6 VALUATION AND FUNDING OF SUSTAINABLE PROPERTY

Slide header copy In This Chapter >Fundamentals of valuation >Planning the analysis >Linking performance to value >Funding for green buildings

Slide header copy Market 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 copy Exercise: Value Discussion Starter >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 copy Approaches to Valuation >Comparable sales approach >Income approach >Cost approach

Slide header copy Comparable Sales Approach 6-5 >Not commonly practiced for sustainable property -No two sustainable properties have exact location, features, or performance

Slide header copy Income Approach >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 copy Data Gathering for Cost Approach >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 copy Planning the Analysis >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 copy Linking Performance to Value >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 copy Discussing the Debt Market with Clients >Common source of funding for green projects is debt market -Banks -Insurance companies that address risk

Slide header copy Searching for Funding >Check “DSIRE” and EPA Web sites >Inquire among contacts >Conduct your own search

Slide header copy The Underwriter Perspective >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 copy The Appraiser Perspective >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 copy The Underwriter Perspective >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 copy Exercise: Valuation Concepts DCF analysis The equity market The cost approach Complex sustainable property risk profile DSIRE Income capitalization Comparable sales approach Government sector owner-users B. E. H. G. F. A. C.