The Resource Appraisal:  Due Diligence Reporting for  Energy/Resource Performance  Retrofit Financing                   gJ...
Wells Fargo Bank and sustainability              g                        y July 2005: 10-point environmental commitment,...
Wells Fargo Environmental Finance Report                                           2
Resource Appraisal [RA] Presentation goals:A review of energy/performance financing risk issues Common 3rd party due dili...
Increasing Emphasis on Energy Efficiency Retrofits Obama “Better Buildings Initiative”, DOE, SBA Utility companies, NEEA...
Insufficient energy efficiency financing Construction lending is costly to manage As Proposed value in the appraisal is ...
Risk challenges have been met before Third party (not lender & not borrower) reports common in  loan process Accepted by...
A quick review of loan underwriting Wells Fargo loan underwriting criteria:   #1 People   #2 Credit   #3 Real Estate RE ...
What is a Resource Appraisal?A document, a process, an idea Loan due diligence report with financial analysis Data flow ...
What else is in a Resource Appraisal? Combines components of:    PCA [Property Condition Assessment]    Energy Audit (A...
Similarities to the Valuation Appraisal process Valuation appraisal process is familiar Starts with detailed inspection,...
Reporting cultures varies by property type One size program or report does not fit all Seven major property types report...
Risk varies by property type  Holding period – MUSH vs. investor A  Access to capital – SBA vs. Large C&I         t     ...
Energy/resource Management System [EMS] Once up and running a RA can be in real time Linked to the property EMS So data...
Other Resource Appraisal items Behavior influence of EMS data flow Behavior of operations staff and workers Making ener...
Spinning the Retrofit Triangle p     g          f        g Linking the 3 retrofit elements:   Operations, Technology, Fin...
Performance retrofits (should) happen in stages The six ideal retrofit stages:1 - As-Is, Where-Is and historic operation2...
It’s a process, so go slow Speed, accuracy, price: you only get two   F / h    Fast/cheap, not good. Good/fast, but expe...
The Resource Appraisal is a property asset Tracking resource use and proving performance  has  h market value; data prove...
Is it all worth it? Upside value is good, but watch out for the  downside of doing nothing  d     id   fd i      thi Los...
Public disclosure of Energy/resource use A key payback to any incentive program EEComps based on BEPA, Portfolio Manager...
Conclusions The RA is a topical framework Goal is to tease out the vital parts Incenting EE investment is still not cra...
Thank You !!James F. Finlay a  s        ayVP, Commercial Appraisal ManagerWells Fargo Bank – RETECHSW ll F      B k707 Wil...
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RESOURCE APPRAISAL - Tulane Univ & Fed Of Atlanta, New Orleans,03 10 2011

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Investment risk underwriting of complex property requires due diligence. This is a well established process with the standard real estate valuation appraisal and the Phase 1 environmental report. The same type of process is needed to correctly risk high performance buildings that are frugal with resources. Inherent in the process to craft such a document is the creation of a building energy/resource managment system. The buidling management system becomes a part of the underwriting process itself. This deck examines the "Resource Appraisal" option to investment risk with high performance commercial appraisal.

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RESOURCE APPRAISAL - Tulane Univ & Fed Of Atlanta, New Orleans,03 10 2011

