1. Brownfields: Emerging Issues in Redevelopment The Economics of Green Presented to: Rutgers, New Jersey Agricultural Experiment Station September 16, 2008 Presented by: Mark Pomykacz, MAI, MRICS mark@federalappraisal.com 908.534.3590 FEDERAL APPRAISAL & CONSULTING LLC www.federalappraisal.com 866.FED.APPR

2. Federal Appraisal and Consulting LLC Introduction Mark Pomykacz  Managing Partner,  Federal Appraisal & Consulting LLC  MAI, MRICS, SCGREA  Over 22 years appraising

3. Federal Appraisal and Consulting LLC The Need for Green  In the United States alone, buildings account for:  70% of electricity consumption  39% of energy use  39% of all carbon dioxide (CO 2 ) emissions  40% of raw material use  30% of waste output (136 million tons annually)  12% of potable water consumption

4. Federal Appraisal and Consulting LLC What is Green?  Green is an evolutionary concept  What is “green” today may no longer be “green” tomorrow  Fundamentally, Green is about Quality!

5. Federal Appraisal and Consulting LLC Two Business Reasons  Profit and/or Image  Profits are Supply  Image is Demand

6. Federal Appraisal and Consulting LLC One Personal Reason  It’s the “right thing to do”, Conscientiousness  Demand

7. Federal Appraisal and Consulting LLC Profit Motive  Additional Cost of Construction vs. Reduced Operating Costs  Green does not always cost more

8. Federal Appraisal and Consulting LLC Profit Motive: Construction Costs  Materials  Green building costs may or may not be higher than non-green costs  Depends on level of planning  Government sponsored financial incentives

9. Federal Appraisal and Consulting LLC Profit Motive: Construction Costs  Design  Once design is discovered and learned, no additional cost

10. Federal Appraisal and Consulting LLC Cost of Green vs Non-Green Langdon, Davis; The Cost of Green Revisited, July 2007

11. Federal Appraisal and Consulting LLC Cost of Green vs Non-Green Langdon, Davis; The Cost of Green Revisited, July 2007

12. Federal Appraisal and Consulting LLC Profit Motive: Operating Cost  Utilities (Elect, Oil, Gas, Water, Sewage)  Maintenance (External building, Internal building, Land)  Green features may reduce operating and capital expenses  Which would increase net operating income  Which increases profits and value

13. Federal Appraisal and Consulting LLC Profit Motive: Operating Costs  Maintenance and management expenses may be reduced  Operating and capital repairs may be reduced

14. Federal Appraisal and Consulting LLC Profit Motive: May Increase Revenue  Relates to demand side  Faster, higher priced sales and rentals  Green buildings may have a different financial risk profile and investor rate of return requirements

15. Federal Appraisal and Consulting LLC Conscientiousness  Environmentally Friendly  Corporate Image & Conscientiousness  Private Conscientiousness, Internal Motivations

16. Federal Appraisal and Consulting LLC Valuation  Three Approaches to Value  Sales  Income  Cost

17. Federal Appraisal and Consulting LLC Sales Approach Scenario One Subject Comp 1 Adjustments Comparable Sale Price $ 9,000,000 $ 9,000,000 Time:-5% Location:0% Size:-5% Condition:0% QualityTraditionalTraditional 0% Total Adjustment : -10% Final Adjusted Price : $8,100,000 Scenario Two Subject Comp 1 $ 9,000,000 $ 9,000,000 -5% 0% -5% 0% GreenTraditional 25% 15% $10,350,000 Difference $2,250,000 Green Premium 28% Quality:DesignFunctionalityAppealMaterialsEtc.

18. Traditional $/Annual Gross Income Rent PSF$25.00 Rent$1,250,000 Less: Vacancy & Credit Loss Rate10.0% Effective Gross Income$1,125,000 Operating Expenses R.E. Taxes$20,000 Utilities$30,000 Operating Expenses$125,000 Reserves Rate4.0% Reserves$45,000 Management Expense Rate5.0% Management Expense$56,250 Total Expenses$276,250 OER24.6% Net Operating Income$848,750 Capitalization Rate Calculation Nominal Interest Rate7.50% Loan Term20 Loan to Value:75.00% Equity Rate:12.00% Indicated Cap Rate, rounded10.25% Capitalized Value$8,280,213 Green $/Annual $30.00 $1,500,000 9.5% $1,357,500 $21,000 $20,000 $150,000 4.0% $45,000 5.0% $56,250 $292,250 26% $1,065,250 7.50% 20 75.00% 11.75% 10.05% $10,598,569 Indicated Value rounded Traditional $8,280,000 Green $10,599,000 Difference$2,319,000 Green Premium28% Income Approach

19. Federal Appraisal and Consulting LLC Cost Approach Scenario 1 Traditional Base Cost$175 Adjustments$0 Depreciation Physical-4% Functional, Super Adequacy 0% Economic0% Value via Cost$168 Scenario 2 Green $225 $0 -4% -5% 0% $205 Scenario 3 Traditional $175 $0 -4% 0% $168 Scenario 4 Green $225 $0 -4% 0% $216 $50Cost to Cure 27% Curable Functional Obs $205 Value after Cure, via Cost

20. Federal Appraisal and Consulting LLC Valuation  Market evidence is needed  Education is needed

21. Federal Appraisal and Consulting LLC Vancouver Valuation Accord  Appraisers Must  identify the relevant components of a sustainable property;  provide information resources for green buildings and projects data;  evaluate the initial costs in context with the longer-term benefits;  analyze capital and operating costs relative to net income from operations and reversion;  analyze the relevance of green features in the marketplace;  assess market and investment risk(s) relative to potential rewards;  identify who pays the costs and who receives the benefits for the sustainable elements incorporated; and  provide a competent and reliable estimate of market value in the context of available data Steve Bergsman, Sustainable by all accords: the recently signed Vancouver Valuation Accord marks agreement among industry leaders to address the interrelationship of sustainability and value, Valuation Insights & Perspectives, Spring 2007

22. Federal Appraisal and Consulting LLC Cost premium stats Delloitte and Lockwood, Dollars and Sense of Green Retrofitting p.4

23. Federal Appraisal and Consulting LLC Where are the problems?  The government is at fault, some say, for not leading the way by providing more financial incentives for green building, and for not investing more in alternative energies like solar.  Builders are to blame for sticking to their old energy- wasting patterns, all in the name of maximum profits with minimum risk.  Appraisers are to blame, some say, for not aggressively seeking out and valuing green building features.  Homebuyers are guilty of shortsightedness when favoring a slightly smaller purchase price over vastly lowered monthly utility bills