to use MPT approach for
aiming 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 alternative
investments which are non- correlated to traditional stock and bond markets. They partner with clients
for long- term consistency for any market situation. But they do some similar quantitative and
qualitative analysis on the investments for track record, fees, performance history, risks statistics,
correlations, reputation, consumer base, geographic locations, management style, and so on. The
conservative strategy will avoid high risk investments in divertive because it has less liquidity and
higher risks.
Green real estate development has a long way to go for improving awareness and efficiency. It will be
more and more valuable before it become well- known and accepted globally. But they are fixed asset
businesses, so they have high depreciation amount on costs and tax aspects. This can make the net
income lower if taking depreciation into the calculation. That’s why real estate companies usually don’t
go 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 the
properties and obtain a diversification portfolio. In FIN 463, we learned about three real estate valuation
approaches, cost method, sales method, and discount method. In KSDG, we only use the most advanced
method 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 value
properties. 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 operating
expenditures for estimated inflation. Another thing we need to pay attention is the interest rate, loan
term, and loan- to- value. In KSDG case, they also negotiate mortgage interest and loan term with
Fannie Mae. The negotiate results and assumptions by management team will determine the Excel
model for valuation.
In KSDG, we also learned about the calculation on taxes and fees, and these parts of details were not
included in GGU courses I have taken. Maybe courses in Accounting will involve different levels of
taxes such as federal general tax and California tax. But the KSDG internship has a special content on
PAL, which is the Passive Active Loss limitation. The PAL limitation limits the return of investors who
own more than one property in some extent.
Upon the investment approaches such as fundamental method and technical method, I didn’t have
chance 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. Account
receivable turnover, P/ E ratio, and other valuation ratios are not used in the internship. Because the
internship only involve the ratios in real estate, such as loan- to- value, cap rate, sale cost rate, inflation
rate, and mortgage rate. So, these skills and knowledge is limited in the green real estate company and
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10. the current analyst position. Maybe I can apply them in other position like real estate investment fund if
I 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 $40
billion were invested annually in residential retrofits nation- wide. On average, $300 per unit of tenant
benefit from direct benefits of utility savings and indirect benefits. Based on a report, about 19% fuel
savings and 7% of electric savings can be achieved by green buildings. In 2008, only 1% of existing
building in U.S. is green, and green buildings and homes are expected to have higher rents and sales
prices. If energy prices rise at 5% per year from 2008, energy savings will be twice the cost of greening
over 20 years. If the energy prices growth rate is 8%, the energy savings would be over three times the
average cost of greening（Greening Our Built World, 2010; The Benefits, 2012）.
According to Green Building Performance (2011), the projected increase in energy consumption
by 2030 despite dramatic gains in energy efficiency will by 31%; 20% of U.S. drinking water supply is
consumed by commercial buildings; $2 trillion gallons of water a year would be saved if commercial
buildings reduced their water consumption by 10%.Green buildings are about 30 times more likely than
conventional buildings to include on- site renewable energy (such as solar), or to buy power generated
from renewable energy (such as wind, geothermal, or solar). Green buildings become one of the largest
and most effective strategies for accelerating a national transition to clean energy. The percentage of new
green 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% by
2030. 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 that
we will focus more on Clean Energy Economy. The increasing of green business in the city had reduced
unemployment rate by approximately 2% last year. San Francisco’s resource recovery is 70% higher
than other U.S. city, and we have reduced carbon footprint to 12% bellow 1990 levels. The San
Francisco government and green business program, such as SFMADE and SF.citi, will enhance more
than 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 low
rates, 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 green
companies can leverage with this good numbers, they can have a very good looking number on the
investments and a sweet smile on their faces. But we also need to consider the following questions: Will
the mortgage rate increase in future? Is it a good choice to sign a 30- year mortgage than a shorter term
mortgages with rolling strategies? Which method will has less risks or less costs? Will you consider and
recommend green investments when considering both the financial and environmental aspects? How
long and how much will you get the return? Do you use payback period method, IRR, or NPV to make
your decision? What is the best hedging plan for you for global real estate investments? Is a low
leverage strategy or a high leverage strategy good for the recent economy? How do you collect
government information and policy efficiently on green buildings and how do you solve potential legal
issues on the ownerships and maintaining the real estate properties?
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11. References
Davis Langdon. (2011). The cost and benefit of achieving green buildings. Davis Langdon and Sean
International.
Deutsche Bank. (2012). The benefits of energy efficiency in multifamily affordable housing. Living
Cities and HR& A.
Gregory, K. (2010). Greening our built world. Washington, NW: OislandPress.
GSA Public Building Service. (2011). Green building performance. U.S. General Services
Administration.
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 Global
Energy and Materials.
Mercer LLC. (2010). Energy efficiency and real estate opportunities for investors. Mercer LLC and
Ceres.
Miller, N. (2008). Does green pay off. Jay Spivey and Andy Florance.
Obama, B. (2012). State of the Union 2012: Obama delivers address.
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12. Principles for Responsible Investment. (2011). Why environmental externalities matter to institutional
investors. PRI Association and UNEP Finance Initiative.
U.S. Energy Information Administration. (2010). Annual Energy Review.Washington, DC:U.S. EIA.
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