  1. 1. The Resource Appraisal: Due Diligence Reporting for Energy/Resource Performance Retrofit Financing gJames F Finlay yVP, Commercial Real Estate Appraisal ManagerWells Fargo Bank – RETECHS Los AngelesChair, CCh i Commercial RE & Finance Committee, USGBC-LA i l Fi C i USGBC LAStrengthening the Green Foundation: Research and PolicyDirections for Development and FinanceFederal Reserve Bank of AtlantaTulane University, New Orleans, March 10, 2011
  2. 2. Wells Fargo Bank and sustainability g y July 2005: 10-point environmental commitment, 10 point creates the Environmental Initiative team Now Environmental Affairs  My role: Primary appraisal manager, risk analysis, trends y y pp g , y , More than $3.7 billion in loans for high-performance $ g p designed real estate – LEED, Energy Star V6 1
  3. 3. Wells Fargo Environmental Finance Report 2
  4. 4. Resource Appraisal [RA] Presentation goals:A review of energy/performance financing risk issues Common 3rd party due diligence in loan underwriting o o 3 d pa y du d g oa u d g What is a Resource Appraisal ? Similarities: Valuation Appraisal & Resource Appraisal Real time valuation via an Energy Management System The Retrofit Triangle – operations + tech + finance Stages of a ideal performance retrofit The Resource Appraisal as a property asset Credit enhancement and EEComps Fi l points and W t h The Downside Final i t d Watch Th D id 3
  5. 5. Increasing Emphasis on Energy Efficiency Retrofits Obama “Better Buildings Initiative”, DOE, SBA Utility companies, NEEA USGBC Existing Building O&M registrations Energy Upgrade California, Energy Upgrade LA PACE commercial, creative financing options Energy Service Companies [ESCO], experience with bldg tech [M&V], performance contracting guarantees Increasing cost of energy National Security: Stuxnet ICS malware, US utility grid 4
  6. 6. Insufficient energy efficiency financing Construction lending is costly to manage As Proposed value in the appraisal is difficult Energy/resource Efficient design is complex:  measuring today’s value of future events that don’t happen  Upgrades have different risk profiles  O On-site power – solar photovoltaic, wind, h d it l h t lt i i d hydro  “Negawatts” – insulation, windows, doors, occupancy sensors  Power offset – solar thermal, fuel cells, cogeneration Small loans difficult for a bank to make profitably p y  Standardized process, credit based or credit enhanced 5
  7. 7. Risk challenges have been met before Third party (not lender & not borrower) reports common in loan process Accepted by underwriters, bank regulators; transfer risk Most common: FIRREA (Fi (Financial I tit ti i l Institutions R f Reform, Recovery and Enforcement Act) Valuation Appraisal  Complies with USPAP (Uniform Standard of Prof Appr. Practice) Appr Environmental Site Assessment Phase I (ASTM)  Continues to evolve, now “All Appropriate Inquiries” PCA (Property Condition Assessment) – Frequently required by Freddie-Fannie and SBA (Small Business Administration) 6
  8. 8. A quick review of loan underwriting Wells Fargo loan underwriting criteria: #1 People #2 Credit #3 Real Estate RE Market value – via Income Approach  Income, Vacancy, Expenses [= NOI], Risk , y, p [ ], Cash flow & debt coverage 7
  9. 9. What is a Resource Appraisal?A document, a process, an idea Loan due diligence report with financial analysis Data flow from real time operations tracking Make energy use and cost visible, in real time k d bl l  *Loan pool bonds; higher precision = lower risk/cost Loan 8
  10. 10. What else is in a Resource Appraisal? Combines components of:  PCA [Property Condition Assessment]  Energy Audit (ASHRAE)  Energy Management System [EMS] with data exhaust display, archive display  Financial analysis from EMS data  Working in real time “Green PCA’s” a current reference, but not exactly Green PCA s reference Energy Service Companies very close 9
  11. 11. Similarities to the Valuation Appraisal process Valuation appraisal process is familiar Starts with detailed inspection, building survey inspection PCA [Prop. Cond. Assmt.] for energy modeling Financial analysis per upgrade design options Review by lender for content, analysisBut wait there’s more . . . Scope evolves into bldg systems integration Data output standards like ASTM BEPA (Building p ( g Energy Performance Assessment) real time 10
  12. 12. Reporting cultures varies by property type One size program or report does not fit all Seven major property types reports & cultures types, SFR/ 1-4u: Single Family Residences, 1 to 4 unit apartments Small C&I: SBA, mom & pop/owner-user. Valuations < $2MM Medium C&I: larger owner-user/part owner-user, local investor – values $2MM to $10MM Large C&I: multi-tenant leased investment – values >$10MM Multifamily: medium/large investor grade apartments, condos Specialty: gas station, fast food, hotel/motel, theater, data cntrs MUSH: Municipal, University, School (grades 1-12), Hospitals 11
  13. 13. Risk varies by property type  Holding period – MUSH vs. investor A Access to capital – SBA vs. Large C&I t it l L  Split incentive – owner user vs. leased  Owner vs. bank vs. debt pool security view  Results are reported on three levels:  “The Number”, Executive Summary, Full Detail 12
  14. 14. Energy/resource Management System [EMS] Once up and running a RA can be in real time Linked to the property EMS So data flows from operations, is not “extra” EMS is the heart of the Resource Appraisal Resources tracked are the Resource Quintet  Energy, Water, Waste, Carbon  IEQ/air and light [Interior Environmental Quality] 13
  15. 15. Other Resource Appraisal items Behavior influence of EMS data flow Behavior of operations staff and workers Making energy/resources visible g gy/ Weather influence tracking, operational impactE Events outside th property line t t id the t li  Walkability score, local pollution (freeways) 14
  16. 16. Spinning the Retrofit Triangle p g f g Linking the 3 retrofit elements: Operations, Technology, Finance Usually exist in organizational silos y g Operations uses tech to manage operations and p g p sends data to finance who uses it to support upgrade investments Spinning a flywheel; the first turn is hardest 15
  17. 17. Performance retrofits (should) happen in stages The six ideal retrofit stages:1 - As-Is, Where-Is and historic operation2 – Fruit on the ground; EMS, maintenance tweaks h d S k3 – Low hanging fruit; p y g g ; payback <2 yr payback y p y4 – Medium Payback; 2-7 years5 – Long Payback; >7 years6 - N t Zero (Energy) or as close to it as can you get Net Z (E ) l t t 16
  18. 18. It’s a process, so go slow Speed, accuracy, price: you only get two  F / h Fast/cheap, not good. Good/fast, but expensive. d G d/f b i Changing occupant behavior takes time  And it’s really important (BECC Conference) Confidence builds over time  Higher confidence = lower risk/interest rate Pl Plan capital upgrades as needed/proven i l d d d/ 17
  19. 19. The Resource Appraisal is a property asset Tracking resource use and proving performance has h market value; data proves it k t l d t The RA is tied to Energy/resource Mngt. System [EMS] y [ ] Investment in process control has value just as the savings produced have value 18
  20. 20. Is it all worth it? Upside value is good, but watch out for the downside of doing nothing d id fd i thi Loss emotion is twice as strong as gain emotion RA and Net Zero design exercise IDs the “dogs” It is not expensive if done with care. 19
  21. 21. Public disclosure of Energy/resource use A key payback to any incentive program EEComps based on BEPA, Portfolio Manager  Energy/resource Efficiency Comparables  Building Energy Performance Assessment Particularly important now Utility installed smart meters are crippled  Too important NOT to be owned 20
  22. 22. Conclusions The RA is a topical framework Goal is to tease out the vital parts Incenting EE investment is still not cracked PACE other EE fi PACE, th finance programs need a plan d l RA test drive in Energy Upgrade Los Angeles Will continue to work on RA idea thru 2011 21
  23. 23. Thank You !!James F. Finlay a s ayVP, Commercial Appraisal ManagerWells Fargo Bank – RETECHSW ll F B k707 Wilshire Blvd, 11th FlLos Angeles, CA 90017310 821 8111310-821-8111James.F.Finlay@WellsFargo.comI’m Li k dII’ LinkedIn 22

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